REG - 3M Company - 1st Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 3
05/05/2017 07:05
- Part 3: For the preceding part double click ID:nRSE2620Eb
due to hedge
ineffectiveness. Additional information regarding designated interest rate swaps can be found in Note 12 in 3M's 2016
Annual Report on Form 10-K.
The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments
designated as fair value hedges and similar information relative to the hedged items are as follows:
Gain (Loss) on Derivative Gain (Loss) on Hedged Item
Three months ended March 31, 2017 Recognized in Income Recognized in Income
(Millions) Location Amount Location Amount
Interest rate swap contracts Interest expense $ (5) Interest expense $ 5
Total $ (5) $ 5
Three months ended March 31, 2016
(Millions) Location Amount Location Amount
Interest rate swap contracts Interest expense $ 29 Interest expense $ (29)
Total $ 29 $ (29)
Net Investment Hedges:
The Company may use non-derivative (foreign currency denominated debt) and derivative (foreign exchange forward contracts)
instruments to hedge portions of the Company's investment in foreign subsidiaries and manage foreign exchange risk. For
instruments that are designated and qualify as hedges of net investments in foreign operations and that meet the
effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in
cumulative translation within other comprehensive income. The remainder of the change in value of such instruments is
recorded in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to
circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation.
To the extent foreign currency denominated debt is not designated in or is dedesignated from a net investment hedge
relationship, changes in value of that portion of foreign currency denominated debt due to exchange rate changes are
recorded in earnings through their maturity date.
3M's use of foreign exchange forward contracts designated in hedges of the Company's net investment in foreign subsidiaries
can vary by time period depending on when foreign currency denominated debt balances designated in such relationships are
dedesignated, matured, or are newly issued and designated. Additionally, variation can occur in connection with the extent
of the Company's desired foreign exchange risk coverage.
At March 31, 2017, the total notional amount of foreign exchange forward contracts designated in net investment hedges was
approximately 150 million Euros and approximately 248 billion South Korean Won, along with a principal amount of long-term
debt instruments designated in net investment hedges totaling 4.4 billion Euros. The maturity dates of these derivative and
nonderivative instruments designated in net investment hedges range from 2017 to 2031.
The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to
derivative and nonderivative instruments designated as net investment hedges are as follows. There were no
reclassifications of the effective portion of net investment hedges out of accumulated other comprehensive income into
income for the periods presented in the table below.
Pretax Gain (Loss)
Recognized as
Cumulative Translation
within Other Ineffective Portion of Gain (Loss) on
Comprehensive Income Instrument and Amount Excluded
on Effective Portion of from Effectiveness Testing
Three months ended March 31, 2017 Instrument Recognized in Income
(Millions) Amount Location Amount
Foreign currency denominated debt $ (121) N/A $ -
Foreign currency forward contracts (20) Cost of sales 2
Total $ (141) $ 2
Three months ended March 31, 2016
(Millions) Amount Location Amount
Foreign currency denominated debt $ (144) N/A $ -
Foreign currency forward contracts (43) Cost of sales (2)
Total $ (187) $ (2)
Derivatives Not Designated as Hedging Instruments:
3M enters into foreign exchange forward contracts that are not designated in hedge relationships to offset, in part, the
impacts of certain intercompany transactions and to further mitigate short-term currency impacts. In addition, the Company
enters into commodity price swaps to offset, in part, fluctuations in costs associated with the use of certain precious
metals. These derivative instruments are not designated in hedging relationships; therefore, fair value gains and losses on
these contracts are recorded in earnings. The Company does not hold or issue derivative financial instruments for trading
purposes.
The Company revised amounts previously presented in the table below for the gain (loss) on derivatives recognized in income
for the three months ended March 31, 2016 relative to foreign currency forward contracts. This immaterial correction
increased the previously presented amount of the loss recognized in income in the disclosure table below by $58 million for
the three months ended March 31, 2016. This revision had no impact on the Company's consolidated results of operations,
financial condition, or cash flows.
