REG - 3M Company - Half Yearly Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 7
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percent across all developing markets, and 4 percent in developed markets. Currency impacts reduced first six months
2014 worldwide sales growth by 1.0 percent.
Worldwide selling prices rose 1.2 percent in the first six months of 2014, as 3M continues to experience positive selling
price changes across most of its businesses. As discussed in second-quarter results above, 3M also began raising selling
prices in mid-2013 to help offset currency weakness in select developing countries.
Operating Expenses:
Three months ended Six months ended
June 30, June 30,
(Percent of net sales) 2014 2013 Change 2014 2013 Change
Cost of sales 51.5 % 51.7 % (0.2) % 51.5 % 51.8 % (0.3) %
Selling, general and administrative 20.2 20.8 (0.6) 20.5 20.8 (0.3)
expenses
Research, development and related 5.5 5.5 - 5.6 5.6 -
expenses
Operating income 22.8 % 22.0 % 0.8 % 22.4 % 21.8 % 0.6 %
As discussed in the overview section, 3M expects defined benefit pension and postretirement expense for total year 2014 to
decrease by approximately $160 million pre-tax when compared to 2013, 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 15, 2014 (MD&A section entitled Critical Accounting Estimates - Pension and Postretirement Obligations)
for background concerning this reduction. The year-on-year decrease in defined benefit pension and postretirement expense
for the second quarter and first six months was $39 million and $79 million, respectively.
Cost of Sales:
Cost of sales includes manufacturing, engineering and freight costs. Cost of sales as a percent of net sales was 51.5
percent in both the second quarter and first six months of 2014, down 0.2 and 0.3 percentage points, respectively, from the
same periods last year. Cost of sales as a percent of sales decreased due to the combination of selling price increases and
raw material cost decreases, as selling prices rose 1.3 percent and 1.2 percent in the second quarter and first six months,
respectively. Raw material cost deflation was approximately 2 percent favorable year-on-year for both the second quarter
and first six months. In addition, lower pension and postretirement costs (of which a portion impacts cost of sales), along
with organic volume leverage, decreased cost of sales as a percent of sales. These benefits were partially offset by
foreign exchange impacts.
Selling, General and Administrative Expenses:
SG&A increased 2.2 percent and 2.5 percent in the second quarter and first six months of 2014, respectively, when compared
to the same periods last year. Second quarter and first six months 2014 SG&A included strategic investments in business
transformation and 3M's global enterprise resource planning (ERP) implementation, which were partially offset by lower
pension and postretirement expense. SG&A, measured as a percent of sales, was 20.2 percent of sales in the second quarter
of 2014 and 20.5 percent of sales in the first six months of 2014, compared to 20.8 percent in the same periods last year.
Research, Development and Related Expenses:
R&D expense increased approximately 5 percent in both the second quarter and first six months of 2014 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, which refers to innovation that helps create a new market and which eventually disrupts an existing market.
These increases were partially offset by lower pension and postretirement expense. R&D, measured as a percent of sales, was
5.6 percent of sales in both the first six months of 2014 and 2013.
Operating Income:
Operating income margins were 22.8 percent in the second quarter of 2014 compared to 22.0 in the second quarter of 2013, an
increase of 0.8 percentage points. These results included a 1.2 percentage point benefit from the combination of higher
selling prices and lower raw material costs. In addition, lower year-on-year pension and postretirement benefit costs
provided a 0.5 percentage point benefit and profit leverage on organic volume growth added 0.3 percentage points. Items
that reduced operating income margins included a 0.4 percentage point impact from strategic investments. Strategic
investments included incremental increases in new disruptive R&D programs, business transformation and ERP costs, and the
establishment of a new manufacturing, supply chain, and distribution Center of Expertise in Europe, all of which are
expected to strengthen 3M for the future. Foreign exchange impacts reduced operating income margins by 0.6 percentage
points and other items reduced margins by 0.2 percentage points.
Operating income margins were 22.4 percent in the first six months of 2014 compared to 21.8 in the first six months of
2013, an increase of 0.6 percentage points. These results included a 1.2 percentage point benefit from the combination of
higher selling prices and lower raw material costs. In addition, lower year-on-year pension and postretirement benefit
costs provided a 0.5 percentage point benefit and profit leverage on organic volume growth added 0.3 percentage points.
Items that reduced operating income margins included a 0.6 percentage point impact from strategic investments, which
included disruptive R&D, business transformation and ERP costs, the Center of Expertise in Europe, and restructuring.
Foreign exchange impacts reduced operating income margins by 0.5 percentage points, and other items reduced margins by 0.3
percentage points.
Interest Expense and Income:
Three months ended Six months ended
June 30, June 30,
(Millions) 2014 2013 2014 2013
Interest expense $ 45 $ 41 $ 82 $ 80
Interest income (9) (10) (18) (20)
Total $ 36 $ 31 $ 64 $ 60
Interest expense was higher in the second quarter and first six months of 2014 compared to the same periods last year,
primarily due to international bank borrowings and a higher debt balance for the Company, partially offset by the lower
average financing costs from commercial paper and lower rates on new debt issuances. Interest income in the second quarter
and first six months of 2014 is comparable to prior periods.
