REG - 3M Company - 3rd Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 4
01/11/2017 07:06
- Part 4: For the preceding part double click ID:nRSA1805Vc
had been received or pledged
related to these derivative instruments.
Offsetting of Financial Assets under Master Netting Agreements with Derivative Counterparties
Gross Amounts not Offset in the
Consolidated Balance Sheet that are Subject
Gross Amount of to Master Netting Agreements
Derivative Assets Gross Amount of
Presented in the Eligible Offsetting
September 30, 2017 Consolidated Recognized Cash Collateral Net Amount of
(Millions) Balance Sheet Derivative Liabilities Received Derivative Assets
Derivatives subject to master netting agreements $ 77 $ 34 $ - $ 43
Derivatives not subject to master netting agreements - -
Total $ 77 $ 43
December 31, 2016
(Millions)
Derivatives subject to master netting agreements $ 259 $ 39 $ - $ 220
Derivatives not subject to master netting agreements - -
Total $ 259 $ 220
Offsetting of Financial Liabilities under Master Netting Agreements with Derivative Counterparties
Gross Amounts not Offset in the
Consolidated Balance Sheet that are Subject
Gross Amount of to Master Netting Agreements
Derivative Liabilities Gross Amount of
Presented in the Eligible Offsetting
September 30, 2017 Consolidated Recognized Cash Collateral Net Amount of
(Millions) Balance Sheet Derivative Assets Pledged Derivative Liabilities
Derivatives subject to master netting agreements $ 182 $ 34 $ - $ 148
Derivatives not subject to master netting agreements - -
Total $ 182 $ 148
December 31, 2016
(Millions)
Derivatives subject to master netting agreements $ 93 $ 39 $ - $ 54
Derivatives not subject to master netting agreements 2 2
Total $ 95 $ 56
Currency Effects
3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, decreased pre-tax income by
approximately $34 million and $99 million for the three and nine months ended September 30, 2017, respectively. These
estimates include transaction gains and losses, including derivative instruments designed to reduce foreign currency
exchange rate risks and any impacts from swapping Venezuelan bolivars into U.S. dollars.
NOTE 11. Fair Value Measurements
3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at
fair value on a recurring basis and nonrecurring basis. Under the standard, fair value is defined as the exit price, or the
amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset
or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are
inputs that reflect the Company's assumptions about the factors market participants would use in valuing the asset or
liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three
levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs
include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or
liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
For 3M, assets and liabilities that are measured at fair value on a recurring basis primarily relate to available-for-sale
marketable securities and certain derivative instruments. Derivatives include cash flow hedges, interest rate swaps and net
investment hedges. The information in the following paragraphs and tables primarily addresses matters relative to these
financial assets and liabilities. Separately, there were no material fair value measurements with respect to nonfinancial
assets or liabilities that are recognized or disclosed at fair value in the Company's financial statements on a recurring
basis for the three and nine months ended September 30, 2017 and 2016.
3M uses various valuation techniques, which are primarily based upon the market and income approaches, with respect to
financial assets and liabilities. Following is a description of the valuation methodologies used for the respective
financial assets and liabilities measured at fair value.
Available-for-sale marketable securities - except certain U.S. municipal securities:
Marketable securities, except certain U.S. municipal securities, are valued utilizing multiple sources. A weighted average
market price is used for these securities. Market prices are obtained for these securities from a variety of industry
standard data providers, security master files from large financial institutions, and other third-party sources. These
multiple prices are used as inputs into a distribution-curve-based algorithm to determine the daily fair value to be used.
3M classifies U.S. treasury securities as level 1, while all other marketable securities (excluding certain U.S. municipal
securities) are classified as level 2. Marketable securities are discussed further in Note 7.
Available-for-sale marketable securities - certain U.S. municipal securities only:
In both 2016 and 2014, 3M obtained municipal bonds from the City of Nevada, Missouri, which represents 3M's only U.S.
municipal securities holding as of September 30, 2017 and December 31, 2016. Due to the nature of this security, the
valuation method utilized will include the financial health of the City of Nevada, any recent municipal bond issuances by
Nevada, and macroeconomic considerations related to the direction of interest rates and the health of the overall municipal
bond market, and as such has been classified as a level 3 security.
