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MMM > SEC Filings for MMM > Form 10-Q on 1-Nov-2012All Recent SEC Filings

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Form 10-Q for 3M CO


1-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of 3M's financial statements with a narrative from the perspective of management. 3M's MD&A is presented in the following sections:

          Overview

          Results of Operations

          Performance by Business Segment

          Financial Condition and Liquidity

          Cautionary Note Concerning Factors That May Affect Future Results

OVERVIEW

3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. 3M manages its operations in six operating business segments: Industrial and Transportation; Health Care; Consumer and Office; Safety, Security and Protection Services; Display and Graphics; and Electro and Communications. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis.

Consistent with 3M's strategy of building relevance and presence in the marketplace, the Company announced in October 2012 that it was beginning immediately to align resources and management toward a new structure comprised of five business groups: Consumer; Industrial; Health Care; Safety and Graphics; and Electronics and Energy. The company intends that its operating results will be managed on the basis of its existing segment structure through 2012 with results managed under the new alignment once it is fully effective in the first quarter of 2013.

Third-quarter 2012 sales totaled $7.5 billion, a decrease of 0.4 percent from the third quarter of 2011. In the face of the current slow-growth economy, 3M continued to achieve organic local-currency sales growth (which includes organic volume impacts plus selling price impacts) in all six business segments. Organic local-currency sales increased 4.3 percent in Health Care, 3.3 percent in Industrial and Transportation, 1.4 percent in Consumer and Office, 1.3 percent in Display and Graphics, 0.7 percent in Safety, Security and Protection Services, and 0.1 percent in Electro and Communications. For the company in total, organic local-currency sales grew 2.2 percent, with equal contributions from higher organic volumes and selling price increases. Acquisitions added 0.5 percent to sales, driven by the October 2011 acquisition of the do-it-yourself and professional business of GPI Group (Consumer and Office), the April 2012 acquisition of CodeRyte, Inc. (Health Care), and the September 2012 purchase of assets that comprised the business of Federal Signal Technologies Group (Display and Graphics). Currency impacts reduced sales by 3.1 percent year-on-year, as the U.S. dollar remained strong against the Euro, Brazil real, and other currencies.

On a geographic basis, third-quarter 2012 sales increased 3.1 percent in Latin America/Canada and 2.8 percent in the United States, and were down 6.0 percent in EMEA (Europe, Middle East and Africa) and 1.4 percent in Asia Pacific. These results were impacted by foreign currency translation, which reduced sales in EMEA by 8.4 percent, Latin America/Canada by 7.4 percent, and Asia Pacific by 1.3 percent. Organic local-currency sales growth was led by Latin America/Canada at 10.5 percent, with all business segments contributing, led by Safety, Security and Protection Services, Electro and Communications, Display and Graphics, and Health Care. On a country basis, organic local-currency sales growth in Mexico was 19 percent. Organic sales growth in the United States was 2.3 percent, marking the twelfth consecutive quarter of positive growth. Organic local-currency sales in EMEA increased 0.8 percent, with positive organic growth in Middle East and Africa, along with Central/East Europe. Organic local-currency sales in West Europe were down 1 percent in the quarter, an improvement versus the first half of the year, and reflecting the economic growth challenges in that region. Organic local-currency sales declined 0.1 percent in the Asia Pacific area, with sales growth in Health Care and Consumer and Office offset by declines in Electro and Communication and Safety, Security and Protection Services. In Asia Pacific, the consumer electronics industry continues to improve and is showing signs of recovery. In China/Hong Kong organic local-currency sales were flat in the third quarter, with positive growth in the Health Care, Industrial and Transportation, and Consumer and Office business segments offset by declines in the other business segments. From a market perspective, sales in renewable energy and personal safety declined in China/Hong Kong.

Operating income increased 6.1 percent in the third quarter and operating margins were 22.4 percent, an increase of 1.4 percentage points year-on-year. These results benefited from selling price increases, raw material cost decreases, factory efficiency, and cost discipline throughout the organization. In the third quarter of 2012, restructuring actions decreased earnings by approximately 1 cent per diluted share. Net insurance gains, related to the 2011 earthquake and tsunami in


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Japan and the Thailand floods, in addition to the evaluation of certain environmental matters, increased earnings by approximately 2 cents per diluted share.