The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments not
designated as hedging instruments are as follows:
Three months ended March 31, 2017
Gain (Loss) on Derivative Recognized in
Income
(Millions) Location Amount
Foreign currency forward/option contracts Cost of sales $ (1)
Foreign currency forward contracts Interest expense 42
Total $ 41
Three months ended March 31, 2016
Gain (Loss) on Derivative Recognized in
Income
(Millions) Location Amount
Foreign currency forward/option contracts Cost of sales $ (5)
Foreign currency forward contracts Interest expense (65)
Total $ (70)
Location and Fair Value Amount of Derivative Instruments
The following tables summarize the fair value of 3M's derivative instruments, excluding nonderivative instruments used as
hedging instruments, and their location in the consolidated balance sheet. Notional amounts below are presented at period
end foreign exchange rates, except interest rate swaps, which are presented using the contract inception date's foreign
exchange rate. Additional information with respect to the fair value of derivative instruments is included in Note 9.
Gross Assets Liabilities
March 31, 2017 Notional Fair Fair
(Millions) Amount Location Value Amount Location Value Amount
Derivatives designated as
hedging instruments
Foreign currency forward/option contracts $ 2,150 Other current assets $ 42 Other current liabilities $ 37
Foreign currency forward/option contracts 1,470 Other assets 57 Other liabilities 12
Interest rate swap contracts 400 Other current assets 2 Other current liabilities 1
Interest rate swap contracts 1,753 Other assets 22 Other liabilities 4
Total derivatives designated as hedging instruments $ 123 $ 54
Derivatives not designated as
hedging instruments
Foreign currency forward/option contracts $ 6,293 Other current assets $ 52 Other current liabilities $ 29
Total derivatives not designated as hedging instruments $ 52 $ 29
Total derivative instruments $ 175 $ 83
Gross Assets Liabilities
December 31, 2016 Notional Fair Fair
(Millions) Amount Location Value Amount Location Value Amount
Derivatives designated as
hedging instruments
Foreign currency forward/option contracts $ 2,160 Other current assets $ 107 Other current liabilities $ 9
Foreign currency forward/option contracts 1,459 Other assets 86 Other liabilities 3
Interest rate swap contracts 1,953 Other assets 25 Other current liabilities 1
Total derivatives designated as hedging instruments $ 218 $ 13
Derivatives not designated as
hedging instruments
Foreign currency forward/option contracts $ 5,655 Other current assets $ 41 Other current liabilities $ 82
Total derivatives not designated as hedging instruments $ 41 $ 82
Total derivative instruments $ 259 $ 95
Credit Risk and Offsetting of Assets and Liabilities of Derivative Instruments
The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps, currency
swaps, commodity price swaps, and forward and option contracts. However, the Company's risk is limited to the fair value of
the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit
limits, and by selecting major international banks and financial institutions as counterparties. 3M enters into master
netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting
arrangement may allow each counterparty to net settle amounts owed between a 3M entity and the counterparty as a result of
multiple, separate derivative transactions. As of March 31, 2017, 3M has International Swaps and Derivatives Association
(ISDA) agreements with 16 applicable banks and financial institutions which contain netting provisions. In addition to a
master agreement with 3M supported by a primary counterparty's parent guarantee, 3M also has associated credit support
agreements in place with 15 of its primary derivative counterparties which, among other things, provide the circumstances
under which either party is required to post eligible collateral (when the market value of transactions covered by these
agreements exceeds specified thresholds or if a counterparty's credit rating has been downgraded to a predetermined
rating). The Company does not anticipate nonperformance by any of these counterparties.
3M has elected to present the fair value of derivative assets and liabilities within the Company's consolidated balance
sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise
qualify for net presentation. However, the following tables provide information as if the Company had elected to offset the
asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default
or termination as stipulated by the terms of netting arrangements with each of the counterparties. For each counterparty,
if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period
based on the 3M entity that is a party to the transactions. Derivatives not subject to master netting agreements are not
eligible for net presentation. As of the applicable dates presented below, no collateral had been received or pledged
related to these derivative instruments.