Provision for Income Taxes:
Three months ended Six months ended
June 30, June 30,
(Percent of pre-tax income) 2014 2013 2014 2013
Effective tax rate 29.5 % 27.4 % 28.5 % 28.2 %
The effective tax rate for the second quarter of 2014 was 29.5 percent, compared to 27.4 percent in the second quarter of
2013, an increase of 2.1 percentage points. Factors that increased the Company's effective tax rate on a combined basis by
2.1 percentage points year-on-year included the 2013 restoration of tax basis on certain assets for which depreciation was
previously limited, international taxes as a result of changes to the geographic mix of income before taxes, lapse of the
U.S. research and development credit as of January 1, 2014, adjustments to the Company's income tax reserves, and other
items.
The effective tax rate for the first six months of 2014 was 28.5 percent, compared to 28.2 percent in the first six months
of 2013, an increase of 0.3 percentage points. Factors which increased the Company's effective tax rate by 1.1 percentage
points for the first six months of 2014 when compared to the same period for 2013 included the lapse of the U.S. research
and development credit as of January 1, 2014, and international taxes as a result of changes to the geographic mix of
income before taxes. This increase was partially offset by a 0.8 percentage point decrease as the result of adjustments to
the Company's reserves and the restoration of tax basis on certain assets for which depreciation was previously limited.
Refer to Note 5 for further discussion of income taxes.
During 2014, the Company will be establishing a new manufacturing, supply chain, and distribution center of expertise in
Europe. As a result of this establishment, the Company may incur jurisdictional tax charges related to the transfer of
certain functions to the center of expertise.
The Company currently expects that its effective tax rate for total year 2014 will be approximately 28.0 to 29.0 percent,
which assumes that the U.S. research and development credit will be reinstated for 2014. The rate can vary 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 geographic mix of income before taxes.
Net Income Attributable to Noncontrolling Interest:
Three months ended Six months ended
June 30, June 30,
(Millions) 2014 2013 2014 2013
Net income attributable to noncontrolling interest $ 16 $ 16 $ 34 $ 34
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 largely related to
Sumitomo 3M Limited (Japan), which is 3M's most significant consolidated entity with non-3M ownership interests. As of June
30, 2014, 3M's effective ownership in Sumitomo 3M Limited is 75 percent. As discussed in Note 4, in July 2014, 3M announced
that it will purchase the remaining 25 percent ownership in Sumitomo 3M Limited, with an anticipated close date of
September 1, 2014.
Currency Effects:
3M estimates that year-on-year currency effects, including hedging impacts, decreased net income attributable to 3M by
approximately $25 million for the three months ended June 30, 2014 and decreased net income attributable to 3M by
approximately $54 million for the six months ended June 30, 2014. 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 includes year-on-year currency effects from transaction
gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks and the negative
impact of converting Venezuelan bolivars into Euros and U.S. dollars, which 3M estimates decreased net income attributable
to 3M by approximately $22 million for three months ended June 30, 2014 and decreased net income attributable to 3M by
approximately $25 million for the six months ended June 30, 2014.
Significant Accounting Policies:
Information regarding new accounting standards is included in Note 1 to the Consolidated Financial Statements.
PERFORMANCE BY BUSINESS SEGMENT
Disclosures related to 3M's business segments are provided in Note 13. The reportable segments are Industrial; Safety and
Graphics; Electronics and Energy; Health Care; and Consumer.
Corporate and Unallocated:
In addition to these five operating business segments, 3M assigns certain costs to "Corporate and Unallocated", which is
presented separately in the preceding business segments table and in Note 13. Corporate and Unallocated includes a variety
of miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain
insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and
certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the Company may choose not to allocate
directly to its business segments. Because this category includes a variety of miscellaneous items, it is subject to
fluctuation on a quarterly and annual basis.
Corporate and Unallocated operating expenses improved by $38 million and $40 million in the second quarter and first six
months of 2014, respectively, when compared to the same periods last year. A majority of this decrease was due to lower
pension and postretirement benefit expenses, which declined year-on-year by $39 million and $79 million, respectively, when
compared to the same periods last year. Of this reduction, $29 million and $58 million, respectively, was allocated to
Corporate and Unallocated. In addition, the sale of certain real estate benefited the second quarter of 2014.
Operating Business Segments:
Each of 3M's five business segments is absorbing incremental investments in 2014 related to business transformation and
global ERP implementation. This resulted in a 0.30 percentage point year-on-year reduction in operating income margins for
each of the five business segments in both the second-quarter and first six months of 2014 when compared to the same
periods last year.
