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MMM > SEC Filings for MMM > Form 10-Q on 2-May-2013All Recent SEC Filings

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Form 10-Q for 3M CO


2-May-2013

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 five operating business segments: Industrial; Safety and Graphics; Electronics and Energy; Health Care; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis.

As described in Note 12, effective in the first quarter of 2013, the Company completed a realignment of its business segments to better serve global markets and customers. In addition, during the first quarter of 2013, 3M realigned its geographic area reporting to include Puerto Rico in the United States rather than in the Latin America/Canada region. The Company has begun to report comparative results under the new business segment and geographic area structure with the filing of this Quarterly Report on Form 10-Q. In the second quarter of 2013, the Company plans to revise its business segment and geographic area disclosures in its 2012 Annual Report on Form 10-K via a Current Report on Form 8-K to reflect these realignments.

Net income attributable to 3M was $1.129 billion, or $1.61 per diluted share in the first quarter of 2013, compared to $1.125 billion, or $1.59 per diluted share, in the first quarter of 2012. Despite a low-growth economic environment and the strong U.S. dollar, first-quarter 2013 sales increased 2.0 percent to $7.6 billion. 3M achieved organic local-currency sales growth (which includes organic volume impacts plus selling price impacts) in four of its five business segments. Organic local-currency sales increased 4.0 percent in Health Care, 3.7 percent in Consumer, 2.9 percent in Industrial, and 2.3 percent in Safety and Graphics. Organic local-currency sales declined 2.2 percent in Electronics and Energy, impacted by weakness in consumer electronics demand. For the company in total, organic local-currency sales grew 2.1 percent, with higher organic volumes contributing 1.7 percent and selling price increases contributing 0.4 percent. Acquisitions added 1.7 percent to sales, driven by the November 2012 acquisition of Ceradyne, Inc. (Industrial), the September 2012 purchase of assets that comprised the business of Federal Signal Technologies Group (Safety and Graphics), and the April 2012 acquisition of CodeRyte, Inc. (Health Care). Currency impacts reduced sales by 1.8 percent year-on-year, due in large part to a 14 percent weakening of the Japanese yen versus the U.S. dollar.

On a geographic basis, first-quarter 2013 organic local-currency sales growth was led by Latin America/Canada at 7.3 percent. All business segments contributed to this growth, led by Health Care and Safety and Graphics. Organic sales growth in the United States was 2.3 percent, marking the fourteenth consecutive quarter of positive growth, led by a 5 percent increase in Consumer and positive organic growth in Industrial, Safety and Graphics, and Health Care. Organic local-currency sales growth in Asia Pacific was 1.9 percent, with sales growth led by Consumer and Health Care. China/Hong Kong organic local-currency sales grew by 10 percent, while Japan declined 8 percent. Organic local-currency sales in EMEA decreased 0.8 percent, with positive organic growth in Middle East and Africa, along with Central/East Europe, more than offset by a 3 percent decline in Western Europe, reflecting the economic growth challenges in that region. In EMEA, organic local-currency sales grew in Health Care, were flat in Industrial, and declined in the other three business segments.

Operating income increased 0.7 percent in the first quarter and operating margins were 21.6 percent, a decrease of 0.2 percentage points year-on-year. These results benefited from selling price increases, raw material cost decreases, lower pension and postretirement benefit costs, and organic volume growth, with these benefits more than offset by several items, primarily lower factory utilization levels and the impact of 2012 acquisitions on 2013 operating income margins. Refer to the section entitled "Results of Operations" for further discussion. 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 7). The remainder related to selective restructuring in a few developed countries. These actions, in


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aggregate, were 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.

Weighted-average diluted shares outstanding declined 0.6 percent year-on-year to 702.1 million, which increased earnings per diluted share by approximately 1 cent. The income tax rate was 29.1 percent in the first quarter, up 0.3 percentage points versus last year's first quarter, which decreased earnings per diluted share by approximately 1 cent.

