01—Abstract
Summary
Summary of the 10-K filed February 16, 2010. Cited figures are marked; the original filing is the authoritative source.
3M's 2009 annual report shows a company navigating a severe global downturn with resilience.
Full-year net sales fell 8.5% to $23.1 billiona and organic volumes declined 9.5%, yet operating margin held near 20.8% (versus 20.6% in 2008) thanks to aggressive cost restructuring, roughly 400 million dollars of 2009 savings, and a vacation-policy change that added over $100 million to operating income. Net income attributable to 3M was $3.193 billion, or $4.52 per diluted share, down from $4.89 in 2008. Fourth-quarter sales grew 11.1% year-on-year with all segments and major regions improving, suggesting the trough may have passed.
Management reduced headcount by roughly 6,400 positions since early 2008 and cut capital spending to $903 millionb from $1.471 billion, while maintaining $1.3 billion in R&D. Balance sheet strength is a key investor takeaway. Operating cash flow rose to $4.9 billion, net debt fell to $1.1 billion from $4.1 billion a year earlier, and the debt-to-total-capital ratio dropped to 30% from 39%.
3M holds AA- (S&P) and Aa2 (Moody's) ratings with stable outlooks, and the share repurchase program ($2.6 billionc remaining) was suspended since late 2008 but remains available. The Board raised the 2010 quarterly dividend 2.9% to $0.525, marking the 52nd consecutive annual increase.
Risks flagged in the filing include exposure to global economic conditions (about 63% of revenue from outside the U.S.), U.S. dollar strength, the expiration of the UK passport contract in October 2010, a potential loss of share in optical film as patents expire, a DOJ/SEC investigation into the Turkish subsidiary, and ongoing respirator/asbestos and PFC-related litigation and environmental liabilities. Management expects 2010 pension expense to rise by about $130 milliond pre-tax and plans $500 to $700 million in pension contributions.
02—Key points
Key Highlights
- Net sales declined 8.5% to $23.1 billion, but Q4 2009 sales rose 11.1% year-on-year, with every segment and major region improving
- Operating margin was 20.8% (vs. 20.6% in 2008) despite restructuring charges, helped by roughly $400 million in 2009 savings and expected further savings above $150 million in 2010
- Diluted EPS was $4.52, down from $4.89; net income attributable to 3M was $3.193 billion including about $0.17 per share of restructuring charges
- Operating cash flow rose to $4.9 billion, and net debt fell to $1.1 billion from $4.1 billion, with debt-to-capital improving to 30% from 39%
- Capital expenditures were cut to $903 million (from $1.47 billion), with 2010 capex guided to about $1 billion
- The Board raised the quarterly dividend 2.9% to $0.525 per share, the 52nd consecutive annual increase; the $2.6 billion buyback authorization remains available but repurchases were suspended
- Key risks include the loss of the UK passport contract in October 2010, optical film competition as patents expire, a DOJ/SEC probe of its Turkish subsidiary, and ongoing respirator/asbestos and PFC litigation
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, 3M Co kept $0.14.
- Revenue$23.12B100.0%
- Cost of revenue−$12.11B52.4%
- Gross profit$11.01B47.6%
- Operating costs−$6.20B26.8%
- Operating income$4.81B20.8%
- Interest, other & tax−$1.62B7.0%
- Net income$3.19B13.8%
Where FY2009 revenue went
$23.12B- Cost of revenue: $12.11B, 52% of revenue
- SG&A: $4.91B, 21% of revenue
- Net income: $3.19B, 14% of revenue
- R&D: $838.0M, 3.6% of revenue
- Other operating costs: $455.0M, 2.0% of revenue
- Interest, other & tax: $1.62B, 7.0% of revenue
Kept 14% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 16, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $23.12B$25.27B | −8.5% |
| Cost of Revenue | $12.11B$13.38B | −9.5% |
| Gross Profit | $11.01B$11.89B | −7.4% |
| R&D Expenses | $838.00M$851.00M | −1.5% |
| SG&A Expenses | $4.91B$5.25B | −6.4% |
| Operating Expenses | $18.31B$20.05B | −8.7% |
| Operating Income | $4.81B$5.22B | −7.7% |
| Net Income | $3.19B$3.46B | −7.7% |
| EPS (Basic) | $4.56$4.95 | −7.9% |
| EPS (Diluted) | $4.52$4.89 | −7.6% |
| Shares Outstanding (Basic) | 700.50M699.20M | +0.2% |
| Shares Outstanding (Diluted) | 706.70M707.20M | −0.1% |
05—Questions
Frequently Asked Questions
Did 3M's earnings and revenue recover in 2009?
Full-year 2009 results declined: net sales fell 8.5% to $23.1 billion and diluted EPS dropped to $4.52 from $4.89. However, the trend improved sharply through the year. Quarterly sales declines narrowed from 21.3% in Q1 to 5.6% in Q3, and Q4 sales grew 11.1% year-on-year. Local-currency sales growth in Q4 was 6.4%, and Asia Pacific organic volume rose nearly 19%.
Is 3M's balance sheet and dividend safe?
Yes, by the filing's measures. 3M holds AA- and Aa2 ratings with stable outlooks, net debt fell to $1.1 billion, and cash and marketable securities reached $4.6 billion. Dividends paid totaled $1.43 billion in 2009, and the 2010 dividend was increased to $2.10 annualized. Debt covenants do not restrict dividend payments.
What are the biggest risks to 3M's future results?
The filing highlights global economic exposure (about 63% of sales outside the U.S.), currency swings (a stronger dollar hurts results; currency reduced 2009 net income by about $220 million), intensifying competition in optical films as patents expire, loss of the UK passport production contract after October 2010, and litigation including about 2,510 respirator/asbestos claimants, an Aearo-related liability reserve of $34 million, and PFC environmental matters.
Why did 3M's operating margin hold up despite lower sales?
Management cut costs aggressively, reducing about 6,400 positions since early 2008 and cutting discretionary spending, furloughs, and merit pay. A policy change on banked vacation added more than $100 million to 2009 operating income. Restructuring charges of $194 million net were partly offset by these savings, and operating margin rose slightly to 20.8%.
What should investors expect for 2010 costs and cash flows?
3M expects pension and postretirement expense to rise about $130 million pre-tax (12 cents per diluted share) in 2010, with pension contributions of $500 to $700 million. Capital spending is expected at about $1 billion, and the company expects continued restructuring savings of more than $150 million. There is no required minimum U.S. pension contribution for 2010.
06—Continue