REG - 3M Company - 1st Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 5
05/05/2017 07:05
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amount of $36 million along with productivity and portfolio actions, which
were comprised of asset charges and accelerated depreciation of $80 million in addition to severance and other charges of
$20 million. Additional discussion on strategic investments is provided in the "Results of Operations" section.
The income tax rate was 23.7 percent in the first quarter, down 3.1 percentage points versus last year's first quarter. The
decrease in tax rate was driven by a number of factors as referenced in Note 5.
Weighted-average diluted shares outstanding in the first quarter of 2017 declined 1.5 percent year-on-year to 612.0
million, which increased earnings per diluted share. The decrease in the outstanding weighted-average diluted shares
relates to the Company's purchase of $690 million of its own stock in the first quarter of 2017.
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,
2017 and 2016. 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 operating income results of the Company and its respective business
segments (including Corporate and Unallocated). Refer to Note 12 for additional information on business segments, including
Elimination of Dual Credit. Further discussion of the Company's operating income results is in the section entitled
"Operating Income" within the "Results of Operations" section.
Three months ended March 31,
2017 2016 % change
Net Oper. Net Oper. Net Oper.
(Dollars in millions) Sales Income Sales Income Sales Income
Business Segments
Industrial $ 2,709 $ 625 $ 2,599 $ 622 4.2 % 0.5 %
Safety and Graphics 1,527 399 1,477 359 3.4 % 11.2 %
Health Care 1,423 434 1,391 457 2.3 % (5.2) %
Electronics and Energy 1,210 225 1,089 195 11.1 % 15.1 %
Consumer 1,042 222 1,050 238 (0.7) % (6.8) %
Corporate and Unallocated 2 (81) - (40) - -
Elimination of Dual Credit (228) (50) (197) (43) - -
Total Company $ 7,685 $ 1,774 $ 7,409 $ 1,788 3.7 % (0.8) %
Three months ended March 31, 2017
Organic
Worldwide local- Total
Sales Change Analysis currency sales
By Business Segment sales Divestitures Translation change
Industrial 5.7 % (0.7) % (0.8) % 4.2 %
Safety and Graphics 4.8 % (0.8) % (0.6) % 3.4 %
Health Care 3.1 % - % (0.8) % 2.3 %
Electronics and Energy 11.5 % (0.2) % (0.2) % 11.1 %
Consumer (1.2) % - % 0.5 % (0.7) %
Total Company 4.6 % (0.4) % (0.5) % 3.7 %
Divestitures reduced first-quarter sales by 0.4 percent. As part of its portfolio management process, in the first quarter
of 2016, 3M (Safety and Graphics Business Group) 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 (recorded in selling, general and administrative expenses).
In October 2016, 3M (Industrial Business) sold the assets of its temporary protective films business to Pregis LLC. This
business, with annual sales of approximately $50 million, is a provider of adhesive-backed temporary protective films used
in a broad range of industries. In December 2016, 3M (Electronics and Energy Business) sold the assets of its cathode
battery technology out-licensing business, with annual sales of approximately $10 million, to UMICORE. The aggregate
selling price relative to these two businesses was $86 million. The Company recorded a pre-tax gain of $71 million in the
fourth quarter of 2016 as a result of the sales of these businesses (recorded in selling, general and administrative
expenses).
In January 2017, 3M (Safety and Graphics Business) sold the assets of its safety prescription eyewear business, with annual
sales of approximately $45 million, to HOYA Vision Care. The Company recorded a pre-tax gain of $29 million in the first
quarter of 2017 as a result of this sale (recorded in selling, general and administrative expenses).
Refer to Note 2 in the Consolidated Financial Statements for additional detail concerning divestitures.
