REG - 3M Company - 1st Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 5
05/05/2016 07:06
- Part 5: For the preceding part double click ID:nRSE2988Xd
unchanged.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM*
To the Stockholders and Board of Directors of 3M Company:
We have reviewed the accompanying consolidated balance sheet of 3M Company and its subsidiaries as of March 31, 2016, and
the related consolidated statements of income, comprehensive income, and cash flows for the three-month periods ended March
31, 2016 and 2015. These interim financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).
A review of interim financial information consists principally of applying analytical procedures and making inquiries of
persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is
the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated
interim financial statements for them to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet as of December 31, 2015, and the related consolidated statements of income, comprehensive
income, changes in equity, and cash flows for the year then ended (not presented herein), and in our report dated February
11, 2016, which included a paragraph that described the change in the manner of accounting for marketable securities and
deferred tax assets and liabilities, we expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2015,
is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
May 3, 2016
* Pursuant to Rule 436(c) of the Securities Act of 1933 ("Act") this should not be considered a "report" within the
meaning of Sections 7 and 11 of the Act and the independent registered public accounting firm liability under Section 11
does not extend to it.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a
reader of 3M's financial statements with a narrative from the perspective of management. 3M's MD&A is presented in the
following sections:
· Overview
· Results of Operations
· Performance by Business Segment
· Financial Condition and Liquidity
· Cautionary Note Concerning Factors That May Affect Future Results
Forward-looking statements in Part I, Item 2 may involve risks and uncertainties that could cause results to differ
materially from those projected (refer to the section entitled "Cautionary Note Concerning Factors That May Affect Future
Results" in Part I, Item 2 and the risk factors provided in Part II, Item 1A for discussion of these risks and
uncertainties).
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. 3M
manages its operations in five operating business segments: Industrial; Safety and Graphics; Health Care; Electronics and
Energy; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a
combined basis. Any references to "Membrana" refer to the former Separations Media business acquired by 3M from Polypore in
2015.
The stronger U.S. dollar negatively impacted sales and earnings in the first quarter of 2016 versus the same period last
year, while global economic growth was mixed. Despite these challenges, 3M had positive organic local-currency growth in
three of its five business segments and in all major geographic areas, except Asia Pacific. 3M also expanded operating
income margins by 1.3 percentage points. Fourth-quarter 2015 restructuring actions, as discussed in Note 4, impacted
approximately 1,700 positions worldwide, contributing to an estimated pre-tax savings of approximately $130 million for
total year 2016.
Additional discussion of first quarter results follows.
Earnings per share attributable to 3M common shareholders - diluted:
The following table provides the increase (decrease) in diluted earnings per share for the three-months ended March 31,
2016 compared to 2015.
Three months ended
(Earnings per diluted share) March 31, 2016
Same period last year $ 1.85
Increase/(decrease) in earnings per share - diluted, due to:
Operational benefits 0.04
Acquisitions and divestitures 0.07
Foreign exchange impacts (0.05)
Net interest expense (0.02)
Income tax rate 0.07
Shares of common stock outstanding 0.09
Current period $ 2.05
Net income attributable to 3M was $1.275 billion, or $2.05 per diluted share, in the first quarter of 2016, compared to
$1.199 billion, or $1.85 per diluted share, in the first quarter of 2015. Operational benefits increased earnings by 4
cents per diluted share, which included a benefit of 8 cents per diluted share related to lower defined benefit pension and
postretirement expenses. Operational benefits also included the combination of higher selling prices and lower raw material
costs, in addition to productivity benefits related to the fourth-quarter 2015 restructuring. These operational benefits
were partially offset by the impact of organic sales volume declines and lower asset utilization.
Acquisition and divestiture impacts, which are measured for the first twelve months post-transaction, related to the 2015
acquisitions of Membrana, Capital Safety, and Ivera Medical, plus the first-quarter 2016 divestiture of Polyfoam, the
fourth quarter 2015/first quarter 2016 divestiture of the library systems business, and the fourth quarter 2015 divestiture
of the license plate converting business in France. On a combined basis, these acquisition/divestiture year-on-year impacts
increased earnings by 7 cents per diluted share, driven by divestiture gains and solid performance from 2015 acquisitions.
Foreign currency impacts (net of hedging) decreased pre-tax earnings by approximately $50 million, or the equivalent of 5
cents per diluted share, excluding the impact of foreign currency changes on tax rates.
Over the past few years, 3M has taken actions to better optimize its capital structure and reduce its cost of capital by
adding debt. These actions have led to an increase in interest expense year-on-year, largely due to higher average debt
balances.
