How did 3M perform financially in 2005?

3M posted record net sales of $21.167 billion, up 5.8% (4.1% core local-currency growth), and record net income of $3.199 billion, or $4.12 per diluted share, compared with $3.75 in 2004. Operating income grew 9.4% to $5.009 billion, and operating margin improved to 23.7%. All seven business segments contributed to growth.

How much cash did 3M return to shareholders, and what is the 2006 capital return plan?

In 2005, 3M returned about $3.6 billion through $2.377 billion of share repurchases and $1.286 billion of dividends ($1.68 per share). In February 2006, the board raised the quarterly dividend 9.5% to $0.46 ($1.84 annualized) and authorized up to $2.0 billion of buybacks through February 28, 2007. The company also has a 47-year record of consecutive annual dividend increases.

What are the main risks and uncertainties highlighted in the filing?

Key risks include: (1) the respirator mask/asbestos litigation, with about 48,600 claimants and $210 million of reserves against $447 million of insurance receivables, plus a pending West Virginia AG suit with no liability recorded; (2) regulatory scrutiny of PFOA and PFOS, including EPA and European actions and groundwater issues in Minnesota; (3) expected 2006 declines in personal care and branded pharmaceuticals, with Aldara falling short of expectations and a generic Metrogel-Vaginal substitute expected mid-2006; (4) currency exposure, with about 60% of revenue outside the U.S.; and (5) raw material and energy cost pressures from oil-derived inputs.

What changes are expected in 2006?

3M expects solid sales growth across most businesses, with increased R&D and capital spending (capex about $1.1 billion versus $943 million in 2005). Effective January 1, 2006, the Industrial and Transportation segments were combined, and the Personal Care Division moved into the new segment. The company will adopt SFAS 123R, which it estimates will reduce 2006 diluted EPS by about $0.16. Pension contributions are expected to range from $100 million to $400 million, and the company has no required minimum U.S. pension contribution in 2006.

How is 3M's balance sheet and liquidity position?

At year-end 2005, 3M had cash of $1.072 billion, total debt of $2.381 billion (down from $2.821 billion), net debt of $1.309 billion, and a debt-to-total-capital ratio of about 19%. It holds AA (S&P) and Aa1 (Moody's) credit ratings, and operating cash flow was $4.258 billion. Its $565 million credit facility requires a capitalization ratio below 0.60 to 1, which stood at about 0.20 to 1 at year-end.

MMM 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 21, 2006. Cited figures are marked; the original filing is the authoritative source.

3M Company's fiscal 2005 10-K shows a record year: net sales rose 5.8% to $21.167 billion^a, net income reached a record $3.199 billion ($4.12 per diluted share, versus $3.75 in 2004), and operating income grew 9.4% to $5.009 billion, lifting operating margin to 23.7% from 22.9%.

Growth was broad-based, with all seven business segments posting positive local-currency sales growth. Industrial (boosted by the August 2005 CUNO acquisition, which contributed 5.1 points of segment growth) and Electro and Communications (operating income up 35.4%^b) stood out, while Display and Graphics sales growth was held back by declines in CRT rear-projection lens systems and the commercial videotape phase-out. Core local-currency sales grew 4.1%, and pricing was a modest contributor at 0.6%.

Capital allocation was shareholder-focused. 3M returned about $3.6 billion^c to shareholders in 2005 through $2.377 billion of share repurchases and $1.286 billion of dividends, and raised its quarterly dividend 16.7% during 2005 (47th consecutive annual increase). In February 2006 the board raised the quarterly dividend another 9.5% to $0.46 and authorized up to $2.0 billion of new buybacks through February 2007.

Free cash flow was solid at roughly $3.3 billion^d (operating cash flow of $4.258 billion less $943 million of capex), though operating cash flow was flat versus 2004 and cash fell to $1.072 billion after the $1.36 billion CUNO purchase. Total debt declined to $2.381 billion, and debt to total capital fell to about 19%, supported by AA/Aa1 credit ratings. The filing also flags several items to watch.

