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MMM > SEC Filings for MMM > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for 3M CO

Form 10-Q for 3M CO


31-Oct-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 3M's Current Report on Form 8-K dated May 16, 2013 (which updated 3M's 2012 Annual Report on Form 10-K) and 3M's Quarterly Report on Form 10-Q for the period ended March 31, 2013, during the first quarter of 2013 the Company completed a realignment of its business segments to better serve global markets and customers (refer to Note 13 herein). 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. Segment and geographic information presented herein reflects the impact of these changes for all periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's consolidated statements and notes including in its Current Report on Form 8-K dated May 16, 2013.

Net income attributable to 3M was $1.230 billion, or $1.78 per diluted share, in the third quarter of 2013, compared to $1.161 billion, or $1.65 per diluted share, in the third quarter of 2012. Third-quarter 2013 sales increased 5.6 percent to $7.9 billion. 3M achieved organic local-currency sales growth (which includes organic volume impacts plus selling price impacts) in all five of its business segments. Organic local-currency sales increased 8.1 percent in Safety and Graphics, 6.8 percent in Health Care, 6.2 percent in Industrial, 4.2 percent in Consumer, and 3.8 percent in Electronics and Energy. For the Company in total, organic local-currency sales grew 5.8 percent, with higher organic volumes contributing 4.8 percent and selling price increases contributing 1.0 percent. Acquisitions added 1.5 percent to sales, driven by the November 2012 acquisition of Ceradyne, Inc. and the September 2012 purchase of net assets that comprised the business of Federal Signal Technologies Group. Currency impacts reduced sales by 1.7 percent year-on-year, due in large part to a 20 percent weakening of the Japanese yen versus the U.S. dollar.

On a geographic basis, third-quarter 2013 organic local-currency sales growth was 4 percent across all developed markets, an improvement versus recent quarters, and grew 10 percent in developing markets. Organic local-currency sales growth was led by Latin America/Canada at 10.5 percent, as all business segments contributed to this growth, led by Industrial, Health Care, and Safety and Graphics. Organic local-currency sales growth in Asia Pacific was 6.8 percent, with growth led by Safety and Graphics, and Health Care. Organic local-currency sales in China/Hong Kong grew 11.1 percent, with notable strength in Safety and Graphics, and Health Care, followed by Electronics and Energy. Organic local-currency sales in Japan grew 4.5 percent, led by Industrial, Health Care, and Consumer. Organic sales growth in the United States was 4.5 percent, led by Health Care, Industrial, and Safety and Graphics. Organic local-currency sales in EMEA increased 4.3 percent, led by Middle East Africa and Central East Europe. West Europe local currency sales increased 2.8 percent, continuing a positive trend. This was the strongest local-currency sales growth in West Europe since the first quarter of 2011. In EMEA, organic local-currency sales grew in all five business segments, led by Industrial and Health Care.

Operating income increased 3.6 percent in the third quarter and operating margins were 22.0 percent, a decrease of 0.4 percentage points year-on-year. These results benefited from the combination of selling price increases and raw material cost decreases, plus organic volume growth. These benefits were more than offset by several items, including the impact of 2012 acquisitions on 2013 operating income margins, and strategic investments (including 3M's global ERP investments). Refer to the section entitled "Results of Operations" for further discussion.


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The income tax rate was 27.4 percent in the third quarter, down 0.8 percentage points versus last year's third quarter, which increased earnings per diluted share by approximately 2 cents. Weighted-average diluted shares outstanding in the third quarter of 2013 declined 1.6 percent year-on-year to 691.8 million, which increased earnings per diluted share by approximately 3 cents. Foreign exchange impacts decreased earnings per diluted share by approximately 4 cents.

Net income attributable to 3M was $3.556 billion, or $5.10 per diluted share, in the first nine months of 2013, compared to $3.453 billion, or $4.91 per diluted share, in the first nine months of 2012. Sales in the first nine months of 2013 totaled $23.3 billion, an increase of 3.5 percent, with organic local-currency sales growth of 5.5 percent in Health Care, 4.2 percent in Industrial, 4.0 in Safety and Graphics, and 3.6 percent in Consumer. Organic local-currency sales were flat in Electronics and Energy. Geographically, organic local-currency sales increased in all major geographic regions, led by Latin American/Canada at 8.8 percent.