Offsetting of Financial Assets under Master Netting Agreements with Derivative Counterparties
Gross Amounts not Offset in the
Consolidated Balance Sheet that are Subject
Gross Amount of to Master Netting Agreements
Derivative Assets Gross Amount of
Presented in the Eligible Offsetting
March 31, 2017 Consolidated Recognized Cash Collateral Net Amount of
(Millions) Balance Sheet Derivative Liabilities Received Derivative Assets
Derivatives subject to master netting agreements $ 174 $ 60 $ - $ 114
Derivatives not subject to master netting agreements 1 1
Total $ 175 $ 115
December 31, 2016
(Millions)
Derivatives subject to master netting agreements $ 259 $ 39 $ - $ 220
Derivatives not subject to master netting agreements - -
Total $ 259 $ 220
Offsetting of Financial Liabilities under Master Netting Agreements with Derivative Counterparties
Gross Amounts not Offset in the
Consolidated Balance Sheet that are Subject
Gross Amount of to Master Netting Agreements
Derivative Liabilities Gross Amount of
Presented in the Eligible Offsetting
March 31, 2017 Consolidated Recognized Cash Collateral Net Amount of
(Millions) Balance Sheet Derivative Assets Pledged Derivative Liabilities
Derivatives subject to master netting agreements $ 77 $ 60 $ - $ 17
Derivatives not subject to master netting agreements 6 6
Total $ 83 $ 23
December 31, 2016
(Millions)
Derivatives subject to master netting agreements $ 93 $ 39 $ - $ 54
Derivatives not subject to master netting agreements 2 2
Total $ 95 $ 56
Currency Effects
3M estimates that year-on-year foreign currency transactions effects, including hedging impacts, decreased pre-tax income
by approximately $37 million for the three months ended March 31, 2017. These estimates include transaction gains and
losses, including derivative instruments designed to reduce foreign currency exchange rate risks and any impacts from
swapping Venezuelan bolivars into U.S. dollars.
NOTE 9. Fair Value Measurements
3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at
fair value on a recurring basis and nonrecurring basis. Under the standard, fair value is defined as the exit price, or the
amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset
or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are
inputs that reflect the Company's assumptions about the factors market participants would use in valuing the asset or
liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three
levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs
include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or
liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
For 3M, assets and liabilities that are measured at fair value on a recurring basis primarily relate to available-for-sale
marketable securities, available-for-sale investments (included as part of investments in the Consolidated Balance Sheet)
and certain derivative instruments. Derivatives include cash flow hedges, interest rate swaps and net investment hedges.
The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and
liabilities. Separately, there were no material fair value measurements with respect to nonfinancial assets or liabilities
that are recognized or disclosed at fair value in the Company's financial statements on a recurring basis for the three
months ended March 31, 2017 and 2016.
3M uses various valuation techniques, which are primarily based upon the market and income approaches, with respect to
financial assets and liabilities. Following is a description of the valuation methodologies used for the respective
financial assets and liabilities measured at fair value.
Available-for-sale marketable securities - except certain U.S. municipal securities:
Marketable securities, except certain U.S. municipal securities, are valued utilizing multiple sources. A weighted average
market price is used for these securities. Market prices are obtained for these securities from a variety of industry
standard data providers, security master files from large financial institutions, and other third-party sources. These
multiple prices are used as inputs into a distribution-curve-based algorithm to determine the daily fair value to be used.
3M classifies U.S. treasury securities as level 1, while all other marketable securities (excluding certain U.S. municipal
securities) are classified as level 2. Marketable securities are discussed further in Note 6.
Available-for-sale marketable securities - certain U.S. municipal securities only:
In both 2016 and 2014, 3M obtained municipal bonds from the City of Nevada, Missouri, which represent 3M's only U.S.
municipal securities holding as of March 31, 2017 and December 31, 2016. Due to the nature of this security, the valuation
method utilized will include the financial health of the City of Nevada, any recent municipal bond issuances by Nevada, and
macroeconomic considerations related to the direction of interest rates and the health of the overall municipal bond
market, and as such has been classified as a level 3 security.
Available-for-sale investments:
Investments include equity securities that are traded in an active market. Closing stock prices are readily available from
active markets and are used as being representative of fair value. 3M classifies these securities as level 1.
Derivative instruments:
The Company's derivative assets and liabilities within the scope of ASC 815, Derivatives and Hedging, are required to be
recorded at fair value. The Company's derivatives that are recorded at fair value include foreign currency forward and
option contracts, commodity price swaps, interest rate swaps, and net investment hedges where the hedging instrument is
recorded at fair value. Net investment hedges that use foreign currency denominated debt to hedge 3M's net investment are
not impacted by the fair value measurement standard under ASC 820, as the debt used as the hedging instrument is marked to
a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may
impact fair value.
3M has determined that foreign currency forwards, commodity price swaps, currency swaps, foreign currency options, interest
rate swaps and cross-currency swaps will be considered level 2 measurements. 3M uses inputs other than quoted prices that
are observable for the asset. These inputs include foreign currency exchange rates, volatilities, and interest rates.