Sales and operating income by geographic area:
Percent change information compares the first quarter of 2017 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, 2017
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 2,941 $ 2,433 $ 1,577 $ 736 $ (2) $ 7,685
% of worldwide sales 38.2 % 31.7 % 20.5 % 9.6 % - 100.0 %
Components of net sales change:
Volume - organic 1.7 % 10.1 % 3.7 % 0.4 % - 4.5 %
Price (0.3) - 0.3 1.9 - 0.1
Organic local-currency sales 1.4 10.1 4.0 2.3 - 4.6
Divestitures (0.9) (0.1) (0.1) (0.5) - (0.4)
Translation - (0.1) (4.0) 4.3 - (0.5)
Total sales change 0.5 % 9.9 % (0.1) % 6.1 % - 3.7 %
Total sales change:
Industrial 4.5 % 7.2 % 0.6 % 3.8 % - 4.2 %
Safety and Graphics 1.8 % 5.3 % 3.3 % 4.8 % - 3.4 %
Health Care 2.2 % 6.9 % (3.8) % 13.1 % - 2.3 %
Electronics and Energy 1.9 % 17.2 % 0.9 % 2.3 % - 11.1 %
Consumer (4.8) % 8.7 % (3.9) % 8.5 % - (0.7) %
Organic local-currency sales change:
Industrial 5.8 % 7.9 % 5.2 % 0.4 % - 5.7 %
Safety and Graphics 3.6 % 5.9 % 6.9 % 2.0 % - 4.8 %
Health Care 2.2 % 7.0 % 0.8 % 7.8 % - 3.1 %
Electronics and Energy 2.8 % 17.4 % 2.9 % (0.4) % - 11.5 %
Consumer (4.8) % 6.8 % (0.4) % 2.4 % - (1.2) %
Additional information beyond what is included in the preceding table is as follows:
· In Asia Pacific, where 3M's electronics and energy business is concentrated, sales benefited from strengthened
demand across most market segments in consumer electronics. Total sales in Japan grew 15 percent and China/Hong Kong grew 9
percent. On an organic local-currency sales basis, both Japan and China/Hong Kong grew 13 percent.
· In EMEA, Central/East Europe and Middle East/Africa total sales and organic local-currency sales grew 2 percent.
West Europe total sales declined 1 percent, as organic local-currency sales growth of 5 percent was more than offset by
foreign currency translation.
· In Latin America/Canada, total sales declined 3 percent in Mexico, as organic local-currency sales growth of 8
percent was more than offset by foreign currency translation. In Canada, total sales grew 4 percent, helped by organic
local-currency sales growth of 3 percent. In Brazil total sales growth of 20 percent was driven by foreign currency
translation, as organic local-currency sales declined 3 percent.
Foreign currency translation reduced year-on-year sales slightly, with the translation-related sales increase in Latin
America/Canada more than offset by the decrease in EMEA. The U.S. dollar was stronger compared to first quarter 2016 by 25
percent versus the Brazilian Real and 2 percent versus the Japanese Yen. The U.S. dollar was weaker compared to the first
quarter of 2016 by 4 percent versus the Euro and 5 percent versus the Chinese Yuan.
Managing currency risks:
As discussed above, the stronger U.S. dollar had a negative impact on sales and earnings in the first three months of 2017
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. 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 $988 million of operating cash flows in the first three months of 2017, a decrease of $272 million when
compared to the first three months of 2016. 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 2017, the Company purchased $690 million of its own stock,
compared to $1.227 billion of stock purchases in the first three months of 2016. As of March 31, 2017, approximately $6.4
billion remained available under the February 2016 authorization. The Company expects to purchase $2.5 billion to $4.5
billion of its own stock in 2017. In February 2017, 3M's Board of Directors declared a first-quarter 2017 dividend of
$1.175 per share, an increase of 6 percent. This marked the 59th consecutive year of dividend increases for 3M.
3M's debt to total capital ratio (total capital defined as debt plus equity) was 51 percent at March 31, 2017, and 53
percent at December 31, 2016. 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. The Company generates significant ongoing cash flow
and has proven access to capital markets funding throughout business cycles.
3M expects to contribute approximately $300 million to $500 million of cash to its global defined benefit pension and
postretirement plans in 2017. The Company does not have a required minimum cash pension contribution obligation for its
U.S. plans in 2017.
Year 2017 announced acquisition (not closed as of March 31, 2017):
In March 2017, 3M (Safety and Graphics) announced that it entered into an agreement to acquire Scott Safety from Johnson
Controls for $2.0 billion, subject to closing and other adjustments. This transaction is expected to close in the second
half of 2017. Refer to Note 2 for additional details.