The income tax rate was 26.8 percent in the first quarter, down 2.7 percentage points versus last year's first quarter,
which increased earnings by approximately 7 cents per diluted share. The decrease in tax rate was driven by a number of
factors as referenced in Note 6, including the first quarter 2016 adoption of Accounting Standards Update (ASU) No. 2016-09
(discussed in Note 1).
Weighted-average diluted shares outstanding in the first quarter of 2016 declined 4.3 percent year-on-year to 621.3
million, which increased earnings by approximately 9 cents per diluted share.
Sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the three months ended March 31,
2016 and 2015. In addition to the discussion below, refer to the section entitled "Performance by Business Segment" later
in MD&A for a more detailed discussion of the sales and income results of the Company and its respective business segments
(including Corporate and Unallocated). Refer to Note 14 for additional information on business segments, including
Elimination of Dual Credit.
Three months ended March 31,
2016 2015 % change
Net Oper. Net Oper. Net Oper.
(Dollars in millions) Sales Income Sales Income Sales Income
Business Segments
Industrial $ 2,576 $ 617 $ 2,656 $ 596 (3.0) % 3.6 %
Safety and Graphics 1,412 345 1,372 335 2.9 % 3.1 %
Health Care 1,383 455 1,329 408 4.0 % 11.5 %
Electronics and Energy 1,144 208 1,324 285 (13.6) % (26.8) %
Consumer 1,049 238 1,048 240 0.1 % (1.1) %
Corporate and Unallocated 1 (41) 2 (100) - -
Elimination of Dual Credit (156) (34) (153) (34) - -
Total Company $ 7,409 $ 1,788 $ 7,578 $ 1,730 (2.2) % 3.3 %
Three months ended March 31, 2016
Organic
Worldwide local- Total
Sales Change Analysis currency sales
By Business Segment sales Acquisitions Divestitures Translation change
Industrial (1.9) % 2.0 % (0.1) % (3.0) % (3.0) %
Safety and Graphics 2.4 % 6.9 % (2.4) % (4.0) % 2.9 %
Health Care 6.2 % 0.9 % - % (3.1) % 4.0 %
Electronics and Energy (11.7) % - % - % (1.9) % (13.6) %
Consumer 2.8 % - % - % (2.7) % 0.1 %
Total Company (0.8) % 2.1 % (0.5) % (3.0) % (2.2) %
Sales in U.S. dollars in the first quarter of 2016 decreased 2.2 percent, substantially impacted by foreign currency
translation, which reduced sales by 3.0 percent. Total company organic local-currency sales (which includes organic volume
impacts plus selling price impacts) decreased 0.8 percent, with growth in Health Care, Consumer, and Safety and Graphics
more than offset by declines in Industrial, and Electronics and Energy. Four of 3M's five business segments achieved
operating income margins in excess of 22 percent. Worldwide operating income margins for the first quarter of 2016 were
24.1 percent, compared to 22.8 percent for the first quarter of 2015.
3M continued to invest for long-term success through research and development, commercialization and acquisitions.
Acquisitions increased first-quarter sales growth by 2.1 percent, which related to acquisitions closed in 2015. In August
2015, 3M (Safety and Graphics Business) acquired Capital Safety, a leading global provider of fall protection equipment. In
August 2015, 3M (Industrial Business) also acquired Membrana, a leading provider of microporous membranes and modules for
filtration in life sciences, industrial and specialty segments. In March 2015, 3M (Health Care Business) acquired Ivera
Medical Corp., a manufacturer of health care products that disinfect and protect devices used for access into a patient's
bloodstream. Refer to Note 2 in the Consolidated Financial Statements in 3M's 2015 Annual Report on Form 10-K for
additional detail.
Divestitures reduced first-quarter sales growth by 0.5 percent. As part of its portfolio management process, in the fourth
quarter of 2015, 3M (Safety and Graphics Business) divested the license plate converting business in France and
substantially all of the library systems business. In the first quarter of 2016, 3M completed the sale of the remaining
portions of its library systems business. Also, in the first quarter of 2016, 3M (Industrial Business Group) divested the
assets of 3M's pressurized polyurethane foam adhesives business (formerly known as Polyfoam). This business is a provider
of pressurized polyurethane foam adhesive formulations and systems into the residential roofing, commercial roofing and
insulation and industrial foam segments in the United States with annual sales of approximately $20 million. The Company
recorded a pre-tax gain of $40 million in the first quarter of 2016 as a result of the sale of Polyfoam and the remaining
portion of the library systems business. Refer to Note 2 in the Consolidated Financial Statements for additional detail.