Net income attributable to 3M was $1.161 billion, or $1.65 per diluted share in the third quarter of 2012, compared to $1.088 billion, or $1.52 per diluted share, in the third quarter of 2011. Average diluted shares outstanding declined 1.7 percent year-on-year to 703.1 million, which increased earnings per diluted share by approximately 3 cents. The income tax rate was 28.2 percent in the third quarter, down 0.4 percentage points versus last year's third quarter, which increased earnings by approximately 1 cent per diluted share.

Sales in the first nine months of 2012 of $22.5 billion were flat when compared to the first nine months of 2011, impacted by challenging economic conditions. Organic local-currency sales increased 2.0 percent and acquisitions added 0.8 percent, with these increases offset by foreign currency translation, which reduced sales by 2.8 percent. Organic local-currency sales growth was led by Industrial and Transportation, Health Care, Safety, Security and Protection Services, and Consumer and Office. Organic local-currency sales declined in Display and Graphics and Electro and Communications, both impacted by weakness in the consumer electronics industry. Geographically, organic local-currency sales growth was led by Latin America/Canada and the United States, while sales declined in Asia Pacific and EMEA.

Net income attributable to 3M was $3.453 billion, or $4.91 per diluted share in the first nine months of 2012, compared to $3.329 billion, or $4.61 per diluted share, in the first nine months of 2011. In addition to the third-quarter 2012 restructuring actions and net insurance gains discussed above, 3M incurred early retirement/restructuring costs of approximately 4 cents per diluted share in the first quarter of 2012. Of this amount, approximately 3 cents per diluted share related to special termination benefits for a voluntary early retirement incentive program in the United States (discussed in Note 8). The remainder related to selective restructuring in a few developed countries. These actions, in aggregate, are expected to be neutral to full-year 2012 earnings, with the costs incurred in the first quarter of 2012, and the associated benefits realized over the remainder of 2012. In the second quarter of 2012, 3M incurred expenses related to consolidating certain manufacturing and supply chain support activities within Western Europe, along with relocating a portion of its manufacturing operations from Western to Eastern Europe, which on a combined basis decreased earnings by approximately 3 cents per diluted share. In the second quarter of 2012, 3M recognized insurance recoveries related to the 2011 earthquake and tsunami in Japan, which increased earnings by approximately 2 cents per diluted share.

3M estimates that combined direct and indirect business disruption resulting from the first-quarter 2011 earthquake and tsunami in Japan, net of the benefit from sales of 3M products used in the reconstruction efforts, reduced first nine months 2011 sales growth by 0.9 percentage points, operating margins by 0.3 percentage points, and earnings by approximately 9 cents per diluted share, with nearly all of the impact in the first half of 2011. Japan represented approximately 9 percent of total 3M sales for total year 2011. Refer to 3M's 2011 Annual Report on Form 10-K (Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview section) for more information concerning this item.

The following table contains sales and operating income results by business segment for the three months ended September 30, 2012 and 2011. In addition to the discussion below, refer to the section entitled "Performance by Business Segment" later in MD&A for a more detailed discussion of the sales and income results of the Company and its respective business segments (including Corporate and Unallocated). Refer to Note 13 for additional information on business segments, including Elimination of Dual Credit.

                                Three months ended September 30,
                                 2012                      2011                  % change
                           Net       Operating      Net       Operating      Net       Operating
(Dollars in millions)     Sales        Income      Sales       Income       Sales       Income
Business Segments
Industrial and
Transportation          $   2,566    $      575   $  2,580   $       525       (0.5 )%       9.4 %
Health Care                 1,263           400      1,246           367        1.4          9.0
Consumer and Office         1,114           244      1,096           244        1.6         (0.2 )
Safety, Security and
Protection Services           926           196        954           202       (2.9 )       (2.8 )
Display and Graphics          936           199        935           179          -         11.2
Electro and
Communications                820           186        838           181       (2.1 )        2.5
Corporate and
Unallocated                     1           (93 )        1           (91 )        -            -
Elimination of Dual
Credit                       (129 )         (29 )     (119 )         (26 )        -            -
Total Company           $   7,497    $    1,678   $  7,531   $     1,581       (0.4 )%       6.1 %


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Sales in the third quarter of 2012 decreased 0.4 percent. Organic local-currency sales increased 2.2 percent, acquisitions added 0.5 percent and foreign currency translation impacts reduced sales by 3.1 percent. Sales increased 1.6 percent in Consumer and Office, 1.4 percent in Health Care, and were flat in Display and Graphics. Sales declined 0.5 percent in Industrial and Transportation, 2.1 percent in Electro and Communications, and 2.9 percent in Safety, Security and Protection Services. 3M's six business segments all achieved operating income margins in excess of 21 percent. Worldwide operating income margins for the third quarter of 2012 were 22.4 percent, compared to 21.0 percent for the third quarter of 2011.