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, 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.

The following table contains sales and operating income results by business segment for the three months ended September 30, 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 13 for additional information on business segments, including Elimination of Dual Credit.

                                     Three months ended September 30,
                                      2013                      2012                  % change
                                Net       Operating      Net       Operating      Net      Operating
(Dollars in millions)          Sales        Income      Sales       Income       Sales      Income
Business Segments
Industrial                   $   2,674    $      568   $  2,462   $       568        8.6 %       0.1 %
Safety and Graphics              1,448           315      1,357           295        6.7         7.3
Electronics and Energy           1,449           300      1,414           291        2.5         3.2
Health Care                      1,328           426      1,259           399        5.5         6.7
Consumer                         1,153           247      1,129           246        2.1         0.6
Corporate and Unallocated            2           (87 )        1           (93 )
Elimination of Dual Credit        (138 )         (30 )     (125 )         (28 )
Total Company                $   7,916    $    1,739   $  7,497   $     1,678        5.6 %       3.6 %

Sales in the third quarter of 2013 increased 5.6 percent. Organic local-currency sales increased 5.8 percent, acquisitions added 1.5 percent, and foreign currency translation impacts reduced sales by 1.7 percent. Sales increased 8.6 percent in Industrial, 6.7 percent in Safety and Graphics, 5.5 percent in Health Care, 2.5 percent in Electronics and Energy, and 2.1 percent in Consumer. All five of 3M's business segments achieved operating income margins in excess of 20 percent. Worldwide operating income margins for the third quarter of 2013 were 22.0 percent, compared to 22.4 percent for the third quarter of 2012.

3M generated $3.824 billion of operating cash flows in the first nine months of 2013, an increase of $262 million when compared to the first nine months 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 nine months of 2013, the Company purchased $3.538 billion of stock, of which a portion was under the previous authorization, compared to $1.490 billion of stock repurchases in the first nine months of 2012. As of September 30, 2013, approximately $4.1 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 September 30, 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


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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 $500 million of cash to its global pension and postretirement plans in 2013, primarily for its international pension plans. 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 8 (Pension and Postretirement Benefit Plans) for additional information concerning 3M's pension and postretirement plans.

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 28.0 to 28.5 percent, compared to 29.0 percent for 2012. Based on September 30, 2013 exchange rates, currency effects are expected to reduce total year 2013 sales by approximately 2.0 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 third quarter or first nine months of 2013 with the same period last year, unless otherwise indicated.

Net Sales:



                                                 Three months ended September 30, 2013
                                                       Europe,         Latin
                            United        Asia       Middle East      America/         Other
                            States      Pacific       & Africa         Canada       Unallocated     Worldwide
Net sales (millions)      $    2,896   $    2,342   $       1,747   $        936   $          (5 ) $     7,916
% of worldwide sales            36.6 %       29.6 %          22.0 %         11.8 %             -         100.0 %
Components of net sales
change:
Volume - organic                 3.7 %        7.3 %           3.4 %          4.9 %             -           4.8 %
Price                            0.8         (0.5 )           0.9            5.6               -           1.0
Organic local-currency
sales                            4.5          6.8             4.3           10.5               -           5.8
Acquisitions                     2.7          0.2             2.2            0.2               -           1.5
Divestitures                    (0.1 )          -               -              -               -             -
Translation                        -         (5.3 )           3.1           (6.3 )             -          (1.7 )
Total sales change               7.1 %        1.7 %           9.6 %          4.4 %             -           5.6 %

Sales in the third quarter of 2013 increased 5.6 percent when compared to the third quarter of 2012. Organic local-currency sales grew 5.8 percent, led by Latin America/Canada at 10.5 percent. Organic local-currency sales increased 6.8 percent in Asia Pacific, 4.5 percent in the United States, and 4.3 percent in Europe, Middle East and Africa. Acquisitions added 1.5 percent to worldwide growth and currency impacts reduced third quarter 2013 worldwide sales growth by 1.7 percent. Worldwide selling prices rose 1.0 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, 2013
                                                      Europe,        Latin
                           United        Asia       Middle East     America/        Other
                           States      Pacific       & Africa        Canada      Unallocated     Worldwide
Net sales (millions)      $   8,408   $    6,867   $       5,289   $    2,748   $         (10 ) $    23,302
% of worldwide sales           36.1 %       29.5 %          22.6 %       11.8 %             -         100.0 %
Components of net sales
change:
Volume - organic                2.1 %        4.6 %           1.0 %        3.4 %             -           2.7 %
Price                           0.5         (0.9 )           0.6          5.4               -           0.7
Organic local-currency
sales                           2.6          3.7             1.6          8.8               -           3.4
Acquisitions                    3.0          0.3             2.2          0.4               -           1.7
Divestitures                   (0.1 )          -               -            -               -             -
Translation                       -         (4.0 )           0.8         (4.8 )             -          (1.6 )
Total sales change              5.5 %          - %           4.6 %        4.4 %             -           3.5 %