Derivative positions are primarily valued using standard calculations/models that use as their basis readily observable
market parameters. Industry standard data providers are 3M's primary source for forward and spot rate information for both
interest rates and currency rates, with resulting valuations periodically validated through third-party or counterparty
quotes and a net present value stream of cash flows model.
The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring
basis.
Fair Value Measurements
Description Fair Value at Using Inputs Considered as
(Millions) March 31, 2017 Level 1 Level 2 Level 3
Assets:
Available-for-sale:
Marketable securities:
Corporate debt securities $ 10 $ - $ 10 $ -
Commercial paper 1 - 1 -
Certificates of deposit/time deposits 89 - 89 -
Asset-backed securities:
Automobile loan related 29 - 29 -
Credit card related 9 - 9 -
U.S. municipal securities 20 - - 20
Derivative instruments - assets:
Foreign currency forward/option contracts 151 - 151 -
Interest rate swap contracts 24 - 24 -
Liabilities:
Derivative instruments - liabilities:
Foreign currency forward/option contracts 78 - 78 -
Interest rate swap contracts 5 - 5 -
Fair Value Measurements
Description Fair Value at Using Inputs Considered as
(Millions) December 31, 2016 Level 1 Level 2 Level 3
Assets:
Available-for-sale:
Marketable securities:
Corporate debt securities $ 10 $ - $ 10 $ -
Commercial paper 14 - 14 -
Certificates of deposit/time deposits 197 - 197 -
Asset-backed securities:
Automobile loan related 31 - 31 -
Credit card related 18 - 18 -
Other 7 - 7 -
U.S. municipal securities 20 - - 20
Derivative instruments - assets:
Foreign currency forward/option contracts 234 - 234 -
Interest rate swap contracts 25 - 25 -
Liabilities:
Derivative instruments - liabilities:
Foreign currency forward/option contracts 94 - 94 -
Interest rate swap contracts 1 - 1 -
The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a
recurring basis in the table above that used significant unobservable inputs (Level 3).
Three months ended
Marketable securities - certain U.S. municipal securities only March 31,
(Millions) 2017 2016
Beginning balance $ 20 $ 12
Total gains or losses:
Included in earnings - -
Included in other comprehensive income - -
Purchases and issuances - 6
Sales and settlements - -
Transfers in and/or out of level 3 - -
Ending balance $ 20 $ 18
Change in unrealized gains or losses for the period included in earnings for securities held at the end of the reporting period - -
In addition, the plan assets of 3M's pension and postretirement benefit plans are measured at fair value on a recurring
basis (at least annually). Refer to Note 11 in 3M's 2016 Annual Report on Form 10-K.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:
Disclosures are required for certain assets and liabilities that are measured at fair value, but are recognized and
disclosed at fair value on a nonrecurring basis in periods subsequent to initial recognition. For 3M, such measurements of
fair value relate primarily to long-lived asset impairments. During the three months ended March 31, 2017, the Company
recognized approximately $40 million in long-lived asset impairments related to its Electronics and Energy business
segment, with the complete carrying amount of such assets written off and included in operating income results. There were
no material long-lived asset impairments for the three months ended March 31, 2016.
Fair Value of Financial Instruments:
The Company's financial instruments include cash and cash equivalents, marketable securities, accounts receivable, certain
investments, accounts payable, borrowings, and derivative contracts. The fair values of cash and cash equivalents, accounts
receivable, accounts payable, and short-term borrowings and current portion of long-term debt approximated carrying values
because of the short-term nature of these instruments. Available-for-sale marketable securities and investments, in
addition to certain derivative instruments, are recorded at fair values as indicated in the preceding disclosures. For its
long-term debt, the Company utilized third-party quotes to estimate fair values (classified as level 2). Information with
respect to the carrying amounts and estimated fair values of these financial instruments follow:
March 31, 2017 December 31, 2016
Carrying Fair Carrying Fair
(Millions) Value Value Value Value
Long-term debt, excluding current portion $ 10,802 $ 11,337 $ 10,678 $ 11,168
The fair values reflected above consider the terms of the related debt absent the impacts of derivative/hedging activity.
The carrying amount of long-term debt referenced above is impacted by certain fixed-to-floating interest rate swaps that
are designated as fair value hedges and by the designation of fixed rate Eurobond securities issued by the Company as
hedging instruments of the Company's net investment in its European subsidiaries. Many of 3M's fixed-rate bonds were
trading at a premium at March 31, 2017 and December 31, 2016 due to the low interest rates and tightening of 3M's credit
spreads.