Year 2017 divestiture and portfolio actions (not closed as of March 31, 2017):
In May 2017, 3M (Safety and Graphics business) closed on the sale and transfer of control of its identity management
business. 3M expects a pre-tax gain of approximately $470 million as a result of this divestiture, which translates to net
income of approximately $0.55 per diluted share. 3M will no longer benefit from approximately $0.05 per diluted share
related to the remaining 2017 income of the divested business. In addition, 3M expects to make significant progress on its
plan to better optimize its portfolio and supply chain footprint, with associated costs in the range of $0.40 to $0.45 per
diluted share over the remainder of 2017. In total, 3M expects the net impact of these items to add approximately $0.05 to
$0.10 per diluted share to full year 2017 earnings.
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) 2017 2016 Change
Cost of sales 50.4 % 49.6 % 0.8
Selling, general and administrative expenses 20.4 20.2 0.2
Research, development and related expenses 6.1 6.1 -
Operating income 23.1 % 24.1 % (1.0)
3M expects global defined benefit pension and postretirement expense in 2017 (before settlements, curtailments, special
termination benefits and other) to increase by approximately $74 million pre-tax when compared to 2016, 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 2016 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 that will impact pension and postretirement expenses in 2017. The
year-on-year increase in defined benefit pension and postretirement expense for the first quarter was $22 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.
In the first quarter of 2017, year-on-year incremental strategic investments in growth, productivity and portfolio actions
impacted 3M's operating expenses were as follows:
Three months ended
(Millions) March 31, 2017
Cost of sales $ 79
Selling, general and administrative expenses 56
Research, development and related expenses 1
Total $ 136
Cost of Sales:
Cost of sales includes manufacturing, engineering and freight costs.
Cost of sales, measured as a percent of sales, increased due to first quarter 2017 incremental strategic investments in
productivity and portfolio actions, foreign currency effects (net of hedge gains), and higher defined benefit pension and
postretirement expense. This was partially offset by raw material cost deflation, which was favorable by approximately 2
percent year-on-year. Selling prices increased net sales year-on-year by 0.1 percent in first quarter 2017.
Selling, General and Administrative Expenses:
SG&A in dollars increased 5.2 percent in the first quarter of 2017, when compared to the same period last year, impacted by
incremental strategic investments, lower year-on-year divestiture gains (as discussed in Note 2), and higher defined
benefit pension and postretirement expense.
Research, Development and Related Expenses:
R&D in dollars increased $21 million in the first three months of 2017 compared to the same period last year. 3M continued
to invest in its key 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, 2017 versus 2016.
Three months ended
(Percent of net sales) March 31, 2017
Same period last year 24.1 %
Increase/(decrease) in operating income margin, due to:
Organic volume and productivity 1.2
Selling price and raw material impact 0.5
Foreign exchange impacts (0.4)
Strategic investments (1.8)
Pension and postretirement benefit costs (0.3)
Divestiture gains (0.2)
Current period 23.1 %
Operating income margins declined 1.0 percentage points in the first quarter of 2017 when compared to the first quarter of
2016. Items that reduced operating income margins included year-on-year incremental strategic investments in growth,
productivity and portfolio actions. Additional items that reduced operating margins included foreign currency effects (net
of hedge gains), higher year-on-year defined benefit pension and postretirement expense, and lower year-on-year divestiture
gains. 3M benefited from higher organic local-currency sales growth and productivity. 3M also benefited from lower raw
material costs.
Interest Expense and Income:
Three months ended
March 31,
(Millions) 2017 2016
Interest expense $ 45 $ 47
Interest income (8) (5)
Total $ 37 $ 42
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. However, in the first quarter of 2017, this increase due to higher debt was more than offset by the impact of
foreign exchange hedging of intercompany loans.
Provision for Income Taxes:
Three months ended
March 31,
(Percent of pre-tax income) 2017 2016
Effective tax rate 23.7 % 26.8 %
The effective tax rate for the first quarter of 2017 was 23.7 percent, compared to 26.8 percent in the first quarter of
2016, a decrease of 3.1 percentage points. The changes in the rates between years are impacted by many factors, as
described further in Note 5.
The Company currently anticipates its 2017 full-year tax rate will be 26.0 to 27.5 percent. 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 and employee
share-based payment accounting; as well as recurring factors, such as geographic mix of income before taxes and foreign
currency effects.