Sales and operating income by geographic area:
Percent change information compares the first quarter of 2016 with the same period last year, unless otherwise indicated.
From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis.
Three months ended March 31, 2016
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 2,926 $ 2,213 $ 1,579 $ 693 $ (2) $ 7,409
% of worldwide sales 39.5 % 29.9 % 21.3 % 9.3 % - 100.0 %
Components of net sales change:
Volume - organic 0.3 % (5.4) % 0.5 % (2.6) % - (1.7) %
Price - (0.2) 1.2 6.8 - 0.9
Organic local-currency sales 0.3 (5.6) 1.7 4.2 - (0.8)
Acquisitions 2.6 1.0 2.8 2.2 - 2.1
Divestitures (0.6) (0.2) (0.7) (0.3) - (0.5)
Translation - (2.6) (2.9) (15.7) - (3.0)
Total sales change 2.3 % (7.4) % 0.9 % (9.6) % - (2.2) %
Sales in U.S. dollars increased 2.3 percent in the United States and 0.9 percent in EMEA, while sales declined 7.4 percent
in Asia Pacific and 9.6 percent in Latin America/Canada. Currency impacts reduced first quarter 2016 worldwide sales growth
by 3.0 percent.
Worldwide selling prices rose 0.9 percent in the first quarter of 2016. 3M has been raising selling prices in a number of
developing countries to help offset the impact of currency devaluations. 3M also continues to generate positive selling
price changes across most of its businesses, boosted by world-class innovation and strong new product flow, both of which
are important elements of the 3M business model.
Foreign currency translation reduced year-on-year sales in all major geographies, driven by a 15.7 percent translation
impact in Latin America/Canada. In particular, the Euro and Brazilian Real versus the U.S. dollar were weaker compared to
first quarter 2015 by 1 percent and 25 percent, respectively, while the Yen strengthened versus the U.S. dollar by 4
percent.
In Latin America/Canada, organic local-currency sales grew 4.2 percent, led by Health Care at 9 percent, and Industrial at
8 percent. Organic local-currency sales increased 1 percent in Safety and Graphics, were flat in Electronics and Energy,
and declined 1 percent in Consumer. Organic local-currency sales grew 10 percent in Mexico and 2 percent in Brazil.
In EMEA, organic local-currency sales increased 1.7 percent. Central/East Europe and Middle East/Africa grew 7 percent, and
West Europe was up slightly. Organic local-currency sales growth in EMEA was led by Health Care at 6 percent, while Safety
and Graphics grew 2 percent, Industrial 1 percent, and Electronics and Energy was flat. Organic local-currency sales
declined 5 percent in Consumer.
In the United States, organic local-currency sales growth was 0.3 percent, with growth of 4 percent in both Health Care and
Consumer, and growth in Safety and Graphics of 2 percent, largely offset by declines in both Electronics and Energy of 1
percent and Industrial of 5 percent. The U.S. industrial production index declined, which impacted growth in 3M's
Industrial business.
In Asia Pacific, organic local-currency sales declined 5.6 percent. Organic local-currency sales growth was led by Health
Care at 11 percent, Consumer at 6 percent, and Safety and Graphics at 4 percent, while Industrial declined 4 percent.
Electronics and Energy declined 18 percent, as weak end-market demand and excess channel inventory in consumer electronics
resulted in significant declines. China/Hong Kong organic local-currency sales declined 4 percent and Japan declined 8
percent. Excluding electronics, both Japan and China/Hong Kong organic local-currency sales were flat.
Worldwide operating income increased 3.3 percent in the first quarter and operating income margins were 24.1 percent, an
increase of 1.3 percentage points year-on-year. Operating income margins increased due to the combination of higher selling
prices and lower raw material costs, lower defined benefit pension and postretirement expense, and productivity related to
the fourth quarter 2015 restructuring. These factors were partially offset by acquisition impacts, organic volume declines,
and utilization/other items. Refer to the section entitled "Results of Operations" for further discussion.