NOTE 10. Commitments and Contingencies
Legal Proceedings:
The Company and some of its subsidiaries are involved in numerous claims and lawsuits, principally in the United States,
and regulatory proceedings worldwide. These include various products liability (involving products that the Company now or
formerly manufactured and sold), intellectual property, and commercial claims and lawsuits, including those brought under
the antitrust laws, and environmental proceedings. Unless otherwise stated, the Company is vigorously defending all such
litigation. Additional information about the Company's process for disclosure and recording of liabilities and insurance
receivables related to legal proceedings can be found in Note 14 "Commitments and Contingencies" in the Company's Annual
Report on Form 10-K for the year ended December 31, 2016.
The following sections first describe the significant legal proceedings in which the Company is involved, and then describe
the liabilities and associated insurance receivables the Company has accrued relating to its significant legal
proceedings.
Respirator Mask/Asbestos Litigation
As of March 31, 2017, the Company is a named defendant, with multiple co-defendants, in numerous lawsuits in various courts
that purport to represent approximately 2,650 individual claimants, compared to approximately 2,660 individual claimants
with actions pending at December 31, 2016.
The vast majority of the lawsuits and claims resolved by and currently pending against the Company allege use of some of
the Company's mask and respirator products and seek damages from the Company and other defendants for alleged personal
injury from workplace exposures to asbestos, silica, coal mine dust or other occupational dusts found in products
manufactured by other defendants or generally in the workplace. A minority of the lawsuits and claims resolved by and
currently pending against the Company generally allege personal injury from occupational exposure to asbestos from products
previously manufactured by the Company, which are often unspecified, as well as products manufactured by other defendants,
or occasionally at Company premises.
The Company's current volume of new and pending matters is substantially lower than it experienced at the peak of filings
in 2003. The Company expects that filing of claims by unimpaired claimants in the future will continue to be at much lower
levels than in the past. Accordingly, the number of claims alleging more serious injuries, including mesothelioma and other
malignancies, will represent a greater percentage of total claims than in the past. The Company has prevailed in all eleven
cases taken to trial, including nine of the ten cases tried to verdict (such trials occurred in 1999, 2000, 2001, 2003,
2004, 2007, 2015, and 2016-described below), and an appellate reversal in 2005 of the 2001 jury verdict adverse to the
Company. The remaining case, tried in 2009, was dismissed by the court at the close of plaintiff's evidence, based on the
court's legal finding that the plaintiff had not presented sufficient evidence to support a jury verdict. In August 2016,
3M received a unanimous defense verdict from a jury in state court in Kentucky, in 3M's first respirator trial involving
coal mine dust. The estate of the plaintiff alleged that the 3M 8710 respirator is defective and caused his death because
it did not protect him from harmful coal mine dust. The jury rejected plaintiff's claim and returned a verdict finding no
liability against 3M. The verdict is final as the plaintiff did not file an appeal.
The Company has demonstrated in these past trial proceedings that its respiratory protection products are effective as
claimed when used in the intended manner and in the intended circumstances. Consequently the Company believes that
claimants are unable to establish that their medical conditions, even if significant, are attributable to the Company's
respiratory protection products. Nonetheless the Company's litigation experience indicates that claims of persons with
malignant conditions are costlier to resolve than the claims of unimpaired persons, and it therefore believes the average
cost of resolving pending and future claims on a per-claim basis will continue to be higher than it experienced in prior
periods when the vast majority of claims were asserted by medically unimpaired claimants.
As previously reported, the State of West Virginia, through its Attorney General, filed a complaint in 2003 against the
Company and two other manufacturers of respiratory protection products in the Circuit Court of Lincoln County, West
Virginia, and amended its complaint in 2005. The amended complaint seeks substantial, but unspecified, compensatory damages
primarily for reimbursement of the costs allegedly incurred by the State for worker's compensation and healthcare benefits
provided to all workers with occupational pneumoconiosis and unspecified punitive damages. The case was inactive from the
fourth quarter of 2007 until late 2013, other than a case management conference in March 2011. In November 2013, the State
filed a motion to bifurcate the lawsuit into separate liability and damages proceedings. At the hearing on the motion, the
court declined to bifurcate the lawsuit. No liability has been recorded for this matter because the Company believes that
liability is not probable and estimable at this time. In addition, the Company is not able to estimate a possible loss or
range of loss given the lack of any meaningful discovery responses by the State of West Virginia, the otherwise minimal
activity in this case and the fact that the complaint asserts claims against two other manufacturers where a defendant's
share of liability may turn on the law of joint and several liability and by the amount of fault, if any, a jury might
allocate to each defendant if the case is ultimately tried.