3M generated $3.562 billion of operating cash flows in the first nine months of 2012, an increase of $16 million when compared to the first nine months of 2011. Refer to the section entitled "Financial Condition and Liquidity" later in MD&A for a discussion of items impacting cash flows. In the first nine months of 2012, the Company purchased $1.490 billion of treasury stock compared to $2.207 billion of treasury stock repurchases in the first nine months of 2011. As of September 30, 2012, approximately $3.2 billion of 3M common stock remained available for repurchase under the February 2011 repurchase authorization of $7.0 billion, which has no pre-established end date. In February 2012, 3M's Board of Directors authorized a dividend increase of 7.3 percent for 2012, marking the 54th consecutive year of dividend increases for 3M. 3M's debt to total capital ratio (total capital defined as debt plus equity) was 26 percent at September 30, 2012 and 25 percent at December 31, 2011. As discussed in Note 7, in June 2012, 3M issued $650 million aggregate principal amount of five-year fixed rate notes due 2017 and $600 million aggregate principal amount of ten-year fixed rate notes due 2022. 3M has an AA- credit rating with a stable outlook from Standard & Poor's and an Aa2 credit rating with a stable outlook from Moody's Investors Service. The Company has significant cash on hand and sufficient additional access to capital markets to meet its funding needs.

On a worldwide basis, 3M's pension and postretirement plans were 82 percent funded at year-end 2011. The U.S. qualified plans, which were approximately 71 percent of the worldwide pension obligation, were 86 percent funded, the international pension plans were 87 percent funded, and the U.S. non-qualified pension plan is not funded. Asset returns in 2011 for the U.S. qualified plan were 8.7%. The year-end 2011 discount rate was 4.15%, down 1.08 percentage points from the 2010 discount rate of 5.23%. The decrease in discount rates, both U.S. and internationally, resulted in a significantly higher valuation of the projected benefit obligation, which reduced the plans' funded status. The changes in 3M's defined-benefit pension and postretirement plans' funded status significantly impacted several balance sheet lines at year-end 2011. These changes increased long-term liabilities by approximately $2.4 billion and decreased stockholders' equity by approximately $1.6 billion, with the other major impact primarily related to increased deferred taxes within other assets. Other pension and postretirement changes during the year, such as contributions and amortization, also impacted these balance sheet captions.

3M expects to contribute approximately $1 billion of cash to its global pension and postretirement plans in 2012, with $918 million contributed in the first nine months of 2012. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2012. 3M expects pension and postretirement benefit expense in 2012 to increase by approximately 9 cents per diluted share when compared to 2011. This 9 cents per diluted share increase includes the costs associated with the first-quarter 2012 voluntary early retirement incentive program in the United States (discussed earlier).

There are a few major items that will negatively impact earnings for total year 2012. As discussed further above, 3M expects that pension and postretirement expense will decrease 2012 earnings, when compared to 2011, by approximately 9 cents per diluted share. The company currently expects that its effective tax rate for total year 2012 will be approximately 29.0 to 29.5 percent. This compares to a tax rate of 27.8 percent for 2011. In addition, currency effects are expected to have a negative impact on earnings. 3M currently expects that organic sales growth and related incremental income, in addition to expected productivity improvements, the combination of selling price increases and raw material cost reductions, and other benefits, should more than offset the items that will negatively impact earnings.

Forward-looking statements in Part I, Item 2 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to the section entitled "Cautionary Note Concerning Factors That May Affect Future Results" in Part I, Item 2 and the risk factors provided in Part II, Item 1A for discussion of these risks and uncertainties).


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RESULTS OF OPERATIONS

Percent change information compares the third quarter or first nine months of 2012 with the same period last year, unless otherwise indicated.