Information related to 3M's business segments for the second quarter and first six months of both 2014 and 2013 is
presented in the tables that follow. Organic local-currency sales include both organic volume impacts plus selling price
impacts. Acquisition impacts, if any, are measured separately for the first twelve months of the acquisition. The
divestiture impacts, if any, foreign currency translation impacts and total sales change are also provided for each
business segment. Any references to EMEA relate to Europe, Middle East and Africa on a combined basis.
Industrial Business:
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
Sales (millions) $ 2,815 $ 2,683 $ 5,591 $ 5,376
Sales change analysis:
Organic local currency 4.7 % 3.4 % 4.8 % 3.1 %
Acquisitions - 4.6 - 4.1
Translation 0.2 (1.3) (0.8) (1.6)
Total sales change 4.9 % 6.7 % 4.0 % 5.6 %
Operating income (millions) $ 617 $ 603 $ 1,235 $ 1,182
Percent change 2.4 % 1.5 % 4.5 % (0.4) %
Percent of sales 21.9 % 22.5 % 22.1 % 22.0 %
The Industrial segment serves a broad range of markets, such as automotive original equipment manufacturer (OEM) and
automotive aftermarket (auto body shops and retail), electronics, appliance, paper and printing, packaging, food and
beverage, and construction. Industrial products include tapes, a wide variety of coated, non-woven and bonded abrasives,
adhesives, advanced ceramics, sealants, specialty materials, 3M Purification Inc. (filtration products), closure systems
for personal hygiene products, acoustic systems products, and components and products that are used in the manufacture,
repair and maintenance of automotive, marine, aircraft and specialty vehicles.
Second quarter of 2014:
Sales in Industrial totaled $2.8 billion, up 4.9 percent in U.S. dollars. Organic local-currency sales increased 4.7
percent, and foreign currency translation increased sales by 0.2 percent. On an organic local-currency basis, sales growth
was led by 3M Purification Inc. Organic local-currency sales growth was also strong in automotive OEM, aerospace and
commercial transportation, abrasive systems, and industrial adhesives and tapes. Organic local-currency sales declined in
personal care.
Geographically, organic local-currency sales increased 7 percent in Asia Pacific, 5 percent in both the United States and
EMEA, and declined slightly in Latin America/Canada.
Operating income was $617 million in the second quarter of 2014, an increase of 2.4 percent. Operating income margins
decreased by 0.6 percentage points to 21.9 percent. As indicated in the preceding Operating Business Segments section, each
of 3M's five business segments is absorbing incremental investments in 2014 related to business transformation and global
ERP implementation. This reduced margins in each of the businesses by approximately 0.3 percentage points year-on-year.
First six months of 2014:
Sales in Industrial totaled $5.6 billion, up 4.0 percent in U.S. dollars. Organic local-currency sales increased 4.8
percent, and foreign currency translation reduced sales by 0.8 percent. On an organic local-currency basis, sales growth
was led by 3M Purification Inc. Organic local-currency sales growth was also strong in automotive OEM, aerospace and
commercial transportation, advanced materials, and abrasive systems. Organic local-currency sales declined in personal
care.
Geographically, organic local-currency sales increased 6 percent in both Asia Pacific and EMEA, 4 percent in the United
States, and 3 percent in Latin America/Canada.
Operating income was $1.2 billion in the first six months of 2014, an increase of 4.5 percent. Operating income margins
increased by 0.1 percentage points to 22.1 percent. Operating income margins improved due to sales volume leverage, plus
the combination of selling price increases and raw material cost decreases, partially offset by higher ERP implementation
expenses as discussed in second quarter results.
Safety and Graphics Business:
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
Sales (millions) $ 1,494 $ 1,434 $ 2,917 $ 2,833
Sales change analysis:
Organic local currency 4.7 % 1.8 % 4.7 % 2.0 %
Acquisitions - 1.9 - 2.0
Translation (0.6) (1.6) (1.7) (1.9)
Total sales change 4.1 % 2.1 % 3.0 % 2.1 %
Operating income (millions) $ 353 $ 328 $ 671 $ 660
Percent change 7.4 % (10.2) % 1.6 % (5.4) %
Percent of sales 23.6 % 22.9 % 23.0 % 23.3 %
The Safety and Graphics segment serves a broad range of markets that increase the safety, security and productivity of
people, facilities and systems. Major product offerings include personal protection products; traffic safety and security
products, including border and civil security solutions; commercial solutions, including commercial graphics sheeting and
systems, architectural surface and lighting solutions, and cleaning and protection products for commercial establishments;
and roofing granules for asphalt shingles.
Second quarter of 2014:
Sales in Safety and Graphics totaled $1.5 billion, up 4.1 percent in U.S. dollars. Organic local-currency sales increased
4.7 percent, and foreign currency translation reduced sales by 0.6 percent. On an organic local-currency basis, sales
growth was led by personal safety, commercial solutions, and traffic safety and security. Sales in the roofing granules
business declined year-on-year.
Organic local-currency sales increased 7 percent in Europe, 5 percent in the United States, 4 percent in Latin
America/Canada, and 1 percent in Asia Pacific.