Respirator Mask/Asbestos Liabilities and Insurance Receivables:
The Company annually conducts a comprehensive legal review of its respirator mask/asbestos liabilities in connection with
finalizing and reporting its annual results of operations, unless significant changes in trends or new developments warrant
an earlier review. The Company reviews recent and historical claims data, including without limitation, (i) the number of
pending claims filed against the Company, (ii) the nature and mix of those claims (i.e., the proportion of claims asserting
usage of the Company's mask or respirator products and alleging exposure to each of asbestos, silica, coal or other
occupational dusts, and claims pleading use of asbestos-containing products allegedly manufactured by the Company), (iii)
the costs to defend and resolve pending claims, and (iv) trends in filing rates and in costs to defend and resolve claims,
(collectively, the "Claims Data"). As part of its comprehensive legal review, the Company provides the Claims Data to a
third party with expertise in determining the impact of Claims Data on future filing trends and costs. The third party
assists the Company in estimating the costs to defend and resolve pending and future claims. The Company uses these
estimates to develop its best estimate of probable liability.
Developments may occur that could affect the Company's estimate of its liabilities. These developments include, but are not
limited to, significant changes in (i) the key assumptions underlying the Company's accrual, including, the number of
future claims, the nature and mix of those claims, the average cost of defending and resolving claims, and in maintaining
trial readiness (ii) trial and appellate outcomes, (iii) the law and procedure applicable to these claims, and (iv) the
financial viability of other co-defendants and insurers.
In the first quarter of 2017, the Company made payments for legal fees and settlements of $12 million related to the
respirator mask/asbestos litigation. As of March 31, 2017, the Company had an accrual for respirator mask/asbestos
liabilities (excluding Aearo accruals) of $583 million. This accrual represents the Company's best estimate of probable
loss and reflects an estimation period for future claims that may be filed against the Company approaching the year 2050.
The Company cannot estimate the amount or upper end of the range of amounts by which the liability may exceed the accrual
the Company has established because of the (i) inherent difficulty in projecting the number of claims that have not yet
been asserted or the time period in which future claims may be asserted, (ii) the complaints nearly always assert claims
against multiple defendants where the damages alleged are typically not attributed to individual defendants so that a
defendant's share of liability may turn on the law of joint and several liability, which can vary by state, (iii) the
multiple factors described above that the Company considers in estimating its liabilities, and (iv) the several possible
developments described above that may occur that could affect the Company's estimate of liabilities.
As of March 31, 2017, the Company's receivable for insurance recoveries related to the respirator mask/asbestos litigation
was $4 million. The Company is seeking coverage under the policies of certain insolvent and other insurers. Once those
claims for coverage are resolved, the Company will have collected substantially all of its remaining insurance coverage for
respirator mask/asbestos claims.
Respirator Mask/Asbestos Litigation - Aearo Technologies
On April 1, 2008, a subsidiary of the Company purchased the stock of Aearo Holding Corp., the parent of Aearo Technologies
("Aearo"). Aearo manufactured and sold various products, including personal protection equipment, such as eye, ear, head,
face, fall and certain respiratory protection products.
As of March 31, 2017, Aearo and/or other companies that previously owned and operated Aearo's respirator business (American
Optical Corporation, Warner-Lambert LLC, AO Corp. and Cabot Corporation ("Cabot")) are named defendants, with multiple
co-defendants, including the Company, in numerous lawsuits in various courts in which plaintiffs allege use of mask and
respirator products and seek damages from Aearo and other defendants for alleged personal injury from workplace exposures
to asbestos, silica-related, or other occupational dusts found in products manufactured by other defendants or generally in
the workplace.
As of March 31, 2017, the Company, through its Aearo subsidiary, had accruals of $19 million for product liabilities and
defense costs related to current and future Aearo-related asbestos and silica-related claims. Responsibility for legal
costs, as well as for settlements and judgments, is currently shared in an informal arrangement among Aearo, Cabot,
American Optical Corporation and a subsidiary of Warner Lambert and their respective insurers (the "Payor Group").