Managing currency risks:
As discussed above, the stronger U.S. dollar negatively impacted sales and earnings in the first three months of 2016
compared to the same period last year. 3M utilizes a number of tools to hedge currency risk related to earnings. 3M uses
natural hedges such as pricing, productivity, hard currency and hard currency-indexed billings, and localizing source of
supply. 3M also uses financial hedges to mitigate currency risk. In the case of more liquid currencies, 3M hedges a portion
of its aggregate exposure, using a 12, 24 or 36 month horizon, depending on the currency in question. In mid-2014, 3M began
extending its hedging tenor for certain major currencies, most notably the Euro and Yen, out as far as 24 months, and in
the first quarter of 2015 extended this to 36 months. Previously, 3M had limited its hedge horizon to 12 months. For less
liquid currencies, financial hedging is frequently more expensive with more limitations on tenor. Thus this risk is largely
managed via local operational actions using natural hedging tools as discussed above. In either case, 3M's hedging approach
is designed to mitigate a portion of foreign currency risk and reduce volatility, ultimately allowing time for 3M's
businesses to respond to changes in the marketplace.
Financial condition:
3M generated $1.260 billion of operating cash flows in the first three months of 2016, an increase of $180 million when
compared to the first three months of 2015. Refer to the section entitled "Financial Condition and Liquidity" later in MD&A
for a discussion of items impacting cash flows.
In February 2016, 3M's Board of Directors authorized the repurchase of up to $10 billion of 3M's outstanding common stock,
with no pre-established end date. In the first three months of 2016, the Company purchased $1.227 billion of its own stock,
compared to $886 million of stock purchases in the first three months of 2015. As of March 31, 2016, approximately $9.6
billion remained available under the February 2016 authorization. The Company expects to purchase $4 billion to $6 billion
of its own stock in 2016. In February 2016, 3M's Board of Directors declared a first-quarter 2016 dividend of $1.11 per
share, an increase of 8 percent. This marked the 58th consecutive year of dividend increases for 3M.
3M's debt to total capital ratio (total capital defined as debt plus equity) was 49 percent at March 31, 2016, and 48
percent at December 31, 2015. 3M currently has an AA- credit rating with a stable outlook from Standard & Poor's and has an
A1 credit rating with a stable outlook from Moody's Investors Service. In March 2016, Moody's downgraded 3M's rating from
Aa3 to A1 and revised 3M's outlook from negative to stable. The Company's short-term rating of P-1 was affirmed. This
ratings action followed 3M's announcement of its new five-year plan for the period 2016 through 2020 in which the Company
communicated its intent to further increase financial leverage. The Company generates significant ongoing cash flow and has
proven access to capital markets funding throughout business cycles.
3M expects to contribute approximately $200 million to $400 million of cash to its global defined benefit pension and
postretirement plans in 2016. The Company does not have a required minimum cash pension contribution obligation for its
U.S. plans in 2016.
RESULTS OF OPERATIONS
Net Sales:
Refer to the preceding sections entitled "Sales and operating income by business segment" and "Sales and operating income
by geographic area" for discussion of sales change.
Operating Expenses:
Three months ended
March 31,
(Percent of net sales) 2016 2015 Change
Cost of sales 49.6 % 50.5 % (0.9) %
Selling, general and administrative expenses 20.2 20.6 (0.4)
Research, development and related expenses 6.1 6.1 -
Operating income 24.1 % 22.8 % 1.3 %
3M expects global defined benefit pension and postretirement expense in 2016 (before settlements, curtailments, special
termination benefits and other) to decrease by approximately $320 million pre-tax when compared to 2015, 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 2015 Annual Report on Form 10-K (MD&A section entitled Critical Accounting Estimates - Pension and
Postretirement Obligations and Note 11, Pension and Postretirement Benefit Plans) for background concerning the change to
the spot yield curve approach and other factors, which will result in decreased expenses in 2016. The year-on-year decrease
in defined benefit pension and postretirement expense for the first quarter was $75 million. The first three months of 2015
includes the impact of a first-quarter 2015 Japan pension curtailment gain of $17 million.
The Company is investing in an initiative called business transformation, with these investments impacting cost of sales,
SG&A, and R&D. Business transformation encompasses the ongoing multi-year phased implementation of an enterprise resource
planning (ERP) system on a worldwide basis, as well as changes in processes and internal/external service delivery across
3M.
Cost of Sales:
Cost of sales includes manufacturing, engineering and freight costs.
Cost of sales as a percent of net sales was 49.6 percent in the first quarter of 2016, compared to 50.5 percent in the
first quarter of 2015. Cost of sales, measured as a percent of sales, decreased due to selling price increases and raw
material cost decreases. Selling prices increased net sales year-on-year by 0.9 percent in the first quarter, while raw
material cost deflation was favorable by approximately 4 percent year-on-year. In addition, cost of sales decreased due to
lower defined benefit pension and postretirement expense (of which a portion impacts cost of sales).