The following table contains sales and operating income results by business segment for the three months ended March 31, 2013 and 2012. 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 12 for additional information on business segments, including Elimination of Dual Credit.

                                         Three months ended March 31,
                                         2013                    2012                 % change
                                  Net       Operating      Net      Operating     Net     Operating
(Dollars in millions)            Sales       Income       Sales      Income      Sales     Income
Business Segments
Industrial                      $  2,675   $       576   $ 2,558   $       591      4.6 %      (2.6 )%
Safety and Graphics                1,417           335     1,387           334      2.2         0.4
Electronics and Energy             1,277           196     1,320           234     (3.3 )     (16.3 )
Health Care                        1,311           404     1,275           401      2.8         0.8
Consumer                           1,081           237     1,060           237      2.0         0.1
Corporate and Unallocated              2           (74 )       2          (138 )
Elimination of Dual Credit          (129 )         (28 )    (116 )         (25 )
Total Company                   $  7,634   $     1,646   $ 7,486   $     1,634      2.0 %       0.7 %

Sales in the first quarter of 2013 increased 2.0 percent. Organic local-currency sales increased 2.1 percent, acquisitions added 1.7 percent, and foreign currency translation impacts reduced sales by 1.8 percent. Sales increased 4.6 percent in Industrial, 2.8 percent in Health Care, 2.2 percent in Safety and Graphics, and 2.0 percent in Consumer. Sales declined 3.3 percent in Electronics and Energy. Four of 3M's five business segments achieved operating income margins in excess of 21 percent. Worldwide operating income margins for the first quarter of 2013 were 21.6 percent, compared to 21.8 percent for the first quarter of 2012.

3M generated $994 million of operating cash flows in the first quarter of 2013, an increase of $166 million when compared to the first quarter of 2012. Refer to the section entitled "Financial Condition and Liquidity" later in MD&A for a discussion of items impacting cash flows. In February 2013, 3M's Board of Directors authorized the repurchase of up to $7.5 billion of 3M's outstanding common stock, which replaced the Company's previous repurchase program. This authorization has no pre-established end date. In the first quarter of 2013, the Company purchased $805 million of treasury stock, of which a portion was under the previous authorization, compared to $524 million of treasury stock repurchases in the first quarter of 2012. As of March 31, 2013, approximately $6.9 billion remained available under the February 2013 repurchase authorization. In February 2013, 3M's Board of Directors authorized a per-share dividend increase of 7.6 percent for 2013, marking the 55th consecutive year of dividend increases for 3M. 3M's debt to total capital ratio (total capital defined as debt plus equity) was 24 percent at March 31, 2013 and 25 percent at December 31, 2012. 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.

3M expects to contribute approximately $400 million to $600 million of cash to its global pension and postretirement plans in 2013. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2013. 3M expects pension and postretirement benefit expense in 2013 to decrease by approximately $100 million pre-tax, or approximately 10 cents per diluted share, when compared to 2012. Refer to Note 7 (Pension and Postretirement Benefit Plans) for additional information concerning 3M's pension and post-retirement plans.


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There are a few major items that will impact earnings in 2013. As discussed above, 3M expects that a decrease in pension and postretirement expense will increase 2013 earnings, when compared to 2012, by approximately 10 cents per diluted share. 3M currently expects that its effective tax rate for 2013 will be approximately 29.5 to 30.0 percent, compared to 29.0 percent for 2012. Based on March 31, 2013 exchange rates, currency effects are expected to reduce total year 2013 sales by approximately 1.5 percent. Considering these items, 3M currently expects that sales growth and related incremental income, in addition to 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 first quarter of 2013 with the same period last year, unless otherwise indicated.