Sales in the first nine months of 2013 increased 3.5 percent when compared to the first nine months of 2012. Organic local-currency sales grew 3.4 percent, with increases of 8.8 percent in Latin America/Canada, 3.7 percent in Asia Pacific, 2.6 percent in the United States, and 1.6 percent in Europe, Middle East and Africa. Acquisitions added 1.7 percent to worldwide growth and currency impacts reduced first nine months 2013 worldwide sales growth by 1.6 percent. Worldwide selling prices rose 0.7 percent in the first nine months, despite selling price declines in 3M's optical systems business.


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Operating Expenses:



                                Three months ended              Nine months ended
                                  September 30,                   September 30,
(Percent of net sales)      2013       2012     Change      2013      2012     Change
Cost of sales                 52.4 %     52.5 %    (0.1 )%    52.1 %    51.9 %     0.2 %
Selling, general and
administrative expenses       20.3       19.8       0.5       20.6      20.3       0.3
Research, development
and related expenses           5.3        5.3         -        5.5       5.4       0.1
Operating income              22.0 %     22.4 %    (0.4 )%    21.8 %    22.4 %    (0.6 )%

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). Refer to the 3M's Current Report on Form 8-K dated May 16, 2013 (MD&A section entitled Critical Accounting Estimates - Pension and Postretirement Obligations) for background concerning this reduction. The year-on-year decrease in pension and postretirement expense for the third quarter and first nine months was $16 million and $76 million, respectively. The first nine months 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 8).

Cost of Sales:

Cost of sales includes manufacturing, engineering and freight costs. Cost of sales as a percent of net sales was 52.4 percent in the third quarter of 2013 and 52.1 percent in the first nine months of 2013, both similar to the same periods last year. Cost of sales as a percent of sales increased due to 2012 acquisitions and lower factory utilization. These impacts were offset by the combination of 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.

Selling, General and Administrative Expenses:

SG&A increased 8.2 percent in the third quarter of 2013 when compared to the third quarter of 2012. Third quarter 2013 SG&A included strategic investments in enterprise resource planning (ERP) and business transformation efforts, in addition to increases from acquired businesses that were largely not in 3M's third-quarter 2012 spending (Ceradyne, Inc. and Federal Signal Technologies), which were partially offset by lower pension and postretirement expense. SG&A increased 5.3 percent in the first nine months of 2013, impacted by these same factors. SG&A, measured as a percent of sales, increased 0.3 percentage points to 20.6 percent in the first nine months of 2013, compared to 20.3 in the same period last year.

Research, Development and Related Expenses:

R&D expense increased approximately 6 percent in the third quarter and 5 percent in the first nine months of 2013 when compared to the same periods last year. 3M continued to invest in its key growth initiatives, including more R&D aimed at disruptive innovation. In addition, 2013 R&D included year-on-year increases from acquired businesses which were largely not in 3M's third quarter or first nine months 2012 spending (primarily 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 5.5 percent of sales in the first nine months of 2013, compared to 5.4 percent of sales in the first nine months of 2012.

Operating Income:

Operating income margins were 22.0 percent in the third quarter of 2013 compared to 22.4 in the third quarter of 2012, a decrease of 0.4 percentage points. These results included a 1.2 percentage point benefit from the combination of selling price increases and raw material cost decreases. Selling prices rose 1.0 percent and raw material cost deflation was approximately 2 percent favorable year-on-year. In addition, cost of sales reflected a 0.4 percentage point benefit from operating income leverage on organic volume growth. Items that reduced operating income margins included a 0.8 percentage point impact from strategic investments, including selective restructuring actions. Strategic investments included ERP and business transformation efforts, along with more R&D aimed at disruptive innovation, which are all


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expected to strengthen 3M for the future. Acquisition impacts decreased operating income margins by 0.4 percentage points and foreign exchange impacts decreased margins by 0.3 percentage points. In addition, the recently enacted medical device excise tax in the U.S. and other factors reduced operating income margins by 0.5 percentage points.