Net Sales:



                                               Three months ended September 30, 2012
                                                      Europe,          Latin
                         United        Asia         Middle East      America/         Other
                         States       Pacific        & Africa         Canada       Unallocated     Worldwide
Net sales (millions)   $    2,694   $     2,303    $       1,594    $       907   $          (1 ) $     7,497
% of worldwide sales         35.9 %        30.7 %           21.3 %         12.1 %             -         100.0 %
Components of net
sales change:
Volume - organic              0.6 %         1.5 %           (1.1 )%         6.2 %             -           1.1 %
Price                         1.7          (1.6 )            1.9            4.3               -           1.1
Organic
local-currency sales          2.3          (0.1 )            0.8           10.5               -           2.2
Acquisitions                  0.5             -              1.6              -               -           0.5
Translation                     -          (1.3 )           (8.4 )         (7.4 )             -          (3.1 )
Total sales change            2.8 %        (1.4 )%          (6.0 )%         3.1 %             -          (0.4 )%

Sales in the third quarter of 2012 decreased 0.4 percent. Organic local-currency sales grew 2.2 percent, led by Latin America/Canada at 10.5 percent and the United States at 2.3 percent. Organic local-currency sales increased 0.8 percent in Europe, Middle East and Africa, impacted by weakness in Western Europe. Organic local-currency sales declined 0.1 percent in Asia Pacific, impacted by softness in China. Acquisitions added 0.5 percent to worldwide growth and currency impacts reduced third quarter 2012 worldwide sales growth by 3.1 percent. Worldwide selling prices rose 1.1 percent in the third quarter, despite selling price declines in 3M's optical systems business, where prices typically decline each year, which is common for the electronics' industry.

                                              Nine months ended September 30, 2012
                                                    Europe,         Latin
                        United        Asia        Middle East      America/        Other
                        States      Pacific        & Africa         Canada      Unallocated     Worldwide
Net sales (millions)   $   7,934   $    6,869    $       5,054    $    2,665   $          (5 ) $    22,517
% of worldwide sales        35.2 %       30.5 %           22.4 %        11.9 %             -         100.0 %
Components of net
sales change:
Volume - organic             1.5 %       (0.5 )%          (2.9 )%        6.9 %             -           0.4 %
Price                        2.4         (1.0 )            2.4           4.3               -           1.6
Organic
local-currency sales         3.9         (1.5 )           (0.5 )        11.2               -           2.0
Acquisitions                 0.4          0.3              2.3           0.1               -           0.8
Translation                    -         (0.6 )           (7.6 )        (7.4 )             -          (2.8 )
Total sales change           4.3 %       (1.8 )%          (5.8 )%        3.9 %             -             - %

Sales in the first nine months of 2012 were flat when compared to the first nine months of 2011. Organic local-currency sales grew 2.0 percent, led by Latin America/Canada at 11.2 percent and the United States at 3.9 percent. Organic local-currency sales declined 0.5 percent in Europe, Middle East and Africa, impacted by weakness in Western Europe. Organic local-currency sales declined 1.5 percent in Asia Pacific, impacted by softness in China and electronics. Acquisitions added 0.8 percent to worldwide growth and currency impacts reduced first nine months 2012 worldwide sales growth by 2.8 percent. Worldwide selling prices rose 1.6 percent in the first nine months, despite selling price declines in 3M's optical systems business, where prices typically decline each year, which is common for the electronics' industry.


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Operating Expenses:



                               Three months ended                 Nine months ended
                                  September 30,                     September 30,
(Percent of net sales)     2012        2011      Change       2012       2011      Change
Cost of sales                52.5 %      53.4 %     (0.9 )%     51.9 %     52.7 %     (0.8 )%
Selling, general and
administrative
expenses                     19.8        20.4       (0.6 )      20.3       20.6       (0.3 )
Research, development
and related expenses          5.3         5.2        0.1         5.4        5.3        0.1
Operating income             22.4 %      21.0 %      1.4 %      22.4 %     21.4 %      1.0 %

Pension and postretirement expense increased in 2012, which impacted cost of sales; selling, general and administrative expenses (SG&A); and research, development and related expenses (R&D). The year-on-year increase in pension and postretirement expense for the first nine months was $90 million, with $23 million of this year-on-year increase in the third quarter. Pension and postretirement expense for the first nine months of 2012 includes a $26 million charge related to the first-quarter 2012 voluntary early retirement incentive program (discussed in Note 8).

Cost of Sales:

Cost of sales includes manufacturing, engineering and freight costs. Cost of sales as a percent of net sales was 52.5 percent in the third quarter of 2012, a decrease of 0.9 percentage points from the same quarter last year. Third-quarter selling price increases and raw material cost decreases both benefited third-quarter 2012 cost of sales as a percent of sales, with this benefit partially offset by higher pension and postretirement costs (of which a portion impacts cost of sales) and foreign currency impacts.