Selling, General and Administrative Expenses:
SG&A decreased 4.5 percent in the first quarter of 2016, when compared to the same period last year, benefiting from
divestiture gains (as discussed in Note 2), foreign currency translation, and productivity benefits related to the fourth
quarter 2015 restructuring. In addition, lower defined benefit pension and postretirement expense benefited SG&A. SG&A,
measured as a percent of sales, was 20.2 percent of sales in the first quarter of 2016 compared to 20.6 percent in the
first quarter of 2015.
Research, Development and Related Expenses:
R&D, measured as a percent of sales, was 6.1 percent of sales for both the three months ended March 31, 2016 and 2015. R&D
in dollars decreased $13 million in the first three months of 2016 compared to the same period last year, benefitting from
foreign currency translation and lower defined benefit pension and postretirement expense. 3M continued to invest in its
key growth initiatives, including more R&D aimed at disruptive innovation programs with the potential to create entirely
new markets and disrupt existing markets.
Operating Income:
3M uses operating income as one of its primary business segment performance measurement tools. Refer to the table below for
a reconciliation of operating income margins for the three months ended March 31, 2016 versus 2015.
Three months ended
(Percent of net sales) March 31, 2016
Same period last year 22.8 %
Increase/(decrease) in operating income margin, due to:
Selling price and raw material impact 1.1
Pension and postretirement benefit costs 1.0
Productivity from restructuring 0.4
Strategic investments (0.1)
Foreign exchange impacts (0.1)
Acquisitions (0.2)
Organic volume (0.3)
Utilization and other (0.5)
Current period 24.1 %
Operating income margins were 24.1 percent in the first quarter of 2016, compared to 22.8 percent in the first quarter of
2015, an improvement of 1.3 percentage points. 3M continues to benefit from the combination of higher selling prices and
lower raw material costs, plus lower year-on-year defined benefit pension and postretirement expense, in addition to
productivity benefits related to the fourth quarter 2015 restructuring. Items that reduced operating income margins
included strategic investments, as 3M began to take actions on its manufacturing footprint and increased growth investments
across its businesses. Additional items that reduced operating margins included foreign currency effects (net of hedge
gains), acquisition impacts related to Capital Safety, Membrana, and Ivera Medical, and year-on-year declines in organic
volume. Utilization and other included the impact of lower asset utilization, particularly in the electronics and
industrial businesses, partially offset by divestiture gains in the quarter.
Interest Expense and Income:
Three months ended
March 31,
(Millions) 2016 2015
Interest expense $ 47 $ 31
Interest income (5) (4)
Total $ 42 $ 27
Interest expense was higher in the first quarter of 2016 compared to the same period last year, largely due to higher
average debt balances.
Provision for Income Taxes:
Three months ended
March 31,
(Percent of pre-tax income) 2016 2015
Effective tax rate 26.8 % 29.5 %
The effective tax rate for the first quarter of 2016 was 26.8 percent, compared to 29.5 percent in the first quarter of
2015, a decrease of 2.7 percentage points. This decrease was driven by a number of factors as referenced in Note 6,
including the first quarter 2016 adoption of ASU No. 2016-09 (discussed in Note 1). The Company is planning to take further
global cash optimization actions, which will result in increased tax expense over the remainder of 2016. As a result, the
Company currently expects that its effective tax rate for total year 2016 will remain in the range of approximately 29.5 to
30.5 percent. Refer to Note 6 for additional discussion.
The effective tax rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits,
changes in tax laws and employee share-based payment accounting; as well as recurring factors, such as the geographic mix
of income before taxes.
Net Income Attributable to Noncontrolling Interest:
Three months ended
March 31,
(Millions) 2016 2015
Net income attributable to noncontrolling interest $ 3 $ 2
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 primary noncontrolling interest relates to 3M India Limited, of which
3M's effective ownership is 75 percent.
Currency Effects:
3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by approximately $50
million for the three months ended March 31, 2016. This estimate includes the effect of translating profits from local
currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the
United States and abroad; and 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. 3M estimates that
year-on-year derivative and other transaction gains and losses increased pre-tax income by approximately $10 million for
the three months ended March 31, 2016.