Net Sales:



                                                             Three months ended March 31, 2013
                                                                Europe,           Latin
                                   United        Asia         Middle East        America/        Other
                                    States      Pacific         & Africa          Canada       Unallocated     Worldwide
Net sales (millions)              $    2,704   $    2,286     $       1,765     $       882   $          (3 ) $     7,634
% of worldwide sales                    35.4 %       30.0 %            23.1 %          11.5 %             -         100.0 %
Components of net sales change:
Volume - organic                         1.6 %        3.1 %            (1.1 )%          2.9 %             -           1.7 %
Price                                    0.7         (1.2 )             0.3             4.4               -           0.4
Organic local-currency sales             2.3          1.9              (0.8 )           7.3               -           2.1
Acquisitions                             3.0          0.3               2.3             0.4               -           1.7
Translation                                -         (2.7 )            (1.5 )          (5.0 )             -          (1.8 )
Total sales change                       5.3 %       (0.5 )%              - %           2.7 %             -           2.0 %

Sales in the first quarter of 2013 increased 2.0 percent when compared to the first quarter of 2012. Organic local-currency sales grew 2.1 percent, with increases of 7.3 percent in Latin America/Canada, 2.3 percent in the United States, and 1.9 percent in Asia Pacific. Organic local-currency sales declined 0.8 percent in Europe, Middle East and Africa, impacted by weakness in Western Europe. Acquisitions added 1.7 percent to worldwide growth and currency impacts reduced first three months 2013 worldwide sales growth by 1.8 percent. Worldwide selling prices rose 0.4 percent in the first three months, despite selling price declines in 3M's optical systems business, where prices typically decline each year, which is common for the electronics' industry.

Operating Expenses:



                                                 Three months ended
                                                     March 31,
(Percent of net sales)                         2013     2012   Change
Cost of sales                                   52.0 %  52.0 %      - %
Selling, general and administrative expenses    20.8    20.7      0.1
Research, development and related expenses       5.6     5.5      0.1
Operating income                                21.6 %  21.8 %   (0.2 )%

As discussed in the overview section, 3M expects its global pension and postretirement expense to decrease $100 million for total year 2013 when compared to 2012, which impacts cost of sales; selling, general and administrative expenses (SG&A); and research, development and related expenses (R&D). The year-on-year decrease in pension and postretirement expense for the first quarter was $42 million, which included a year-on-year benefit related to a $26 million charge in the first quarter of 2012 for a voluntary early retirement incentive program (discussed in Note 7).

Cost of Sales:

Cost of sales includes manufacturing, engineering and freight costs. Cost of sales as a percent of net sales was 52.0 percent in the first quarter of 2013, unchanged from the same quarter last year. First-quarter selling price increases and raw material cost decreases, lower pension and postretirement costs (of which a portion impacts cost of sales), in addition to organic volume increases, benefited first-quarter 2013 cost of sales as a percent of sales. These benefits were offset by several items, primarily lower factory utilization and the impact of 2012 acquisitions.

Selling, General and Administrative Expenses:

SG&A increased $37 million, or 2.4 percent, in the first quarter of 2013 when compared to the first quarter of 2012, in line with the net sales increase. First quarter 2013 SG&A included increases from acquired businesses which were not in 3M's first-quarter 2012 spending, primarily related to SG&A spending for Ceradyne, Inc. and Federal Signal Technologies,


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which were partially offset by lower pension and postretirement expense. SG&A, measured as a percent of sales, increased to 20.8 percent in the first quarter of 2013, compared to 20.7 percent in the first quarter of 2012.

Research, Development and Related Expenses:

R&D expense increased $19 million, or 4.6 percent, in the first quarter of 2013 when compared to the first quarter of 2012. 3M continued to invest in its key growth initiatives. In addition, first quarter 2013 R&D included increases from acquired businesses which were not in 3M's first-quarter 2012 spending, primarily related to R&D spending for Ceradyne, Inc. and Federal Signal Technologies. These increases were partially offset by lower pension and postretirement expense. R&D, measured as a percent of sales, increased to 5.6 percent of sales in the first quarter of 2013, compared to 5.5 percent of sales in the first quarter of 2012.