Cost of sales in the first nine months of 2012 was 51.9 percent, a decrease of 0.8 percentage points from the same period last year. First nine months 2012 selling price increases and raw material cost decreases both benefited first nine months 2012 cost of sales as a percent of sales, with this benefit partially offset by higher pension and postretirement costs.

Selling, General and Administrative Expenses:

SG&A in dollars decreased $47 million, or 3.0 percent, in the third quarter of 2012 when compared to the third quarter of 2011. In addition to cost-control efforts, 3M experienced some savings from its first-quarter 2012 voluntary early retirement incentive program and restructuring actions. These benefits were partially offset by higher year-on-year pension and postretirement expense. SG&A, measured as a percent of sales, was 19.8 percent in third quarter of 2012, a decrease of 0.6 percentage points when compared to the same period last year.

SG&A in dollars decreased $81 million, or 1.7 percent, in the first nine months of 2012 when compared to the first nine months of 2011. In addition to cost-control efforts, 3M experienced some savings from its first-quarter 2012 voluntary early retirement incentive program and restructuring actions. First nine months 2012 SG&A included increases from acquired businesses which were largely not in 3M's first-quarter 2011 base spending, primarily related to SG&A spending for Winterthur Technologie AG and the do-it-yourself and professional business of GPI Group. In addition, higher year-on-year pension and postretirement expense, including the impact of the voluntary early retirement incentive program, plus expense related to restructuring actions, increased SG&A. SG&A, measured as a percent of sales, was 20.3 percent in the first nine months of 2012, a decrease of 0.3 percentage points when compared to the same period last year.

Research, Development and Related Expenses:

R&D expense in dollars increased $8 million, or 1.9 percent, in the third quarter of 2012 when compared to the third quarter of 2011, and increased $25 million, or 2.1 percent, in the first nine months of 2012 when compared to the first nine months of 2011. 3M continued to invest in its key growth initiatives. In both the third-quarter and first nine months of 2012, in addition to cost-control efforts, 3M experienced some savings from its first-quarter 2012 voluntary early retirement incentive program and restructuring actions. R&D expense was also impacted in the third-quarter and first nine months of 2012 by higher pension and postretirement expense. R&D, measured as a percent of sales, increased to 5.4 percent of sales in the first nine months of 2012, compared to 5.3 percent of sales in the first nine months of 2011.


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Operating Income:

Operating income margins were 22.4 percent in the third quarter of 2012 compared to 21.0 in the third quarter of 2011, an increase of 1.4 percentage points. This included a 1.6 percentage point benefit from the combination of selling price increases and raw material cost decreases, plus other net benefits of 0.2 percentage points. These benefits were partially offset by increased pension and postretirement benefit costs, which decreased margins by 0.3 percentage points, and foreign currency impacts, which decreased margins by 0.1 percentage points.

Operating income margins were 22.4 percent in the first nine months of 2012 compared to 21.4 in the first nine months of 2011, an increase of 1.0 percentage points. This was primarily comprised of a 1.7 percentage point benefit from the combination of selling price increases and raw material cost decreases. This was partially offset by increased pension and postretirement benefit costs, which reduced margins by 0.4 percentage points, and other net impacts, which decreased margins by 0.3 percentage points.

Interest Expense and Income:



                      Three months ended         Nine months ended
                         September 30,             September 30,
(Millions)            2012           2011        2012         2011
Interest expense   $       44     $       48   $     127    $     141
Interest income           (10 )          (10 )       (29 )        (29 )
Total              $       34     $       38   $      98    $     112

Interest expense was lower in both the third quarter and first nine months of 2012 compared to the same periods last year, primarily due to lower average international debt balances and lower interest rates on U.S. debt, partially offset by higher average U.S. debt balances and higher interest rates on international debt. Interest income was flat year-on-year when comparing the third quarter and first nine months of 2012 to the same periods last year.

Provision for Income Taxes:

Three months ended Nine months ended
September 30, September 30,
(Percent of pre-tax income) 2012 2011 2012 2011 Effective tax rate 28.2 % 28.6 % 29.0 % 28.1 %

The effective tax rate for the third quarter of 2012 was 28.2 percent, compared to 28.6 percent in the third quarter of 2011, a decrease of 0.4 percentage points. The effective tax rate for the first nine months of 2012 was 29.0 percent, compared to 28.1 percent in the first nine months of 2011, an increase . . .

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