Operating income in the second quarter of 2014 totaled $353 million, up 7.4 percent. Operating income margins were 23.6
percent of sales, compared to 22.9 percent in the second quarter of 2013. Operating income margins benefited from organic
volume leverage and selling price increases.
First six months of 2014:
Sales in Safety and Graphics totaled $2.9 billion, up 3.0 percent in U.S. dollars. Organic local-currency sales increased
4.7 percent, and foreign currency translation reduced sales by 1.7 percent. On an organic local-currency basis, sales
growth was led by personal safety. 3M also saw positive organic local-currency sales growth in commercial solutions, and
sales were flat in traffic safety and security. Sales in the roofing granules business declined year-on-year.
Organic local-currency sales increased 6 percent in Europe, 5 percent in the Asia Pacific, and 4 percent in both Latin
America/Canada and the United States.
Operating income in the first six months of 2014 totaled $671 million, up 1.6 percent. Operating income margins were 23.0
percent of sales, compared to 23.3 percent in the first six months of 2013. Operating income margins were impacted by
investments in business transformation and ERP, restructuring, and negative foreign currency effects, partially offset by
organic volume leverage and selling price increases.
Electronics and Energy Business:
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
Sales (millions) $ 1,422 $ 1,340 $ 2,733 $ 2,617
Sales change analysis:
Organic local currency 6.4 % (2.1) % 5.3 % (2.1) %
Translation (0.2) (1.1) (0.8) (1.1)
Total sales change 6.2 % (3.2) % 4.5 % (3.2) %
Operating income (millions) $ 293 $ 237 $ 520 $ 433
Percent change 23.4 % (16.0) % 20.1 % (16.1) %
Percent of sales 20.6 % 17.7 % 19.0 % 16.5 %
The Electronics and Energy segment serves customers in electronics and energy markets, including solutions for dependable,
cost-effective, high-performance electronic devices; electrical products, including infrastructure protection;
telecommunications networks; and power generation and distribution. This segment's electronics solutions include optical
film solutions for the electronic display industry; packaging and interconnection devices; high performance fluids and
abrasives; high-temperature and display tapes; 3M Flexible Circuits, which use electronic packaging and interconnection
technology; and touch systems products, which include touch screens, touch monitors, and touch sensor components. This
segment's energy solutions include pressure sensitive tapes and resins; electrical insulation; infrastructure products that
provide both protection and detection solutions; a wide array of fiber-optic and copper-based telecommunications systems;
and renewable energy component solutions for the solar and wind power industries.
Second quarter of 2014:
Electronics and Energy sales totaled $1.4 billion, up 6.2 percent in U.S. dollars. Organic local-currency sales increased
6.4 percent, and foreign currency translation reduced sales by 0.2 percent.
Organic local-currency sales increased approximately 11 percent in 3M's electronics-related businesses, with strong growth
in both display materials and systems and in electronics materials solutions. In 3M's energy-related businesses, organic
local-currency sales increased approximately 1 percent, led by telecommunications.
On a geographic basis, organic local-currency sales increased 9 percent in Latin America/Canada, 8 percent in Asia Pacific,
and 6 percent in EMEA. Organic local-currency sales were flat in the United States.
Operating income increased 23.4 percent to $293 million in the second quarter of 2014. Operating income margins were 20.6
percent compared to 17.7 percent in the second quarter of 2013, helped by sales volume leverage and improving
productivity.
First six months of 2014:
Electronics and Energy sales totaled $2.7 billion, up 4.5 percent in U.S. dollars. Organic local-currency sales increased
5.3 percent, and foreign currency translation reduced sales by 0.8 percent.
Organic local-currency sales increased approximately 8 percent in 3M's electronics-related businesses, with strong growth
in display materials and systems. In 3M's energy-related businesses, organic local-currency sales increased approximately 2
percent, led by telecommunications.
On a geographic basis, organic local-currency sales increased 9 percent in Latin America/Canada, 8 percent in Asia Pacific,
and 2 percent in EMEA. Organic local-currency sales declined 2 percent in the United States.
Operating income increased 20.1 percent to $520 million in the first six months of 2014. Operating income margins were 19.0
percent compared to 16.5 percent in the first six months of 2013, helped by sales volume leverage and improving
productivity.
Health Care Business:
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
Sales (millions) $ 1,416 $ 1,336 $ 2,790 $ 2,647
Sales change analysis:
Organic local currency 5.1 % 5.7 % 5.7 % 4.8 %
Acquisitions 0.4 - 0.2 0.2
Translation 0.4 (1.1) (0.5) (1.3)
Total sales change 5.9 % 4.6 % 5.4 % 3.7 %
Operating income (millions) $ 434 $ 417 $ 861 $ 821
Percent change 4.1 % 1.2 % 4.9 % 1.0 %
Percent of sales 30.7 % 31.2 % 30.9 % 31.0 %
The Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, dental and orthodontic
practitioners, health information systems, and food manufacturing and testing. Products and services provided to these and
other markets include medical and surgical supplies, skin health and infection prevention products, inhalation and
transdermal drug delivery systems, dental and orthodontic products (oral care), health information systems, and food safety
products.