Management expects declines in personal care and branded pharmaceuticals (including Aldara, whose sales fell short of expectations) to persist through 2006, and a generic Metrogel-Vaginal substitute is expected in mid-2006. The 2006 outlook calls for higher R&D and capital spending (about $1.1 billion), and the adoption of SFAS 123R will reduce 2006 EPS by roughly $0.16.

Legal exposures remain material: the respirator mask/asbestos docket of about 48,600 claimants carries $210 million in reserves against $447 million of insurance receivables, and the company faces PFOA/PFOS regulatory scrutiny and class actions. Roughly 60% of revenue comes from outside the United States, which creates currency sensitivity.

02—Key points

Key Highlights

Record 2005 net sales of $21.167 billion (+5.8%) and record net income of $3.199 billion; diluted EPS of $4.12 versus $3.75 in 2004.
Operating income rose 9.4% to $5.009 billion, with operating margin expanding to 23.7% from 22.9%, supported by about $400 million of cost-reduction benefits.
Capital returns of about $3.6 billion in 2005 ($2.377 billion of buybacks plus $1.286 billion of dividends); a new $2.0 billion repurchase authorization and a 9.5% dividend increase were announced for 2006.
Acquisition of CUNO Inc. (~$1.36 billion, August 2005) added 5.1 points to Industrial segment growth and drove the rise in goodwill to $3.47 billion.
Electro and Communications operating income grew 35.4%, the segment's best local-currency growth since 2000, led by semiconductor-related demand.
Display and Graphics sales growth was weighed down by CRT rear-projection lens declines and the commercial videotape phase-out, though operating income was up only 2.3%.
Key risks include the asbestos/respirator litigation (48,600 pending claimants, $210 million reserve), PFOA/PFOS regulatory actions, Aldara and personal care revenue pressure, and about 60% international revenue exposure to currency swings.

03—Questions

Frequently Asked Questions

How did 3M perform financially in 2005?
3M posted record net sales of $21.167 billion, up 5.8% (4.1% core local-currency growth), and record net income of $3.199 billion, or $4.12 per diluted share, compared with $3.75 in 2004. Operating income grew 9.4% to $5.009 billion, and operating margin improved to 23.7%. All seven business segments contributed to growth.
How much cash did 3M return to shareholders, and what is the 2006 capital return plan?
In 2005, 3M returned about $3.6 billion through $2.377 billion of share repurchases and $1.286 billion of dividends ($1.68 per share). In February 2006, the board raised the quarterly dividend 9.5% to $0.46 ($1.84 annualized) and authorized up to $2.0 billion of buybacks through February 28, 2007. The company also has a 47-year record of consecutive annual dividend increases.
What are the main risks and uncertainties highlighted in the filing?
Key risks include: (1) the respirator mask/asbestos litigation, with about 48,600 claimants and $210 million of reserves against $447 million of insurance receivables, plus a pending West Virginia AG suit with no liability recorded; (2) regulatory scrutiny of PFOA and PFOS, including EPA and European actions and groundwater issues in Minnesota; (3) expected 2006 declines in personal care and branded pharmaceuticals, with Aldara falling short of expectations and a generic Metrogel-Vaginal substitute expected mid-2006; (4) currency exposure, with about 60% of revenue outside the U.S.; and (5) raw material and energy cost pressures from oil-derived inputs.
What changes are expected in 2006?
3M expects solid sales growth across most businesses, with increased R&D and capital spending (capex about $1.1 billion versus $943 million in 2005). Effective January 1, 2006, the Industrial and Transportation segments were combined, and the Personal Care Division moved into the new segment. The company will adopt SFAS 123R, which it estimates will reduce 2006 diluted EPS by about $0.16. Pension contributions are expected to range from $100 million to $400 million, and the company has no required minimum U.S. pension contribution in 2006.
How is 3M's balance sheet and liquidity position?
At year-end 2005, 3M had cash of $1.072 billion, total debt of $2.381 billion (down from $2.821 billion), net debt of $1.309 billion, and a debt-to-total-capital ratio of about 19%. It holds AA (S&P) and Aa1 (Moody's) credit ratings, and operating cash flow was $4.258 billion. Its $565 million credit facility requires a capitalization ratio below 0.60 to 1, which stood at about 0.20 to 1 at year-end.

04—Continue

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