01—Abstract
Summary
Summary of the 10-K filed February 17, 2009. Cited figures are marked; the original filing is the authoritative source.
3M's fiscal 2008 10-K shows a company that grew reported sales 3.3% to a record $25.3 billiona, but the results mask a sharp fourth-quarter downturn.
Local-currency sales grew only 1.4% for the year, with acquisitions (notably Aearo, bought in April 2008 for roughly $1.2 billionb including assumed debt) contributing 3.3 points. Fourth-quarter sales fell 11.2%, and net income of $536 million was hit by $219 million of pre-tax restructuring and exit charges. Full-year net income fell 15.5% to $3.46 billion, or $4.89 per diluted share, versus $5.60 in 2007, which had benefited from large pharmaceutical divestiture gains.
Excluding special items, underlying performance was far less dramatic than the headline decline suggests. The balance sheet weakened in ways investors should note. Total debt rose to $6.7 billionc from $4.9 billion, and net debt more than doubled to $4.1 billion.
The debt-to-capital ratio reached 40% versus 30% a year earlier. Management suspended share repurchases, cut 2009 capital spending by more than 30%, and planned for year-on-year declines in organic volume, margins, and EPS in 2009. Pension funded status fell from 100% to 85%, driving a $2.3 billiond after-tax reduction in equity.
Management still characterized the company's credit ratings (AA from S&P, Aa1 from Moody's with a negative outlook) and liquidity as strong. Dividends were nonetheless raised 2% for 2009, extending a 51-year streak. The main risks are a weak global industrial and consumer demand backdrop, currency headwinds from a strong U.S. dollar (about 64% of revenue is international), and contingent liabilities.
These include respirator/asbestos claims with a $193 million insurance receivable, PFC-related environmental reserves of $137 million, and pending litigation. The 2008 restructuring program eliminated about 3,500 positions and is expected to save $250 to $300 million in 2009, but the filing gives no firm guidance beyond directional expectations for the year ahead.
02—Key points
Key Highlights
- Record 2008 net sales of $25.3 billion, up 3.3% reported but only 1.4% in local currency; acquisitions contributed 3.3 points of growth.
- Diluted EPS fell to $4.89 from $5.60 as 2007 included large pharmaceutical divestiture gains; 2008 included $269 million of pre-tax restructuring and other special charges.
- Fourth-quarter 2008 sales fell 11.2% and net income dropped to $536 million ($0.77 per diluted share), with Display and Graphics operating income down 80%.
- Net debt rose to $4.1 billion from $2.0 billion; debt-to-capital reached 40% versus 30%, and share repurchases were halted.
- Management plans for 2009 year-on-year declines in organic volume, operating margins, and EPS, with capex cut by more than 30%.
- U.S. pension funded status fell to 89% and total global funded status to 85%; $600 to $850 million of 2009 pension contributions are expected.
- Dividend increased 2% to $2.04 annualized, the 51st consecutive annual increase, despite the weaker outlook.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, 3M Co kept $0.14.
- Revenue$25.27B100.0%
- Cost of revenue−$13.38B52.9%
- Gross profit$11.89B47.1%
- Operating costs−$6.67B26.4%
- Operating income$5.22B20.6%
- Interest, other & tax−$1.76B7.0%
- Net income$3.46B13.7%
Where FY2008 revenue went
$25.27B- Cost of revenue: $13.38B, 53% of revenue
- SG&A: $5.25B, 21% of revenue
- Net income: $3.46B, 14% of revenue
- R&D: $851.0M, 3.4% of revenue
- Other operating costs: $576.0M, 2.3% of revenue
- Interest, other & tax: $1.76B, 7.0% of revenue
Kept 14% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 17, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $25.27B$24.46B | +3.3% |
| Cost of Revenue | $13.38B$12.73B | +5.1% |
| Gross Profit | $11.89B$11.73B | +1.4% |
| R&D Expenses | $851.00M— | — |
| SG&A Expenses | $5.25B$5.01B | +4.6% |
| Operating Expenses | $20.05B$18.27B | +9.8% |
| Operating Income | $5.22B$6.19B | −15.7% |
| Net Income | $3.46B$4.10B | −15.5% |
| EPS (Basic) | $4.95$5.70 | −13.2% |
| EPS (Diluted) | $4.89$5.60 | −12.7% |
| Shares Outstanding (Basic) | 699.20M718.30M | −2.7% |
| Shares Outstanding (Diluted) | 707.20M732.00M | −3.4% |
05—Questions
Frequently Asked Questions
Why did 3M's earnings per share fall in 2008 even though sales hit a record?
Most of the decline reflects 2007's large gains on sales of businesses, mainly the European branded pharmaceuticals divestiture, which added $681 million to 2007 operating income. In 2008, restructuring and other special items reduced operating income by $269 million. Sales growth was also modest in local currency at 1.4%, and fourth-quarter sales fell 11.2% as the economic downturn hit.
How much has 3M's debt increased, and is the balance sheet still strong?
Total debt rose to $6.7 billion from $4.9 billion, mainly to fund the Aearo acquisition and build a U.S. cash buffer. Net debt rose to $4.1 billion. Management still cites AA (S&P) and Aa1 (Moody's, negative outlook) ratings, a stable commercial paper market, and an EBITDA-to-interest covenant ratio of about 30 to 1 against a 3.0 minimum.
What is 3M's plan for capital allocation and shareholder returns in 2009?
Share repurchases were suspended, though the $2.6 billion authorization was extended until fully used. Capital expenditures are to fall more than 30% in 2009. The quarterly dividend was raised 2% to $0.51 per share, and pension contributions of $600 to $850 million are expected.
What are the main legal and environmental exposures investors should watch?
The respirator mask/asbestos litigation carries $140 million of liabilities (including Aearo) against a $193 million insurance receivable, and the company says the ultimate liability could exceed its reserves. Environmental reserves cover perfluorinated compounds (PFOA/PFOS) at Minnesota and Alabama sites, totaling $137 million for other environmental liabilities. A French Competition Council investigation has also been opened, and the outcome is difficult to predict.
What does 3M expect for 2009 and what is being done to protect margins?
3M is planning for year-on-year declines in organic volume, operating margin, and EPS, along with a negative currency impact on sales. Restructuring actions in 2008 eliminated about 3,500 positions and are expected to save $250 to $300 million in 2009, with further savings from deferred merit pay, reduced banked vacation, and lower capital spending.
06—Continue