Second quarter of 2014:
Health Care sales totaled $1.4 billion, an increase of 5.9 percent in U.S. dollars. Organic local-currency sales increased
5.1 percent, acquisitions added 0.4 percent, and foreign currency translation reduced sales by 0.4 percent. Organic
local-currency sales grew in all businesses, with the strongest growth in health information systems, critical and chronic
care, and infection prevention.
Acquisition sales growth related to the April 2014 purchase of Treo Solutions LLC, headquartered in Troy, New York. Treo
Solutions LLC is a provider of data analytics and business intelligence to healthcare payers and providers.
On a geographic basis, organic local-currency sales increased 7 percent in both Latin America/Canada and Asia Pacific, 6
percent in the United States, and 3 percent in EMEA. Health Care organic local-currency sales grew 12 percent in developing
markets.
Operating income increased 4.1 percent to $434 million. Operating income margins were 30.7 percent in the second quarter of
2014, compared to 31.2 percent in the second quarter of 2013, with acquisition impacts reducing operating income margins by
0.4 percentage points.
First six months of 2014:
Health Care sales totaled $2.8 billion, an increase of 5.4 percent in U.S. dollars. Organic local-currency sales increased
5.7 percent, acquisitions added 0.2 percent, and foreign currency translation reduced sales by 0.5 percent. Organic
local-currency sales grew in all businesses, with the strongest growth in health information systems, drug delivery
systems, critical and chronic care, food safety, and infection prevention.
On a geographic basis, organic local-currency sales increased 9 percent in Latin America/Canada, 8 percent in Asia Pacific,
7 percent in the United States, and 2 percent in EMEA. Health Care organic local-currency sales grew 11 percent in
developing markets.
Operating income increased 4.9 percent to $861 million. Operating income margins were 30.9 percent in the first six months
of 2014, compared to 31.0 percent in the first six months of 2013, with acquisition impacts reducing operating income
margins by 0.2 percentage points.
Consumer Business:
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
Sales (millions) $ 1,139 $ 1,098 $ 2,218 $ 2,179
Sales change analysis:
Organic local currency 4.2 % 2.9 % 3.4 % 3.2 %
Divestitures (0.2) (0.1) (0.2) -
Translation (0.3) (1.4) (1.4) (1.5)
Total sales change 3.7 % 1.4 % 1.8 % 1.7 %
Operating income (millions) $ 241 $ 235 $ 469 $ 472
Percent change 2.3 % 3.5 % (0.6) % 1.7 %
Percent of sales 21.1 % 21.4 % 21.1 % 21.7 %
The Consumer segment serves markets that include consumer retail, office retail, home improvement, building maintenance and
other markets. Products in this segment include office supply products, stationery products, construction and home
improvement products (do-it-yourself), home care products, protective material products, certain consumer retail personal
safety products, and consumer health care products.
Second quarter of 2014:
Sales in Consumer totaled $1.1 billion, up 3.7 percent in U.S. dollars. Organic local-currency sales increased 4.2 percent,
divestitures reduced sales by 0.2 percent, and foreign currency translation reduced sales by 0.3 percent. On an organic
local-currency basis, sales growth was led by construction and home improvement. 3M also posted positive sales growth in
its consumer health care and home care businesses. Sales in the stationery and office supplies business were flat
year-on-year.
On a geographic basis, organic local-currency sales increased 4 percent in the United States, which was up from the first
quarter year-on-year growth rate. Back-to-school activity began late in the second quarter, reflecting a good start.
Elsewhere, organic local-currency growth was 8 percent in Asia Pacific, and 4 percent in EMEA. Organic local-currency sales
declined 1 percent in Latin America/Canada.
Consumer operating income was $241 million, up 2.3 percent from the second quarter last year. Operating income margins were
21.1 percent, compared to 21.4 percent in the same period last year, impacted by softness in the stationery and office
supplies business.
First six months of 2014:
Sales in Consumer totaled $2.2 billion, up 1.8 percent in U.S. dollars. Organic local-currency sales increased 3.4 percent,
divestitures reduced sales by 0.2 percent, and foreign currency translation reduced sales by 1.4 percent. On an organic
local-currency basis, sales growth was led by construction and home improvement. 3M also posted positive growth in its
consumer health care and home care businesses. Sales in the stationery and office supplies business were flat year-on-year,
as foot traffic in the U.S. office retail channel was soft during the first quarter, due in part to harsh winter weather
conditions along with continued store consolidations.
On a geographic basis, organic local-currency sales increased 7 percent in Asia Pacific, and 2 percent in the remaining
regions, which includes the United States, Latin America/Canada and EMEA. Organic local-currency growth was 7 percent in
developing markets.