Derivative instruments:
The Company's derivative assets and liabilities within the scope of ASC 815, Derivatives and Hedging, are required to be
recorded at fair value. The Company's derivatives that are recorded at fair value include foreign currency forward and
option contracts, commodity price swaps, interest rate swaps, and net investment hedges where the hedging instrument is
recorded at fair value. Net investment hedges that use foreign currency denominated debt to hedge 3M's net investment are
not impacted by the fair value measurement standard under ASC 820, as the debt used as the hedging instrument is marked to
a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may
impact fair value.
3M has determined that foreign currency forwards, commodity price swaps, currency swaps, foreign currency options, interest
rate swaps and cross-currency swaps will be considered level 2 measurements. 3M uses inputs other than quoted prices that
are observable for the asset. These inputs include foreign currency exchange rates, volatilities, and interest rates.
Derivative positions are primarily valued using standard calculations or models that use, as their basis, readily
observable market parameters. Industry standard data providers are 3M's primary source for forward and spot rate
information for both interest rates and currency rates, with resulting valuations periodically validated through
third-party or counterparty quotes and a net present value stream of cash flows model.
The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring
basis.
Fair Value Measurements
Description Fair Value at Using Inputs Considered as
(Millions) September 30, 2017 Level 1 Level 2 Level 3
Assets:
Available-for-sale:
Marketable securities:
Corporate debt securities $ 10 $ - $ 10 $ -
Commercial paper 446 - 446 -
Certificates of deposit/time deposits 84 - 84 -
Asset-backed securities:
Automobile loan related 14 - 14 -
Credit card related 29 - 29 -
U.S. municipal securities 20 - - 20
Derivative instruments - assets:
Foreign currency forward/option contracts 55 - 55 -
Interest rate swap contracts 22 - 22 -
Liabilities:
Derivative instruments - liabilities:
Foreign currency forward/option contracts 179 - 179 -
Interest rate swap contracts 3 - 3 -
Fair Value Measurements
Description Fair Value at Using Inputs Considered as
(Millions) December 31, 2016 Level 1 Level 2 Level 3
Assets:
Available-for-sale:
Marketable securities:
Corporate debt securities $ 10 $ - $ 10 $ -
Commercial paper 14 - 14 -
Certificates of deposit/time deposits 197 - 197 -
Asset-backed securities:
Automobile loan related 31 - 31 -
Credit card related 18 - 18 -
Other 7 - 7 -
U.S. municipal securities 20 - - 20
Derivative instruments - assets:
Foreign currency forward/option contracts 234 - 234 -
Interest rate swap contracts 25 - 25 -
Liabilities:
Derivative instruments - liabilities:
Foreign currency forward/option contracts 94 - 94 -
Interest rate swap contracts 1 - 1 -
The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a
recurring basis in the table above that used significant unobservable inputs (Level 3).
Three months ended Nine months ended
Marketable securities - certain U.S. municipal securities only September 30, September 30,
(Millions) 2017 2016 2017 2016
Beginning balance $ 20 $ 18 $ 20 $ 12
Total gains or losses:
Included in earnings - - - -
Included in other comprehensive income - - - -
Purchases and issuances - - - 6
Sales and settlements - - - -
Transfers in and/or out of level 3 - - - -
Ending balance $ 20 $ 18 $ 20 $ 18
Change in unrealized gains or losses for the period included in earnings for securities held at the end of the reporting period - - - -
In addition, the plan assets of 3M's pension and postretirement benefit plans are measured at fair value on a recurring
basis (at least annually). Refer to Note 11 in 3M's Current Report on Form 8-K dated May 4, 2017 (which updated 3M's 2016
Annual Report on Form 10-K).