Significant Accounting Policies:
Information regarding new accounting standards is included in Note 1 to the Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which modifies
certain accounting aspects for share-based payments to employees including, among other elements, the accounting for income
taxes and forfeitures, as well as classifications in the statement of cash flows. The Company early adopted ASU No. 2016-09
as of January 1, 2016. Prospectively beginning January 1, 2016, excess tax benefits/deficiencies have been reflected as
income tax benefit/expense in the statement of income resulting in an $81 million tax benefit in the quarter ended March
31, 2016. 3M typically experiences the largest volume of stock option exercises and restricted stock unit vestings in the
first quarter of its fiscal year. Refer to Note 1 for additional detail.
PERFORMANCE BY BUSINESS SEGMENT
Disclosures related to 3M's business segments are provided in Note 14. The reportable segments are Industrial; Safety and
Graphics; Health Care; Electronics and Energy; 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 14. 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 income in the first quarter of 2016 when compared to the same period last year improved
by $59 million, impacted by lower defined benefit pension and postretirement expense. 3M's defined benefit pension and
postretirement expense in the first quarter of 2016 when compared to the same period last year decreased in total by $75
million, with $63 million of this decrease allocated to Corporate and Unallocated.
Operating Business Segments:
Information related to 3M's business segments for the first quarter of both 2016 and 2015 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 post-transaction. 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
March 31,
2016 2015
Sales (millions) $ 2,576 $ 2,656
Sales change analysis:
Organic local currency (1.9) % 2.6 %
Acquisitions 2.0 -
Divestitures (0.1) -
Translation (3.0) (7.0)
Total sales change (3.0) % (4.4) %
Operating income (millions) $ 617 $ 596
Percent change 3.6 % (3.4) %
Percent of sales 23.9 % 22.4 %
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 (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. 3M is also a leading global supplier of precision
grinding technology serving customers in the area of hard-to-grind precision applications in industrial, automotive,
aircraft and cutting tools. 3M develops and produces advanced technical ceramics for demanding applications in the
automotive, oil and gas, solar, industrial, electronics and defense industries.
First Quarter 2016 results:
Sales in Industrial totaled $2.6 billion, down 3.0 percent in U.S. dollars. Organic local-currency sales decreased 1.9
percent, acquisitions added 2.0 percent, divestitures reduced sales by 0.1 percent, and foreign currency translation
reduced sales by 3.0 percent. The U.S industrial production index was down in the first quarter, as 3M continued to
experience softness across Industrial.
On an organic local-currency sales basis:
· Sales grew in automotive OEM, automotive aftermarket, and 3M purification.
· Sales declined in abrasive systems, industrial adhesives and tapes, and aerospace commercial transportation.
· Sales also declined in advanced materials, primarily due to ongoing weakness in the oil and gas end markets.
· Geographically, sales increased 8 percent in Latin America/Canada and 1 percent in EMEA, while Asia Pacific declined
4 percent and the United States declined 5 percent.
Acquisitions and divestitures:
· Acquisition sales growth related to the August 2015 acquisition of Membrana, a leading provider of microporous
membranes and modules for filtration in the life sciences, industrial, and specialty segments.
· 3M completed its sale of the assets of 3M's pressurized polyurethane foam adhesives business (formerly known as
Polyfoam) in January 2016 as discussed in Note 2.
Operating income:
· Operating income margins increased by 1.5 percentage points to 23.9 percent, helped by fourth quarter 2015
restructuring actions, and lower raw material costs.
· In addition, the gain on sale of the Polyfoam business was partially offset by acquisition impacts, which resulted
in a net operating income margin benefit of 1.1 percentage points.
Safety and Graphics Business:
Three months ended
March 31,
2016 2015
Sales (millions) $ 1,412 $ 1,372
Sales change analysis:
Organic local currency 2.4 % 4.1 %
Acquisitions 6.9 -
Divestitures (2.4) -
Translation (4.0) (7.7)
Total sales change 2.9 % (3.6) %
Operating income (millions) $ 345 $ 335
Percent change 3.1 % 5.3 %
Percent of sales 24.5 % 24.4 %
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, such as respiratory, hearing,
eye and fall protection equipment; traffic safety and security products, including border and civil security solutions;
commercial solutions, including commercial graphics sheeting and systems, architectural design solutions for surfaces, and
cleaning and protection products for commercial establishments; and roofing granules for asphalt shingles.
First Quarter 2016 results:
Sales in Safety and Graphics totaled $1.4 billion, an increase of 2.9 percent in U.S. dollars. Organic local-currency sales
increased 2.4 percent, and foreign currency translation reduced sales by 4.0 percent. Acquisitions added 6.9 percent, while
divestitures reduced sales by 2.4 percent.
On an organic local-currency sales basis:
· Sales growth was led by roofing granules, commercial solutions, and personal safety, while sales declined in traffic
safety and security.