Consumer operating income was $469 million, down 0.6 percent from the first six months last year. Operating income margins
were 21.1 percent, compared to 21.7 percent in the same period last year, impacted by softness in stationery and office
supplies.
FINANCIAL CONDITION AND LIQUIDITY
3M continues to manage towards a more optimized capital structure, financed with additional low-cost debt. The strength and
stability of 3M's business model and strong free cash flow capability, together with proven capital markets access, enables
3M to implement this strategy while continuing to invest in its businesses. Organic growth remains the first priority, thus
3M will continue to invest in research and development, capital expenditures, and commercialization capability. In 2013, as
a first step towards increasing capital deployment, 3M drew down its U.S. cash position to a minimum level and also
reactivated its $3 billion commercial paper program. In 2014, 3M filed a new 'well-known seasoned issuer" shelf
registration statement, and recommenced the Series F medium term notes program for future debt issuances.
3M considers net debt to be an important measure of liquidity and of its ability to meet ongoing obligations. This measure
is not defined under U.S. generally accepted accounting principles and may not be computed the same as similarly titled
measures used by other companies. The Company defines net debt as total debt less the total of cash, cash equivalents and
current and long-term marketable securities. The following table provides net debt as of June 30, 2014 and December 31,
2013.
June 30, December 31,
(Millions) 2014 2013
Total Debt $ 6,973 $ 6,009
Less: Cash and cash equivalents and marketable securities 4,213 4,790
Net Debt $ 2,760 $ 1,219
In the first six months of 2014, 3M continued to make progress towards increasing capital deployment with a net debt
increase of $1.5 billion at June 30, 2014 when compared to December 31, 2013. Activities in the first half of 2014 that
contributed to the net debt increase included the June 2014 issuance of $625 million of five-year notes due 2019 and $325
million of thirty-year notes due 2044 under the Series F medium term notes program, along with lower cash balances in the
U.S. and international. 3M will continue to implement changes to its capital structure over time. For 2014 in particular,
3M expects added leverage of $2 billion to $4 billion when compared to December 31, 2013. Subsequent to quarter-end, in
July 2014, 3M repaid 1.025 billion Euros of maturing Eurobond notes funded primarily through the issuances of commercial
paper.
3M's primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances. 3M resumed
commercial paper funding in July 2013 for the first time since late 2008. 3M expects to maintain a consistent presence in
the market and believes it will have continuous access to the commercial paper market. 3M's commercial paper program
permits the Company to have a maximum of $3 billion outstanding with a maximum maturity of 397 days from date of issuance.
3M's outstanding commercial paper balance was zero at both June 30, 2014 and December 31, 2013.
The Company has significant liquidity and generates ongoing cash flow, which have been used, in part, to repurchase shares
and to pay dividends on 3M common stock.In addition, 3M's liquidity and cash flow enable it to meet currently anticipated
growth plans, including funds for research and development, capital expenditures, working capital investments and
acquisitions.
At June 30, 2014, cash, cash equivalents and marketable securities held by the Company's foreign subsidiaries and in the
United States totaled approximately $3.9 billion and $300 million, respectively. Of the Company's foreign subsidiaries
cash, cash equivalents and marketable securities, $2.6 billion (65 percent) was invested in money market funds,
asset-backed securities, agency securities, corporate medium-term note securities and other investment-grade fixed income
securities. At December 31, 2013, cash, cash equivalents and marketable securities held by the Company's foreign
subsidiaries and in the United States totaled approximately $4.3 billion and $0.5 billion, respectively. The Company's
total balance of cash, cash equivalents and marketable securities was $0.6 billion lower at June 30, 2014 when compared to
December 31, 2013. 3M is able to manage the business with lower cash levels, particularly in the U.S., due to significant
ongoing cash flow generation and proven access to capital markets funding throughout business cycles.
3M's net debt at June 30, 2014 was $2.8 billion, up from $1.2 billion at December 31, 2013. 3M is planning for added
leverage of $2 billion to $4 billion in 2014 as it continues to improve the efficiency of its capital structure. At June
30, 2014, 3M had $4.2 billion of cash, cash equivalents, and marketable securities and $7.0 billion of debt. Debt included
$5.3 billion of long-term debt and $1.7 billion related to the current portion of long-term debt and other borrowings. The
current portion of long-term debt includes a Eurobond due in July 2014 totaling 1.025 billion Euros ($1.4 billion carrying
value at June 30, 2014). In August 2013, 3M repaid $850 million (principal amount) of medium-term notes. In November 2013,
3M issued an eight-year Eurobond for an amount of 600 million Euros (approximately $815 million carrying value at December
31, 2013). In June 2014, 3M issued $625 million aggregate principal amount of five-year fixed rate medium-term notes due
2019 and also issued $325 million aggregate principal amount of thirty-year fixed rate medium-term notes due 2044. The
strength of 3M's capital structure and significant ongoing cash flows provide 3M proven access to capital markets.
