3M Company — Q3 2015 Form 10-Q Summary
Business context and reporting period
3M is a diversified global manufacturer operating through Industrial, Safety and Graphics, Electronics and Energy, Health Care, and Consumer segments. This unaudited quarterly report covers the three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless noted.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $7.712 billion | $8.137 billion | $22.976 billion | $24.102 billion |
| Operating income | $1.876 billion | $1.901 billion | $5.446 billion | $5.473 billion |
| Operating margin | 24.3% | 23.4% | 23.7% | 22.7% |
| Net income attributable to 3M | $1.296 billion | $1.303 billion | $3.795 billion | $3.777 billion |
| Diluted EPS | $2.05 | $1.98 | $5.92 | $5.67 |
| Effective tax rate | 29.6% | 30.3% | 29.1% | 29.1% |
- Q3 organic local-currency sales grew 1.2%: organic volume contributed 0.1% and selling prices 1.1%. Foreign currency translation reduced reported sales by 7.4%; acquisitions added 1.1%.
- For the first nine months, organic local-currency sales grew 2.0% (volume 1.0%, price 1.0%). Currency translation reduced reported sales by 7.1%; acquisitions added 0.5%.
- Q3 operating margin expanded 0.9 percentage points, principally from pricing and lower raw-material costs; nine-month margin improved 1.0 points. Cost of sales was 50.3% of sales in both 2015 periods, down from 51.7% in Q3 2014 and 51.6% in the prior nine-month period.
- Operating cash flow for the first nine months was $4.082 billion, versus $4.443 billion. Capital spending was $1.015 billion; free cash flow, as defined by 3M, was $3.067 billion versus $3.440 billion, with conversion of 81% versus 91%.
- At September 30, cash and cash equivalents were $1.605 billion; marketable securities totaled $166 million. Working capital was $4.576 billion, down from $5.767 billion at year-end 2014.
- Total debt was $11.253 billion versus $6.837 billion at year-end 2014; net debt was $9.482 billion versus $3.486 billion. Debt-to-total-capital increased to 48% from 34%. Total assets were $33.258 billion and total equity $12.224 billion.
- 3M repurchased $4.104 billion of shares and paid $1.933 billion in dividends during the first nine months. Diluted weighted-average shares fell 3.7% year over year for that period.
Material changes and segment performance
- Reported sales declined 5.2% in Q3 and 4.7% for the first nine months, primarily because of the stronger U.S. dollar. Q3 currency effects reduced pretax income by an estimated $95 million; the nine-month impact was approximately $295 million. Derivative and other transaction gains partly offset currency effects.
- Q3 organic local-currency sales grew in Consumer (5.0%), Health Care (3.7%), Safety and Graphics (2.9%), and Industrial (0.2%); Electronics and Energy declined 2.8%. The latter faced weaker electronics markets and softness in energy-related businesses.
- Q3 operating income increased in Consumer (7.5%) and Electronics and Energy (1.4%); it was nearly flat in Health Care and declined in Industrial (5.8%) and Safety and Graphics (4.8%).
- Acquisitions included Capital Safety, a fall-protection business, and Polypore’s Separations Media business, both acquired in August, and Ivera Medical in March. The two August acquisitions contributed to higher debt and reduced Q3 EPS by 4 cents, reflecting purchase accounting, transaction and integration costs.
Outlook, management commentary, risks and unusual items
- Management cited mixed global growth and a strong dollar, but reported positive organic local-currency growth in four of five segments and all major geographic areas. Pricing, lower raw-material costs and productivity supported margin expansion; higher pension costs, strategic investment and acquisition dilution were offsets.
- Management expected a 2015 effective tax rate of approximately 28.5%–29.5%, assuming reinstatement of the U.S. research and development credit; capital spending of approximately $1.4–$1.5 billion; 2015 gross share repurchases of $5.0–$5.5 billion; and approximately $250 million in global pension and postretirement contributions.
- In October 2015, 3M announced a restructuring expected to reduce approximately 1,500 positions, generate $130 million of pretax savings in 2016, and incur an approximately $100 million pretax Q4 2015 charge (about $0.13 per diluted share).
- October 2015 divestiture announcements covering library systems and Faab Fabricauto were expected to yield an aggregate selling price of approximately $120 million and a net pretax gain of approximately $45 million (about $10 million after tax), subject to closing and working-capital adjustments.
- Risks include foreign-exchange movements, uneven global demand, competition and pricing, raw-material supply and cost, acquisition integration, credit-rating sensitivity as leverage rises, cybersecurity and ERP implementation, and legal, regulatory and environmental matters.
- Legal exposures include respirator/asbestos claims (about 2,035 claimants; $136 million accrued for 3M, plus $22 million for Aearo, and $39 million of related insurance receivables for 3M’s accrual), PFC-related environmental proceedings, and product and commercial litigation. The filing says some potential losses cannot be reasonably estimated; an expert in the EDF dispute cited damages exceeding €100 million, while liability remains subject to court proceedings. The TransWeb judgment was approximately $26 million; 3M appealed and recorded no liability, stating it did not consider the loss probable and estimable.
- 3M reported an AA- rating with stable outlook from S&P and Aa3 with negative outlook from Moody’s. Its $2.25 billion revolving credit facility was undrawn, and the company reported covenant headroom.
Important facts for investors to verify
- Whether organic growth and margin gains can persist despite currency headwinds and weakness in Electronics and Energy.
- Whether Capital Safety and Polypore deliver expected strategic benefits and integration results, and how acquisition-related debt and dilution evolve.
- Actual 2015 tax rate, capital spending, share repurchases, pension contributions, and delivery of restructuring savings versus the announced charge.
- Debt reduction, liquidity and credit-rating developments, including the effects of ongoing buybacks and dividends.
- Developments in asbestos, PFC/environmental, EDF and other litigation, including possible losses beyond recorded accruals and the collectability of insurance recoveries.
- The filing reports that disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter; monitor the continuing global ERP rollout.