Net Income Attributable to Noncontrolling Interest:
Three months ended
March 31,
(Millions) 2017 2016
Net income attributable to noncontrolling interest $ 3 $ 3
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 $34
million for the three months ended March 31, 2017. 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 decreased pre-tax income by approximately $37 million for
the three months ended March 31, 2017.
Significant Accounting Policies:
Information regarding new accounting standards is included in Note 1 to the Consolidated Financial Statements.
PERFORMANCE BY BUSINESS SEGMENT
Disclosures relating to 3M's business segments are provided in Note 12. Effective in the first quarter of 2017, as part of
3M's continuing effort to improve the alignment of its businesses around markets and customers, the Company made the
following changes:
Integration of former Renewable Energy Division
· 3M's former Renewable Energy Division (RED) has been integrated into existing divisions within the Electronics and
Energy business segment and Safety and Graphics business segment. 3M is committed to leadership in sustainability and to
enabling the advancement of energy solutions into the future. Integrating RED's offerings into larger divisions already
serving these segments will provide increased scale and build on strength by leveraging 3M's existing brands, go-to-market
capabilities, and relationships to support growth objectives.
Creation of Automotive and Aerospace Solutions Division
· 3M created the Automotive and Aerospace Solutions Division, which combined the former Automotive Division and
Aerospace and Commercial Transportation Division, which were both within the Industrial business segment. Combining the
strengths along with the deep industry knowledge of each business will enable this new division to utilize shared
technology platforms and processes to deliver a broader set of innovative solutions, along with world-class quality and
service to 3M's customers. This combination will help accelerate the Company's profitable growth and market relevance
across the automotive, aerospace and commercial transportation industries.
Consolidation of U.S. customer account activity - impacting dual credit reporting
· The Company consolidated its customer account activity in the U.S. into more centralized sales districts. This
improved alignment reduces the complexity for customers when interacting with multiple businesses within 3M, creating a
better customer experience. 3M business segment reporting measures include dual credit to business segments for certain
U.S. sales and related operating income. This dual credit is based on which business segment provides customer account
activity with respect to a particular product sold in the U.S. The alignment of U.S. customer accounts to fewer, more
focused sales districts changed the attribution of dual credit across 3M's business segments.
Business segment information presented herein reflects the impact of these changes for all periods presented. 3M manages
its operations in five business segments. The reportable segments are Industrial; Safety and Graphics; Electronics and
Energy; Health Care; and Consumer.
Corporate and Unallocated:
In addition to these five business segments, 3M assigns certain costs to "Corporate and Unallocated," which is presented
separately in the preceding business segments table and in Note 12. 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 determines 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 increased by $41 million in the first quarter of 2017 when compared to the
same period last year. In the first quarter of 2017, a portion of the severance actions were reflected in Corporate and
Unallocated. In addition, defined benefit pension and postretirement expense increased $22 million year-on-year, with $9
million of this increase allocated to Corporate and Unallocated.
Operating Business Segments:
Information related to 3M's business segments for the first quarter of both 2017 and 2016 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.
Refer to the preceding "Sales and operating income by geographic area" section for organic local-currency sales growth by
business segment within major geographic areas.
Industrial Business:
Three months ended
March 31,
2017 2016
Sales (millions) $ 2,709 $ 2,599
Sales change analysis:
Organic local-currency 5.7 % (1.9) %
Acquisitions - 2.0
Divestitures (0.7) (0.1)
Translation (0.8) (3.0)
Total sales change 4.2 % (3.0) %
Operating income (millions) $ 625 $ 622
Percent change 0.5 % 3.5 %
Percent of sales 23.1 % 23.9 %
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 2017 results:
Sales in Industrial totaled $2.7 billion, up 4.2 percent in U.S. dollars. Organic local-currency sales increased 5.7
percent, divestitures reduced sales by 0.7 percent, and foreign currency translation reduced sales by 0.8 percent.
On an organic local-currency sales basis:
· Sales growth was broad-based, led by automotive and aerospace solutions, advanced materials, abrasives, industrial
adhesives and tapes, and automotive aftermarket.
· Automotive OEM business organic growth continues to outpace global auto builds.