Additionally, the Company's maturity profile is staggered to help ensure refinancing needs in any given year are reasonable
in proportion to the total portfolio. The Company has an AA- credit rating, with a stable outlook, from Standard & Poor's
and an Aa2 credit rating, with a stable outlook, from Moody's Investors Service. 3M's transition to a more optimized
capital structure, financed with additional low-cost debt, could impact 3M's credit rating in the future.
In September 2012, 3M entered into a $1.5 billion, five-year multi-currency revolving credit agreement, which amended the
existing agreement that was entered into in August 2011. This amended agreement extended the expiration date from August
2016 to September 2017. This credit agreement includes a provision under which 3M may request an increase of up to $500
million, bringing the total facility up to $2 billion (at the lenders' discretion). This facility was undrawn at June 30,
2014. In August 2013, 3M entered into a $150 million, one-year committed letter of credit facility, which replaced the
one-year $150 million committed credit facility that was entered into in August 2012. As of June 30, 2014, 3M letters of
credit issued under this $150 million committed facility totaled $125 million. In December 2012, 3M entered into a
three-year 66 million British Pound (approximately $106 million based on agreement date exchange rates) committed credit
agreement, which was fully drawn as of December 31, 2012. 3M repaid 36 million British Pounds in the first quarter of 2014,
leaving a remaining balance due of 30 million British Pounds as of June 30, 2014. Apart from the committed facilities, an
additional $95 million in stand-alone letters of credit and $19 million in bank guarantees were also issued and outstanding
at June 30, 2014. These lines of credit are utilized in connection with normal business activities. Under both the $1.5
billion and $150 million credit agreements, the Company is required to maintain its EBITDA to Interest Ratio as of the end
of each fiscal quarter at not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of
consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the
same period. At June 30, 2014, this ratio was approximately 56 to 1. Debt covenants do not restrict the payment of
dividends.
The Company has a "well-known seasoned issuer" shelf registration statement, effective May 16, 2014, which registers an
indeterminate amount of debt or equity securities for future sales. This replaced 3M's previous shelf registration dated
August 5, 2011. In June 2014, in connection with the May 16, 2014 shelf registration, 3M re-commenced its medium-term notes
program (Series F) under which 3M may issue, from time to time, up to $9 billion aggregate principal amount of notes.
Included in this $9 billion are $2.25 billion of notes previously issued in 2011 and 2012 as part of Series F. In June
2014, 3M issued $625 million aggregate principal amount of five-year fixed rate medium-term notes due 2019 with a coupon
rate of 1.625%. Upon debt issuance, $600 million of this amount was converted to an interest rate based on a floating LIBOR
index. In addition, in June 2014, 3M issued $325 million aggregate principal amount of thirty-year fixed rate medium-term
notes due 2044 with a coupon rate of 3.875%. Both June 2014 debt issuances were from the medium-term notes program (Series
F).
In September 2011, in connection with the August 5, 2011 shelf registration statement, 3M established a $3 billion
medium-term notes program (Series F), from which 3M issued a five-year $1.0 billion fixed rate note with a coupon rate of
1.375%. Proceeds were used for general corporate purposes, including repayment in November 2011 of $800 million (principal
amount) of medium-term notes. In June 2012, 3M issued $650 million aggregate principal amount of five-year fixed rate
medium-term notes due 2017 with a coupon rate of 1.000% and $600 million aggregate principal amount of ten-year fixed rate
medium-term notes due 2022 with a coupon rate of 2.000%, which were both issued from this $3 billion medium-term notes
program (Series F).
Sources for cash availability in the United States, such as ongoing cash flow from operations and 3M's proven access to
capital markets, have historically been sufficient to fund dividend payments to shareholders and share repurchases, in
addition to funding U.S. acquisitions, U.S. capital spending, U.S. pension/other postemployment benefit contributions, and
other items as needed. For those international earnings considered to be reinvested indefinitely, the Company currently has
no plans or intentions to repatriate these funds for U.S. operations. However, if these international funds are needed for
operations in the U.S., 3M would be required to accrue and pay U.S. taxes to repatriate them.
In 2014, the Company plans to contribute an amount in the range of $100 million to $200 million of cash to its pension and
postretirement plans. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans
in 2014. Therefore, the amount of the anticipated discretionary contribution could vary significantly depending on the U.S.
qualified plans' funded status as of the 2014 measurement date and the anticipated tax deductibility of the contribution.
Future contributions will also depend on market conditions, interest rates and other factors. 3M believes its strong cash
flow and balance sheet will allow it to fund future pension needs without compromising growth opportunities.
3M's strong balance sheet and liquidity provide the Company with significant flexibility to take advantage of numerous
opportunities going forward. The Company will continue to invest in its operations to drive growth, including continual
review of acquisition opportunities. In December 2013, 3M's Board of Directors declared a dividend of 85.5 cents per share
for the first-quarter of 2014, an increase of 35 percent. This is equivalent to an annual dividend of $3.42 per share and
marked the 56th consecutive year of dividend increases for 3M. In February 2014, 3M's Board of Directors also authorized
the repurchase of up to $12 billion of 3M's outstanding common stock, which replaced the Company's February 2013 repurchase
program. This authorization has no pre-established end date. As of June 30, 2014, approximately $9.2 billion remained
available under the February 2014 repurchase authorization.
Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month to month
depending on short-term liquidity needs. Working capital (defined as current assets minus current liabilities) totaled
$6.153 billion at June 30, 2014, compared with $5.235 billion at December 31, 2013, an increase of $918 million. Current
asset balance changes increased working capital by $460 million, with increases in accounts receivable and other items
largely offset by a decrease in cash and cash equivalents. Current liability balance changes increased working capital by
$458 million, largely due to decreases in other current liabilities. The other current liabilities decrease largely related
to the dividend declared in December 2013 that was not paid until March 2014 (discussed in Note 4).
The Company uses various working capital measures that place emphasis and focus on certain working capital assets and
liabilities. These measures are not defined under U.S. generally accepted accounting principles and may not be computed the
same as similarly titled measures used by other companies. One of the primary working capital measures 3M uses is a
combined index, which includes accounts receivable, inventories and accounts payable. This combined index (defined as
quarterly net sales - fourth quarter at year-end - multiplied by four, divided by ending net accounts receivable plus
inventories less accounts payable) was 4.6 at June 30, 2014 compared to 4.8 at December 31, 2013. Receivables increased
$506 million, or 11.9 percent, compared with December 31, 2013, with higher June 2014 sales compared to December 2013 sales
contributing to this increase. Currency translation impacts increased accounts receivable by $13 million. Inventories
increased $229 million, or 5.9 percent, compared with December 31, 2013, with the increases primarily attributable to an
increase in demand in the first six months of 2014, partially offset by currency translation, which decreased inventories
by $13 million. Accounts payable increased $45 million compared with December 31, 2013, primarily related to changes in
business activity.
Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts in
the Consolidated Statement of Cash Flows exclude the effects of acquisitions, divestitures and exchange rate impacts on
cash and cash equivalents, which are presented separately in the cash flows. Thus, the amounts presented in the following
operating, investing and financing activities tables reflect changes in balances from period to period adjusted for these
effects.
Cash Flows from Operating Activities:
Six months ended
June 30,
(Millions) 2014 2013
Net income including noncontrolling interest $ 2,508 $ 2,360
Depreciation and amortization 708 671
Company pension contributions (74) (168)
Company postretirement contributions (3) (3)
Company pension expense 155 221
Company postretirement expense 41 54
Stock-based compensation expense 174 150
Income taxes (deferred and accrued income taxes) (20) 203
Excess tax benefits from stock-based compensation (97) (51)
Accounts receivable (484) (628)
Inventories (242) (167)
Accounts payable 57 199
Product and other insurance receivables and claims 13 19
Other - net (4) (187)
Net cash provided by operating activities $ 2,732 $ 2,673
Cash flows from operating activities can fluctuate significantly from period to period, as pension funding decisions, tax
timing differences and other items can significantly impact cash flows.
In the first six months of 2014, cash flows provided by operating activities increased $59 million compared to the same
period last year, driven by increases in net income including noncontrolling interest. The combination of accounts
receivable, inventories and accounts payable increased working capital by $669 million in the first six months of 2014,
compared to increases of $596 million in the first six months of 2013, primarily driven by year-on-year increases in
working capital requirements due to increasing sales. Additional discussion on working capital changes is provided earlier
in the "Financial Condition and Liquidity" section.
Free Cash Flow (non-GAAP measure):
In addition to net cash provided by operating activities, 3M uses free cash flow as a useful measure of performance and as
an indication of the strength of the Company and its ability to generate cash. 3M defines free cash flow as net cash
provided by operating activities less purchases of property, plant and equipment (which is classified as an investing
activity). Free cash flow is not defined under U.S. generally accepted accounting principles (GAAP). Therefore, it should
not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable
to similarly titled measures used by other companies. It should not be inferred that the entire free cash flow amount is
available for discretionary expenditures. Below find a recap of free cash flow for the six months ended June 30, 2014 and
2013.
Six months ended
June 30,
(Millions) 2014 2013
Net cash provided by operating activities $ 2,732 $ 2,673
Purchases of property, plant and equipment (PP&E) (634) (718)
Free Cash Flow $ 2,098 $ 1,955
Cash Flows from Investing Activities:
Six months ended
June 30,
(Millions) 2014 2013
Purchases of property, plant and equipment (PP&E) $ (634) $ (718)
Proceeds from sale of PP&E and other assets 38 18
Acquisitions, net of cash acquired (94) -
Purchases and proceeds from sale or maturities of marketable securities and investments, net 133 (52)
Other investing (22) 12
Net cash used in investing activities $ (579) $ (740)
Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and
increasing manufacturing efficiency. Capital spending was $634 million in the first six months of
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