Operating Income:

Operating income margins were 21.6 percent in the first quarter of 2013 compared to 21.8 in the first quarter of 2012, a decrease of 0.2 percentage points. This included a 0.9 percentage point benefit from the combination of selling price increases and raw material cost decreases. Selling prices rose 0.4 percent and raw material cost deflation was over 2 percent favorable year-on-year. In addition, lower year-on-year pension and postretirement benefit costs provided a 0.6 percentage point benefit and profit leverage on organic volume growth added 0.2 percentage points. These benefits were offset by lower factory utilization, which decreased margins by approximately 1.0 percentage points. Factory utilization largely related to increased inventories in portions of the Electronics and Energy, and Industrial business segments. In addition, acquisition impacts decreased margins by approximately 0.4 percentage points and other items decreased margins by approximately 0.5 percentage points.

Interest Expense and Income:



                      Three months ended
                           March 31,
(Millions)            2013           2012
Interest expense   $       39     $       40
Interest income           (10 )           (9 )
Total              $       29     $       31

Interest expense was slightly lower in the first quarter of 2013 compared to the same period last year, primarily due to lower interest rates, partially offset by higher average debt balances. Interest income was up slightly year-on-year when comparing the first quarter of 2013 to the same period last year, primarily due to higher average cash balances, partially offset by lower international interest rates.

Provision for Income Taxes:

Three months ended
March 31,
(Percent of pre-tax income) 2013 2012 Effective tax rate 29.1 % 28.8 %

The effective tax rate for the first quarter of 2013 was 29.1 percent, compared to 28.8 percent in the first quarter of 2012, an increase of 0.3 percentage points. This included an increase in the effective tax rate of 3.6 percentage points year-on-year, which largely related to adjustments to 3M's income tax reserves in the first quarter of 2012. This increase was partially offset by factors which decreased the Company's effective tax rate by 3.3 percentage points year-on-year, which included the combination of the reinstatement of the U.S. research and development credit in 2013, and international taxes. The international tax benefit was largely due to the estimated current year geographic mix of income before taxes. Refer to Note 5 for further discussion of income taxes.

The company currently expects that its effective tax rate for total year 2013 will be approximately 29.5 to 30.0 percent. The rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors, such as geographic mix of income before taxes.


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Net Income Attributable to Noncontrolling Interest:

Three months ended
March 31,
(Millions) 2013 2012 Net income attributable to noncontrolling interest $ 18 $ 16

Net income attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M ownership interests in 3M consolidated entities. The changes in noncontrolling interest amounts are primarily related to Sumitomo 3M Limited (Japan), which is 3M's most significant consolidated entity with non-3M ownership interests. As of March 31, 2013, 3M's effective ownership in Sumitomo 3M Limited is 75 percent.

Currency Effects:

3M estimates that year-on-year currency effects, including hedging impacts, decreased net income attributable to 3M by approximately $6 million for the three months ended March 31, 2013. This estimate includes the effect of translating profits from local currencies into U.S. dollars and the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad. This estimate also includes year-on-year currency effects from transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks and the negative impact of swapping Venezuelan bolivars into U.S. dollars, which 3M estimates increased net income attributable to 3M by approximately $13 million for three months ended March 31, 2013.

Significant Accounting Policies:

Information regarding new accounting standards is included in Note 1 to the Consolidated Financial Statements.

PERFORMANCE BY BUSINESS SEGMENT

Disclosures related to 3M's business segments are provided in Note 12. The reportable segments are Industrial; Safety and Graphics; Electronics and Energy; Health Care; and Consumer.