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:
Disclosures are required for certain assets and liabilities that are measured at fair value, including those recognized and
disclosed at fair value on a nonrecurring basis in periods subsequent to initial recognition. For 3M, such measurements of
fair value relate primarily to long-lived asset impairments. During the nine months ended September 30, 2017, the Company
recognized approximately $40 million in long-lived asset impairments related to its Electronics and Energy business
segment, with the complete carrying amount of such assets written off and included in operating income results. There were
no material long-lived asset impairments for the three months ended September 30, 2017 and the three and nine months ended
September 30, 2016.
Fair Value of Financial Instruments:
The Company's financial instruments include cash and cash equivalents, marketable securities, accounts receivable, certain
investments, accounts payable, borrowings, and derivative contracts. The fair values of cash equivalents, accounts
receivable, accounts payable, and short-term borrowings and current portion of long-term debt approximated carrying values
because of the short-term nature of these instruments. Available-for-sale marketable securities, in addition to certain
derivative instruments, are recorded at fair values as indicated in the preceding disclosures. For its long-term debt, the
Company utilized third-party quotes to estimate fair values (classified as level 2). Information with respect to the
carrying amounts and estimated fair values of these financial instruments follow:
September 30, 2017 December 31, 2016
Carrying Fair Carrying Fair
(Millions) Value Value Value Value
Long-term debt, excluding current portion $ 10,828 $ 11,336 $ 10,678 $ 11,168
The fair values reflected above consider the terms of the related debt absent the impacts of derivative and hedging
activity. The carrying amount of long-term debt referenced above is impacted by certain fixed-to-floating interest rate
swaps that are designated as fair value hedges and by the designation of fixed rate Eurobond securities issued by the
Company as hedging instruments of the Company's net investment in its European subsidiaries. Many of 3M's fixed-rate bonds
were trading at a premium at September 30, 2017 and December 31, 2016 due to the low interest rates and tightening of 3M's
credit spreads.
NOTE 12. Commitments and Contingencies
Legal Proceedings:
The Company and some of its subsidiaries are involved in numerous claims and lawsuits, principally in the United States,
and regulatory proceedings worldwide. These include various products liability (involving products that the Company now or
formerly manufactured and sold), intellectual property, and commercial claims and lawsuits, including those brought under
the antitrust laws, and environmental proceedings. Unless otherwise stated, the Company is vigorously defending all such
litigation. Additional information about the Company's process for disclosure and recording of liabilities and insurance
receivables related to legal proceedings can be found in Note 14 "Commitments and Contingencies" in the Company's Annual
Report on Form 10-K for the year ended December 31, 2016 as updated by the Company's Current Report on Form 8-K dated May
4, 2017.
The following sections first describe the significant legal proceedings in which the Company is involved, and then describe
the liabilities and associated insurance receivables the Company has accrued relating to its significant legal
proceedings.
Respirator Mask/Asbestos Litigation
As of September 30, 2017, the Company is a named defendant, with multiple co-defendants, in numerous lawsuits in various
courts that purport to represent approximately 2,330 individual claimants, compared to approximately 2,660 individual
claimants with actions pending at December 31, 2016.
The vast majority of the lawsuits and claims resolved by and currently pending against the Company allege use of some of
the Company's mask and respirator products and seek damages from the Company and other defendants for alleged personal
injury from workplace exposures to asbestos, silica, coal mine dust, or other occupational dusts found in products
manufactured by other defendants or generally in the workplace. A minority of the lawsuits and claims resolved by and
currently pending against the Company generally allege personal injury from occupational exposure to asbestos from products
previously manufactured by the Company, which are often unspecified, as well as products manufactured by other defendants,
or occasionally at Company premises.