Liability is allocated among the parties based on the number of years each company sold respiratory products under the "AO
Safety" brand and/or owned the AO Safety Division of American Optical Corporation and the alleged years of exposure of the
individual plaintiff. Aearo's share of the contingent liability is further limited by an agreement entered into between
Aearo and Cabot on July 11, 1995. This agreement provides that, so long as Aearo pays to Cabot a quarterly fee of $100,000,
Cabot will retain responsibility and liability for, and indemnify Aearo against, any product liability claims involving
exposure to asbestos, silica, or silica products for respirators sold prior to July 11, 1995. Because of the difficulty in
determining how long a particular respirator remains in the stream of commerce after being sold, Aearo and Cabot have
applied the agreement to claims arising out of the alleged use of respirators involving exposure to asbestos, silica or
silica products prior to January 1, 1997. With these arrangements in place, Aearo's potential liability is limited to
exposures alleged to have arisen from the use of respirators involving exposure to asbestos, silica, or silica products on
or after January 1, 1997. To date, Aearo has elected to pay the quarterly fee. Aearo could potentially be exposed to
additional claims for some part of the pre-July 11, 1995 period covered by its agreement with Cabot if Aearo elects to
discontinue its participation in this arrangement, or if Cabot is no longer able to meet its obligations in these matters.
In March 2012, Cabot CSC Corporation and Cabot Corporation filed a lawsuit against Aearo in the Superior Court of Suffolk
County, Massachusetts seeking declaratory relief as to the scope of Cabot's indemnity obligations under the July 11, 1995
agreement, including whether Cabot has retained liability for coal workers' pneumoconiosis claims, and seeking damages for
breach of contract. In 2014, the court granted Aearo's motion for summary judgment on two claims, but declined to rule on
two issues: the specific liability for certain known coal mine dust lawsuits; and Cabot's claim for allocation of liability
between injuries allegedly caused by exposure to coal mine dust and injuries allegedly caused by exposure to silica dust.
Following additional discovery, the parties filed new motions for summary judgment. In February 2016, the court ruled in
favor of Aearo on these two remaining issues, and ordered that Cabot, and not Aearo, is solely responsible for all
liability for the coal mine dust lawsuits under the 1995 agreement. Cabot has appealed with a decision expected in 2017.
Developments may occur that could affect the estimate of Aearo's liabilities. These developments include, but are not
limited to: (i) significant changes in the number of future claims, (ii) significant changes in the average cost of
resolving claims, (iii) significant changes in the legal costs of defending these claims, (iv) significant changes in the
mix and nature of claims received, (v) trial and appellate outcomes, (vi) significant changes in the law and procedure
applicable to these claims, (vii) significant changes in the liability allocation among the co-defendants, (viii) the
financial viability of members of the Payor Group including exhaustion of available insurance coverage limits, and/or (ix)
a determination that the interpretation of the contractual obligations on which Aearo has estimated its share of liability
is inaccurate. The Company cannot determine the impact of these potential developments on its current estimate of Aearo's
share of liability for these existing and future claims. If any of the developments described above were to occur, the
actual amount of these liabilities for existing and future claims could be significantly larger than the amount accrued.
Because of the inherent difficulty in projecting the number of claims that have not yet been asserted, the complexity of
allocating responsibility for future claims among the Payor Group, and the several possible developments that may occur
that could affect the estimate of Aearo's liabilities, the Company cannot estimate the amount or range of amounts by which
Aearo's liability may exceed the accrual the Company has established.
Environmental Matters and Litigation
The Company's operations are subject to environmental laws and regulations including those pertaining to air emissions,
wastewater discharges, toxic substances, and the handling and disposal of solid and hazardous wastes enforceable by
national, state, and local authorities around the world, and private parties in the United States and abroad. These laws
and regulations provide, under certain circumstances, a basis for the remediation of contamination, for restoration of or
compensation for damages to natural resources, and for personal injury and property damage claims. The Company has
incurred, and will continue to incur, costs and capital expenditures in complying with these laws and regulations,
defending personal injury and property damage claims, and modifying its business operations in light of its environmental
responsibilities. In its effort to satisfy its environmental responsibilities and comply with environmental laws and
regulations, the Company has established, and periodically updates, policies relating to environmental standards of
performance for its operations worldwide.
Under certain environmental laws, including the United States Comprehensive Environmental Response, Compensation and
Liability Act of 1980 and similar state laws, the Company may be jointly and severally liable, typically with other
companies, for the costs of remediation of
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