· Sales increased 4 percent in Asia Pacific, 2 percent in both the United States and EMEA, and 1 percent in Latin
America/Canada.
Acquisitions and divestitures:
· Acquisition sales growth reflects the acquisition of Capital Safety in August 2015. Capital Safety is a leading
global provider of fall protection equipment.
· In the fourth quarter of 2015, 3M divested its license plate converting business in France and substantially all of
its library systems business. In the first quarter of 2016, 3M divested the remainder of the library systems business as
discussed in Note 2.
Operating income:
· Operating income totaled $345 million, up 3.1 percent.
· Operating income margins were 24.5 percent of sales, compared to 24.4 percent in the first quarter of 2015,
benefiting from higher selling prices and lower raw material costs.
· Divestiture gains, partially offset by acquisition impacts, resulted in a net operating income margin benefit of 0.3
percentage points.
Health Care Business:
Three months ended
March 31,
2016 2015
Sales (millions) $ 1,383 $ 1,329
Sales change analysis:
Organic local currency 6.2 % 3.0 %
Acquisitions 0.9 0.7
Translation (3.1) (7.0)
Total sales change 4.0 % (3.3) %
Operating income (millions) $ 455 $ 408
Percent change 11.5 % (4.3) %
Percent of sales 32.9 % 30.7 %
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, oral care solutions (dental and orthodontic products), health information systems, and
food safety products. Effective in the third quarter of 2015, the Company formed the Oral Care Solutions Division, which
combined the former 3M ESPE and 3M Unitek divisions.
First Quarter 2016 results:
Health Care sales totaled $1.4 billion, an increase of 4.0 percent in U.S. dollars. Organic local-currency sales increased
6.2 percent, acquisitions added 0.9 percent, and foreign currency translation reduced sales by 3.1 percent.
On an organic local-currency sales basis:
· Sales growth was broad-based across the Health Care portfolio, led by food safety, and health information systems.
Health Care's larger businesses also showed solid growth, including critical and chronic care, infection prevention, and
oral care solutions.
· On a geographic basis, sales increased 11 percent in Asia Pacific, 9 percent in Latin America/Canada, 6 percent in
EMEA, and 4 percent in the United States.
· In developing markets, Health Care organic local-currency sales grew 13 percent, with particular strength in
China/Hong Kong, Mexico, and Russia.
· 3M continues to increase investments across the businesses to drive efficient growth into the future.
Acquisitions:
· Acquisition sales growth related to the March 2015 purchase of Ivera Medical Corp. Ivera is a manufacturer of health
care products that disinfect and protect devices used for access into a patient's bloodstream.
Operating income:
· Operating income increased 11.5 percent to $455 million.
· Operating income margins were 32.9 percent, compared to 30.7 percent in the same period last year, driven by the
combination of higher selling prices and lower raw material costs, plus organic volume increases.
· Acquisitions had a minimal impact on operating income margins.
In September 2015, 3M announced that it would explore strategic alternatives for its Health Information Systems Division
(HIS), which included spinning-off, selling, or retaining the business. In February 2016, following an in-depth exploration
of strategic alternatives, the Company announced its intent to retain and further invest in HIS.
Electronics and Energy Business:
Three months ended
March 31,
2016 2015
Sales (millions) $ 1,144 $ 1,324
Sales change analysis:
Organic local currency (11.7) % 6.0 %
Divestitures - (0.9)
Translation (1.9) (4.0)
Total sales change (13.6) % 1.1 %
Operating income (millions) $ 208 $ 285
Percent change (26.8) % 24.3 %
Percent of sales 18.2 % 21.5 %
The Electronics and Energy segment includes solutions that improve the dependability, cost-effectiveness, and performance
of 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; high-performance fluids and abrasives; high-temperature and display tapes; flexible circuits, which use
electronic packaging and interconnection technology; and touch systems products. 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.
First Quarter 2016 results:
Electronics and Energy sales totaled $1.1 billion, down 13.6 percent in U.S. dollars. Organic local-currency sales declined
11.7 percent, and foreign currency translation reduced sales by 1.9 percent.
On an organic local-currency sales basis:
· Sales decreased 18 percent in 3M's electronics-related businesses, with declines in both electronics materials
solutions and display materials and systems. This decline was due to a combination of factors, including soft end market
demand, elevated channel inventory, and a challenging year-on-year comparison.
· Sales decreased approximately 1 percent in 3M's energy-related businesses, as declines in renewable energy and
telecommunications were partially offset by growth in electrical markets.