Acquisitions and divestitures:
· In October 2016, 3M sold the assets of its temporary protective films business.
· In January 2016, 3M completed its sale of the assets of 3M's pressurized polyurethane foam adhesives business
(formerly known as Polyfoam).
· Acquisition sales growth in 2016 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.
Operating income:
· Operating income margins decreased 0.8 percentage points, as divestiture gains related to the first quarter 2016
sale of the Polyfoam business resulted in a net year-on-year operating income margin penalty of 1.2 percentage points.
Safety and Graphics Business:
Three months ended
March 31,
2017 2016
Sales (millions) $ 1,527 $ 1,477
Sales change analysis:
Organic local-currency 4.8 % 2.6 %
Acquisitions - 6.6
Divestitures (0.8) (2.3)
Translation (0.6) (4.0)
Total sales change 3.4 % 2.9 %
Operating income (millions) $ 399 $ 359
Percent change 11.2 % 3.0 %
Percent of sales 26.1 % 24.3 %
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, 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,
window films, and cleaning and protection products for commercial establishments; and roofing granules for asphalt
shingles.
First Quarter 2017 results:
Sales in Safety and Graphics totaled $1.5 billion, up 3.4 percent in U.S. dollars. Organic local-currency sales increased
4.8 percent, divestitures reduced sales by 0.8 percent, and foreign currency translation reduced sales by 0.6 percent.
On an organic local-currency sales basis:
· Sales increased in roofing granules, personal safety, and traffic safety and security, while commercial solutions
was flat.
Acquisitions and divestitures:
· In January 2017, 3M sold its safety prescription eyewear business.
· Acquisition sales growth in 2016 reflects the acquisition of Capital Safety in August 2015. Capital Safety is a
leading global provider of fall protection equipment.
· In the first quarter of 2016, 3M divested the remainder of the library systems business.
Operating income:
· Operating income margins increased 1.8 percentage points, as divestiture gains year-on-year partially offset by
acquisition charges resulted in a net operating income margin benefit of 1.0 percentage points.
In May 2017, 3M (Safety and Graphics business) closed on the sale and transfer of control of its identity management
business. 3M expects a pre-tax gain of approximately $470 million as a result of this divestiture. In March 2017, 3M
(Safety and Graphics) announced that it entered into an agreement to acquire Scott Safety from Johnson Controls for $2.0
billion, subject to closing and other adjustments. This transaction is expected to close in the second half of 2017. Refer
to Note 2 for additional details.
Health Care Business:
Three months ended
March 31,
2017 2016
Sales (millions) $ 1,423 $ 1,391
Sales change analysis:
Organic local-currency 3.1 % 6.3 %
Acquisitions - 0.9
Translation (0.8) (3.1)
Total sales change 2.3 % 4.1 %
Operating income (millions) $ 434 $ 457
Percent change (5.2) % 11.5 %
Percent of sales 30.5 % 32.9 %
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.
First Quarter 2017 results:
Sales in Health Care totaled $1.4 billion, up 2.3 percent in U.S. dollars. Organic local-currency sales increased 3.1
percent and foreign currency translation reduced sales by 0.8 percent.
On an organic local-currency sales basis:
· Sales increased in drug delivery systems, food safety, oral care, and medical consumables (which is comprised of the
critical and chronic care and infection prevention businesses).
· Sales declined in health information systems.
· In developing markets, Health Care organic local-currency sales growth was led by China/Hong Kong, Taiwan, Brazil,
and Mexico.
Acquisitions:
· Acquisition sales growth in 2016 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 margins decreased, as 3M invested $21 million across the business to accelerate future growth
opportunities.
Electronics and Energy Business:
Three months ended
March 31,
2017 2016
Sales (millions) $ 1,210 $ 1,089
Sales change analysis:
Organic local-currency 11.5 % (12.6) %
Divestitures (0.2) -
Translation (0.2) (1.7)
Total sales change 11.1 % (14.3) %
Operating income (millions) $ 225 $ 195
Percent change 15.1 % (27.9) %
Percent of sales 18.6 % 17.9 %
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 2017 results:
Sales in Electronics and Energy totaled $1.2 billion, up 11.1 percent in U.S. dollars. Organic local-currency sales
increased 11.5 percent, divestitures reduced sales by 0.2, and foreign currency translation reduced sales by 0.2 percent.