In addition to these five operating business segments, 3M assigns certain costs to "Corporate and Unallocated", which is presented separately in the preceding business segments table and in Note 12. Corporate and Unallocated includes a variety of miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the Company may choose not to allocate directly to its business segments. Because this category includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis. Corporate and Unallocated operating expenses decreased by $64 million in the first quarter of 2013 when compared to the same period last year. About half of this decrease was due to lower pension and postretirement benefit expense. A portion of the remainder relates to the phased implementation of 3M's enterprise resource planning (ERP) system. As 3M moves its ERP system from the development stage into deployment, more costs are being borne by the business segments rather than Corporate. On average, this ERP impact reduced year-on-year operating income margins in each of 3M's five business segments by 0.3 percentage points, while Corporate reflects a year-on-year benefit.

Information related to 3M's business segments for the first quarter of both 2013 and 2012 is presented in the tables that follow. Organic local-currency sales include both organic volume impacts plus selling price impacts. Acquisition impacts are measured separately for the first twelve months of the acquisition. The acquisition and divestiture impacts, if any, foreign currency translation impact and total sales change are also provided for each business segment. Any references to EMEA relate to Europe, Middle East and Africa on a combined basis.


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Industrial Business:



                                Three months ended
                                    March 31,
                                 2013         2012
Sales (millions)              $    2,675     $ 2,558
Sales change analysis:
Organic local currency               2.9 %       7.1 %
Acquisitions                         3.6         3.2
Translation                         (1.9 )      (1.2 )
Total sales change                   4.6 %       9.1 %

Operating income (millions)   $      576     $   591
Percent change                      (2.6 )%     19.3 %
Percent of sales                    21.5 %      23.1 %

The Industrial segment serves a broad range of markets, such as automotive original equipment manufacturers (OEM) and automotive aftermarket (auto body shops and retail), electronics, paper and packaging, food and beverage, and appliance. Industrial products include tapes, a wide variety of coated and non-woven abrasives, adhesives, specialty materials, filtration products, closure systems for personal hygiene products, acoustic systems products, and components and products that are used in the manufacture, repair and maintenance of automotive, marine, aircraft and specialty vehicles.

Sales in Industrial totaled $2.7 billion, up 4.6 percent in U.S. dollars. Organic local-currency sales increased 2.9 percent, acquisitions added 3.6 percent, and foreign currency translation reduced sales by 1.9 percent. On an organic local-currency basis, most of Industrial's businesses experienced sales growth in the first quarter. Sales growth was led by aerospace, due to a combination of market share gains and strong end-market growth, followed by industrial adhesives and tapes, personal care, and liquid filtration. 3M's automotive OEM business local-currency sales increased 2 percent, despite an estimated decline in first-quarter global auto production, as 3M continues to gain relevance and higher market penetration levels. Organic local-currency sales declined in advanced materials. Acquisition growth related to the November 2012 acquisition of Ceradyne, Inc., which is involved in the development and production of advanced technical ceramics for demanding applications in the automotive, oil and gas, solar, industrial, electronics and defense industries.

Geographically, organic local-currency sales increased 6 percent in Latin America/Canada, and 4 percent in both the United States and Asia Pacific. Organic local-currency sales were flat in EMEA, with broad-based declines in Western Europe offset by increases in Central/East Europe and Middle East/Africa.

Operating income was $576 million in the first quarter, down 2.6 percent year-on-year. Operating income margins decreased by 1.6 percentage points to 21.5 percent. This decline in margins partially related to the Ceradyne acquisition, which reduced operating income margins by approximately 1.0 percentage point, in addition to some increased inventories in the advanced materials business, which reduced factory utilization levels in the first quarter.


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Safety and Graphics Business:



                                Three months ended
                                    March 31,
                                 2013         2012
Sales (millions)              $    1,417    $  1,387
Sales change analysis:
Organic local currency               2.3 %       5.3 %
Acquisitions                         2.2         0.1
Divestitures                        (0.1 )         -
Translation                         (2.2 )      (1.2 )
Total sales change                   2.2 %       4.2 %
. . .
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