· On a geographic basis, sales were flat in both EMEA, Latin America/Canada, and the United States. Sales declined 18
percent in Asia Pacific, where 3M's electronics business is concentrated.
Divestitures:
· 3M completed the sale of its static control business in January 2015.
Operating income:
· Operating income decreased 26.8 percent to $208 million.
· Operating income margins were 18.2 percent compared to 21.5 percent in the same period last year, as lower organic
volume and foreign currency effects were only partially offset by lower raw material costs.
In late April 2016, 3M announced it is taking actions to better align the Electronics and Energy business to market
realities. These actions will reduce approximately 250 positions worldwide, with the majority of the reductions on the
electronics side of the business. As a result, 3M expects to incur a second-quarter expense of approximately $20 million.
Consumer Business:
Three months ended
March 31,
2016 2015
Sales (millions) $ 1,049 $ 1,048
Sales change analysis:
Organic local currency 2.8 % 2.1 %
Translation (2.7) (5.0)
Total sales change 0.1 % (2.9) %
Operating income (millions) $ 238 $ 240
Percent change (1.1) % 5.2 %
Percent of sales 22.7 % 22.9 %
The Consumer segment serves markets that include consumer retail, office retail, office business to business, home
improvement, drug and pharmacy retail, 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.
First Quarter 2016 results:
Consumer sales totaled $1.0 billion, up 0.1 percent in U.S. dollars. Organic local-currency sales increased 2.8 percent,
and foreign currency translation reduced sales by 2.7 percent.
On an organic local-currency sales basis:
· Sales growth was led by construction and home improvement, plus consumer health care.
· Stationery and office supplies, and home care sales were flat.
· On a geographic basis, sales increased 6 percent in Asia Pacific, and 4 percent in the United States, while sales in
Latin America/Canada declined 1 percent, and EMEA declined 5 percent.
Operating income:
· Operating income was $238 million, down 1.1 percent from the same period last year.
· Operating income margins were 22.7 percent, down slightly from 22.9 percent in the same period last year, impacted
by increased advertising and merchandising investments to drive growth.
FINANCIAL CONDITION AND LIQUIDITY
3M continues its transition to a better-optimized capital structure and is adding leverage at a measured pace. The strength
and stability of 3M's business model and strong free cash flow capability, together with proven capital markets access,
enable the Company to implement this strategy. Investing in 3M's businesses to drive organic growth remains the first
priority for capital deployment, including research and development, capital expenditures, and commercialization
capability. Investment in organic growth will be supplemented by complementary acquisitions. 3M will also continue to
return cash to shareholders through dividends and share repurchases. Sources for cash availability in the United States,
such as ongoing cash flow from operations and access to capital markets, have historically been sufficient to fund dividend
payments to shareholders and share repurchases, as well as funding U.S. acquisitions 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. See Note 8 in 3M's 2015 Annual Report on Form 10-K for
further information on earnings considered to be reinvested indefinitely.
3M's primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances. 3M 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.
Net Debt:
The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term marketable
securities. 3M considers net debt and its components to be an important indicator of liquidity and a guiding measure of
capital structure strategy. Net debt 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 following table provides net debt as of March
31, 2016, and December 31, 2015.
March 31, December 31,
(Millions) 2016 2015
Total Debt $ 11,139 $ 10,797
Less: Cash and cash equivalents and marketable securities 1,528 1,925
Net Debt $ 9,611 $ 8,872
In the first three months of 2016, net debt increased by $0.7 billion to a net debt balance of $9.6 billion. The first
three months 2016 net debt increase was driven by commercial paper issuances of approximately $400 million, in addition to
a decrease in cash, cash equivalents and marketable securities of approximately $400 million. Specific actions related to
cash, cash equivalents, and marketable securities, in addition to debt, are discussed further below.
Cash, cash equivalents and marketable securities:
At March 31, 2016, 3M had $1.5 billion of cash, cash equivalents and marketable securities, of which approximately $1.4
billion was held by the Company's foreign subsidiaries and approximately $90 million was held by the United States. Of the
$1.4 billion held internationally, U.S. dollar-based cash, cash equivalents and marketable securities totaled $140 million,
or 10 percent, which was invested in money market funds, asset-backed securities, agency securities, corporate medium-term
note securities and other high-quality fixed income securities. At December 31, 2015, cash, cash equivalents and marketable
securities held by the Company's foreign subsidiaries and by the United States totaled approximately $1.7 billion and $200
million, respectively.
Total debt:
The Company's
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