Total sales within the electronics-related and energy-related businesses were up 17 percent and 1 percent, respectively.
Total sales increased 17 percent in Asia Pacific.
On an organic local-currency sales basis:
· Sales increased 18 percent in 3M's electronics-related businesses, with increases in both display materials and
systems and electronics materials solutions, as the businesses drove increased inclusion in OEM platforms in addition to
strengthened demand in consumer electronics.
· Sales increased 1 percent in 3M's energy-related businesses, as sales grew in electrical markets and were flat in
telecommunications.
· Sales increased 17 percent in Asia Pacific, where 3M's electronics business is concentrated.
Divestitures:
· In December 2016, 3M sold the assets of its cathode battery technology out-licensing business, with annual sales of
approximately $10 million.
Operating income:
· Operating income margins increased 0.7 percentage points, as benefits from higher organic volume were offset by
first quarter 2017 footprint and portfolio actions. These actions resulted in a year-on-year operating income margin
penalty of 5.3 percentage points.
Consumer Business:
Three months ended
March 31,
2017 2016
Sales (millions) $ 1,042 $ 1,050
Sales change analysis:
Organic local-currency (1.2) % 2.7 %
Translation 0.5 (2.7)
Total sales change (0.7) % - %
Operating income (millions) $ 222 $ 238
Percent change (6.8) % (1.2) %
Percent of sales 21.3 % 22.7 %
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, 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 2017 results:
Sales in Consumer totaled $1.0 billion, down 0.7 percent in U.S. dollars. Organic local-currency sales declined 1.2
percent, while foreign currency translation increased sales by 0.5 percent.
On an organic local-currency sales basis:
· Sales grew in home improvement, consumer health care, and home care.
· Stationery and office supplies declined due to channel inventory reductions, primarily in the U.S. office retail and
wholesale market.
Operating income:
· Operating income margins declined year-on-year, in part due to increased growth investments in core platforms.
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 2016 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 $5 billion outstanding with a maximum maturity of 397 days from date of issuance.
Total debt:
The Company's total debt was approximately $11.7 billion at both March 31, 2017 and December 31, 2016. In May 2016, 3M
issued 500 million Euro aggregate principal amount of 5.75-year fixed rate medium-term notes due February 2022 with a
coupon rate of 0.375% and 500 million Euro aggregate principal amount of 15-year fixed rate medium-term notes due 2031 with
a coupon rate of 1.50%. In September 2016, 3M issued $600 million aggregate principal amount of five-year fixed rate
medium-term notes due 2021 with a coupon rate of 1.625%, $650 million aggregate principal amount of 10-year fixed rate
medium-term notes due 2026 with a coupon rate of 2.250%, and $500 million aggregate principal amount of 30-year fixed rate
medium-term notes due 2046 with a coupon rate of 3.125%. All of these 2016 issuances were under the medium-term notes
program (Series F). As of March 31, 2017, the total amount of debt issued as part of the medium-term notes program (Series
F), inclusive of debt issued in 2011, 2012, 2014, 2015 and the 2016 debt referenced above, is approximately $11.1 billion
(utilizing the foreign exchange rates applicable at the time of issuance for the Euro denominated debt). Information with
respect to long-term debt issuances and maturities for the periods presented is included in Note 10 of 3M's 2016 Annual
Report on Form 10-K.
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. 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. The Company's ongoing transition to a
more optimized capital structure, financed with additional low-cost debt, could impact 3M's credit rating in the future.
Effective February 24, 2017, the Company updated its "well-known seasoned issuer" (WKSI) shelf registration statement,
which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M's
previous shelf registration dated May 16, 2014. In May 2016, in connection with the WKSI shelf, 3M entered into an amended
and restated distribution agreement relating to the future issuance and sale (from time to time) of the Company's
medium-term notes program (Series F), up to the aggregate principal amount of $18 billion, which was an increase from the
previous aggregate principal amount up to $9 billion of the same Series.
