01—Abstract
Summary
Summary of the 10-K filed February 15, 2008. Cited figures are marked; the original filing is the authoritative source.
3M's fiscal 2007 10-K shows record results, but with a significant one-time boost.
Net sales rose 6.7% to $24.462 billiona and net income rose 6.4% to $4.096 billion, or $5.60 per diluted share. Operating income grew 8.7% to $6.193 billion. Those reported figures include roughly $681 million of net gains (about $0.62 per diluted share after tax), mainly from the sale of the branded pharmaceuticals business in Europe and the Opticom/Canoga businesses, partly offset by environmental charges, restructuring and other exit costs.
Excluding these items, management characterizes underlying operating income margins as similar to 2006. Underlying local-currency sales growth was 7.3%b, with organic growth of 4.9%, acquisitions adding 2.4%, and divestitures reducing growth by 3.8%. Results were led by Safety, Security and Protection Services and Health Care, while Display and Graphics faced pricing and attachment-rate pressure in LCD monitors and TVs.
Capital allocation was shareholder-focused. 3M returned about $4.6 billionc through buybacks ($3.2 billion) and dividends ($1.38 billion), and the board authorized up to $7.0 billion of repurchases through February 2009, with about $4.1 billion remaining. The quarterly dividend was raised 4.2% to $0.50 for 2008, the 50th consecutive annual increase.
Balance sheet leverage increased: total debt rose to $4.92 billiond, and the debt-to-capital ratio reached 30% from 26%. Cash and marketable securities were about $3 billion. The company retains an AA (S&P) and Aa1 (Moody's, negative outlook) rating.
Looking ahead, 3M expects 2008 capital expenditures of $1.3 to $1.4 billion, a pending acquisition of Aearo Holding Corp. for about $1.2 billion, and continued pressure on Display and Graphics margins. Raw material costs for metals, wood pulp and oil-derived inputs are expected to remain high into early 2008. Key risks include 63% of revenue coming from outside the U.S., respirator/asbestos litigation (about 8,750 claimants at year-end, down from about 17,700), and PFOA/PFOS environmental liabilities, which were increased by $121 million in Q1 2007 plus $13 million in Q2.
02—Key points
Key Highlights
- Record net sales of $24.46 billion (+6.7%) and record net income of $4.10 billion ($5.60 diluted EPS, up from $5.06), though the 2007 figures include about $681 million of net pre-tax gains.
- Underlying local-currency sales growth of 7.3% (organic 4.9%, acquisitions 2.4%), with Health Care (+18.3% ex-divestitures) and Safety, Security and Protection Services (+10.8%) leading.
- Operating margin of 25.3% was boosted about 2.8 points by one-time gains; management says underlying margins were similar to 2006.
- Shareholder returns of about $4.6 billion in 2007 (buybacks $3.2B, dividends $1.38B), with a new $7.0B repurchase authorization through Feb 2009 ($4.1B remaining) and a 4.2% dividend increase to $2.00 annualized.
- Debt rose to $4.92B (debt-to-capital 30% vs. 26%), but liquidity remains strong at about $3B in cash and marketable securities and AA/Aa1 credit ratings.
- Display and Graphics faces price and attachment-rate pressure in LCD monitors and TVs, with management expecting margin declines in 2008.
- Ongoing liabilities include respirator/asbestos claims (about 8,750 claimants, down from 17,700), with $332M in related insurance receivables, plus PFOA/PFOS environmental exposure in Minnesota.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2007, 3M Co kept $0.17.
- Revenue$24.46B100.0%
- Cost of revenue−$12.73B52.1%
- Gross profit$11.73B47.9%
- Operating costs−$5.53B22.6%
- Operating income$6.19B25.3%
- Interest, other & tax−$2.10B8.6%
- Net income$4.10B16.7%
Where FY2007 revenue went
$24.46B- Cost of revenue: $12.73B, 52% of revenue
- SG&A: $5.01B, 21% of revenue
- Net income: $4.10B, 17% of revenue
- Other operating costs: $519.0M, 2.1% of revenue
- Interest, other & tax: $2.10B, 8.6% of revenue
Kept 17% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 15, 2008Financial Statements
| Revenue | $24.46B |
| Cost of Revenue | $12.73B |
| Gross Profit | $11.73B |
| SG&A Expenses | $5.01B |
| Operating Expenses | $18.27B |
| Operating Income | $6.19B |
| Net Income | $4.10B |
| EPS (Basic) | $5.70 |
| EPS (Diluted) | $5.60 |
| Shares Outstanding (Basic) | 718.30M |
| Shares Outstanding (Diluted) | 732.00M |
05—Questions
Frequently Asked Questions
How much of 3M's 2007 profit growth came from one-time items?
Net gains from business and real estate sales, net of environmental, restructuring and other charges, increased 2007 operating income by $681 million and net income by $448 million, or $0.62 per diluted share. That is roughly 11% of 2007 net income, so underlying EPS growth was considerably lower than the reported 10.7% increase. Management says underlying operating margins were similar to 2006.
What is the outlook for 3M's 2008 capital spending and acquisitions?
Capital expenditures are expected to be $1.3 to $1.4 billion in 2008, compared with $1.422 billion in 2007. 3M is also completing the roughly $1.2 billion acquisition of Aearo Holding Corp., expected to close around the end of Q1 2008. Discretionary pension contributions of $100 to $400 million are planned for 2008.
Is 3M's debt level a concern for investors?
Debt increased to $4.92 billion from $3.55 billion, and the debt-to-capital ratio rose to 30% from 26%, largely to fund buybacks and acquisitions. Liquidity is solid, with about $3 billion in cash and marketable securities, a $1.5 billion credit facility, and an EBITDA-to-interest ratio of about 35x against a 3.0x covenant. Ratings are AA (S&P, stable) and Aa1 (Moody's, negative outlook).
What are the main legal and environmental risks disclosed?
Respirator/asbestos litigation involves about 8,750 claimants, down from 17,700, with a $121 million liability and $332 million in insurance receivables. Other environmental liabilities rose to $147 million, mainly for PFOA/PFOS contamination in Minnesota and Alabama. Breast implant litigation is largely resolved. A West Virginia Attorney General suit is pending with no liability recorded.
Which business segments are growing fastest, and which are under pressure?
Health Care (excluding divested pharmaceuticals) and Safety, Security and Protection Services led growth, helped by acquisitions. Industrial and Transportation grew local-currency sales 5.8%. Display and Graphics grew only 1.8% amid optical film price and attachment-rate pressure, and roofing granules and electronic solutions were weak, with 2008 Display and Graphics margins expected to decline a few points.
06—Continue