Operating income margins were 21.8 percent in the first nine months of 2013 compared to 22.4 in the first nine months of 2012, a decrease of 0.6 percentage points. These results included a 1.1 percentage point benefit from the combination of selling price increases and raw material cost decreases. Selling prices rose 0.7 percent and raw material cost deflation was approximately 2 percent favorable year-on-year. Items that reduced operating income margins included a 0.5 percentage point impact from lower factory utilization, and acquisition impacts, which decreased operating income margins by 0.4 percentage points. Finally, the combination of strategic investments in ERP and business transformation efforts, along with more R&D aimed at disruptive innovation, the recently enacted medical device excise tax in the U.S., and other factors reduced operating income margins by 0.8 percentage points.

Interest Expense and Income:



                      Three months ended         Nine months ended
                         September 30,             September 30,
(Millions)            2013           2012        2013         2012
Interest expense   $       33     $       44   $     113    $     127
Interest income           (10 )          (10 )       (30 )        (29 )
Total              $       23     $       34   $      83    $      98

Interest expense was lower in the third quarter and first nine months of 2013 compared to the same periods last year, primarily due to lower interest rates. In addition, the third quarter benefited significantly from lower average U.S. debt balances. Interest income was relatively flat year-on-year when comparing the third quarter and first nine months of 2013 to the same periods last year, as higher average international cash balances were offset by lower average U.S. balances and interest rates. In addition, lower international interest rates penalized year-on-year first nine month results.

Provision for Income Taxes:

Three months ended Nine months ended
September 30, September 30,
(Percent of pre-tax income) 2013 2012 2013 2012 Effective tax rate 27.4 % 28.2 % 28.0 % 29.0 %

The effective tax rate for the third quarter of 2013 was 27.4 percent, compared to 28.2 percent in the third quarter of 2012, a decrease of 0.8 percentage points, impacted by many factors. Factors that decreased the Company's effective tax rate included benefits realized for restoration of tax basis on certain assets for which depreciation deductions were previously limited, international taxes (with this international tax benefit largely due to the estimated current year geographic mix of income before taxes), the reinstatement of the U.S. research and development credit in 2013, and other items. Combined, these factors decreased the Company's effective tax rate by 3.3 percentage points. This benefit was partially offset by factors that increased the effective tax rate by 2.5 percentage points, which largely related to adjustments to 3M's income tax reserves in the third quarter of 2013 when compared to the same period of 2012.

The effective tax rate for the first nine months of 2013 was 28.0 percent, compared to 29.0 percent in the first nine months of 2012, a decrease of 1.0 percentage points, impacted by many factors. Factors that decreased the Company's effective tax rate included international taxes (with this international tax benefit largely due to the estimated current year geographic mix of income before taxes), the reinstatement of the U.S. research and development credit in 2013, the restoration of tax basis on certain assets for which depreciation deductions were previously limited, and other items. Combined, these factors decreased the Company's effective tax rate by 2.7 percentage points. This benefit was partially offset by factors that increased the effective tax rate by 1.7 percentage points, which largely related to adjustments to 3M's income tax reserves for the first nine months of 2013 when compared to the same period of 2012. Refer to Note 6 for further discussion of income taxes.

The Company currently expects that its effective tax rate for total year 2013 will be approximately 28.0 to 28.5 percent. The rate will change 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 the estimated current year geographic mix of income before taxes.


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Net Income Attributable to Noncontrolling Interest:



                                           Three months ended                  Nine months ended
                                              September 30,                      September 30,
(Millions)                               2013              2012             2013              2012
Net income attributable to

noncontrolling interest $ 15 $ 19 $ 49 $ 54

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 September 30, 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 $26 million for the three months ended September 30, 2013 and decreased net income attributable to 3M by approximately $44 million for the nine months ended September 30, 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 . . .

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