In March 2016, 3M amended and restated its existing $2.25 billion five-year revolving credit facility expiring in August
2019 to a $3.75 billion five-year revolving credit facility expiring in March 2021. This credit agreement includes a
provision under which 3M may request an increase of up to $1.25 billion (at lenders' discretion), bringing the total
facility up to $5.0 billion. This revolving credit facility is undrawn at March 31, 2017. Under the $3.75 billion credit
agreement, 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 March 31, 2017, this
ratio was approximately 45 to 1. Debt covenants do not restrict the payment of dividends. Apart from the committed
facilities, $293 million in stand-alone letters of credit and bank guarantees were also issued and outstanding at March 31,
2017. These lines of credit are utilized in connection with normal business activities.
Cash, cash equivalents and marketable securities:
At March 31, 2017, 3M had $2.3 billion of cash, cash equivalents and marketable securities, of which approximately $2.0
billion was held by the Company's foreign subsidiaries and approximately $340 million was held by the United States. Of the
$2.0 billion held internationally, U.S. dollar-based cash, cash equivalents and marketable securities totaled $460 million,
or 23 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, 2016, cash, cash equivalents and marketable
securities held by the Company's foreign subsidiaries and by the United States totaled approximately $2.35 billion and $350
million, respectively.
Net Debt (non-GAAP measure):
Net debt is not defined under U.S. GAAP 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. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be
important indicators of liquidity and financial position. The following table provides net debt as of March 31, 2017, and
December 31, 2016.
March 31, December 31,
(Millions) 2017 2016
Total Debt $ 11,711 $ 11,650
Less: Cash and cash equivalents and marketable securities 2,331 2,695
Net Debt (non-GAAP measure) $ 9,380 $ 8,955
In the first three months of 2017, net debt increased by $0.4 billion to a net debt balance of $9.4 billion, driven by a
decrease in cash, cash equivalents and marketable securities.
Balance Sheet:
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.
The Company uses working capital measures that place emphasis and focus on certain working capital assets. These measures
include working capital, accounts receivable turns, and inventory turns.
Working capital (non-GAAP measure):
(Millions) March 31, 2017 December 31, 2016 Change
Current assets $ 11,901 $ 11,726 $ 175
Less: Current Liabilities (5,995) (6,219) 224
Working Capital $ 5,906 $ 5,507 $ 399
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 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 working capital
as current assets minus current liabilities. Working capital increased $399 million compared with December 31, 2016.
Current asset balance changes increased working capital by $175 million, driven by increases in accounts receivable, and
inventories (discussed further below), partially offset by decreases in cash, cash equivalents, and marketable securities.
Current liability balance changes increased working capital by $224 million, largely due to decreases in accounts payable
and accrued payroll, partially offset by increases in accrued income taxes. 3M believes working capital is meaningful to
investors as a measure of operational efficiency and short-term financial health.
Accounts receivable and inventory turns (non-GAAP measures):
Accounts receivable and inventory turns 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. 3M defines accounts receivable turns as quarterly
net sales multiplied by 4 divided by ending accounts receivable - net, and defines inventory turns as quarterly
manufacturing cost multiplied by 4 divided by ending inventory. 3M believes accounts receivable turns is meaningful to
investors as a measure of how efficiently the Company manages credit and collects from its customers. For inventory turns
calculation purposes, manufacturing cost is defined as cost of sales less freight and engineering costs. 3M believes
inventory turns is meaningful to investors as a measure of how quickly inventory is sold. Details of these calculations
follow.
Accounts receivable turns (non-GAAP measure)
(Millions, except turns) March 31, 2017 December 31, 2016
Quarterly net sales $ 7,685 $ 7,329
Ending accounts receivable - net $ 4,722 $ 4,392
Accounts receivable turns 6.51 6.67
Inventory turns (non-GAAP measure)
(Millions, except turns) March 31, 2017 December 31, 2016
Quarterly cost of sales $ 3,869 $ 3,716
Less: Freight and engineering $ 171 $ 160
Manufacturing cost $ 3,698 $ 3,556
Ending inventory $ 3,612 $ 3,385
Inventory turns 4.10 4.20
Concerning accounts receivable, higher March 2017 sales compared to December 2016 sales contributed to the accounts
receivable increase. On a seasonal basis, both accounts receivable and inventory turns are usually higher at year-end,
driven by typically lower year-end accounts receivable and inventory balances.
Cash Flows:
Cash flows from
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