The Company's current volume of new and pending matters is substantially lower than it experienced at the peak of filings
in 2003. The Company expects that filing of claims by unimpaired claimants in the future will continue to be at much lower
levels than in the past. Accordingly, the number of claims alleging more serious injuries, including mesothelioma and other
malignancies, will represent a greater percentage of total claims than in the past. The Company has prevailed in all twelve
cases taken to trial, including ten of the eleven cases tried to verdict (such trials occurred in 1999, 2000, 2001, 2003,
2004, 2007, 2015, and the cases tried in 2016 and 2017-described below), and an appellate reversal in 2005 of the 2001 jury
verdict adverse to the Company. The remaining case, tried in 2009, was dismissed by the court at the close of plaintiff's
evidence, based on the court's legal finding that the plaintiff had not presented sufficient evidence to support a jury
verdict. In August 2016, 3M received a unanimous defense verdict from a jury in state court in Kentucky, in 3M's first
respirator trial involving coal mine dust. The estate of the plaintiff alleged that the 3M 8710 respirator is defective and
caused his death because it did not protect him from harmful coal mine dust. The jury rejected plaintiff's claim and
returned a verdict finding no liability against 3M. The verdict is final as the plaintiff did not file an appeal. In
September 2017, 3M received a unanimous verdict in its favor from a jury in state court in Kentucky in 3M's second
respirator trial involving coal mine dust. The jury ultimately determined that the plaintiff's claims were barred by the
statute of limitations. The plaintiff filed a motion for a new trial.
The Company has demonstrated in these past trial proceedings that its respiratory protection products are effective as
claimed when used in the intended manner and in the intended circumstances. Consequently the Company believes that
claimants are unable to establish that their medical conditions, even if significant, are attributable to the Company's
respiratory protection products. Nonetheless the Company's litigation experience indicates that claims of persons with
malignant conditions are costlier to resolve than the claims of unimpaired persons, and it therefore believes the average
cost of resolving pending and future claims on a per-claim basis will continue to be higher than it experienced in prior
periods when the vast majority of claims were asserted by medically unimpaired claimants.
As previously reported, the State of West Virginia, through its Attorney General, filed a complaint in 2003 against the
Company and two other manufacturers of respiratory protection products in the Circuit Court of Lincoln County, West
Virginia, and amended its complaint in 2005. The amended complaint seeks substantial, but unspecified, compensatory damages
primarily for reimbursement of the costs allegedly incurred by the State for worker's compensation and healthcare benefits
provided to all workers with occupational pneumoconiosis and unspecified punitive damages. The case was inactive from the
fourth quarter of 2007 until late 2013, other than a case management conference in March 2011. In November 2013, the State
filed a motion to bifurcate the lawsuit into separate liability and damages proceedings. At the hearing on the motion, the
court declined to bifurcate the lawsuit. No liability has been recorded for this matter because the Company believes that
liability is not probable and estimable at this time. In addition, the Company is not able to estimate a possible loss or
range of loss given the lack of any meaningful discovery responses by the State of West Virginia, the otherwise minimal
activity in this case and the fact that the complaint asserts claims against two other manufacturers where a defendant's
share of liability may turn on the law of joint and several liability and by the amount of fault, if any, a jury might
allocate to each defendant if the case is ultimately tried.
Respirator Mask/Asbestos Liabilities and Insurance Receivables:
The Company annually conducts a comprehensive legal review of its respirator mask/asbestos liabilities in connection with
finalizing and reporting its annual results of operations, unless significant changes in trends or new developments warrant
an earlier review. The Company reviews recent and historical claims data, including without limitation, (i) the number of
pending claims filed against the Company, (ii) the nature and mix of those claims (i.e., the proportion of claims asserting
usage of the Company's mask or respirator products and alleging exposure to each of asbestos, silica, coal or other
occupational dusts, and claims pleading use of asbestos-containing products allegedly manufactured by the Company), (iii)
the costs to defend and resolve pending claims, and (iv) trends in filing rates and in costs to defend and resolve claims,
(collectively, the "Claims Data"). As part of its comprehensive legal review, the Company provides the Claims Data to a
third party with expertise in determining the impact of Claims Data on future filing trends and costs. The third party
assists the Company in estimating the costs to defend and resolve pending and future claims. The Company uses these
estimates to develop its best estimate of probable liability.
Developments may occur that could affect the Company's estimate of its liabilities. These developments include, but are not
limited to, significant changes in (i) the key assumptions underlying the Company's accrual, including, the number of
future claims, the nature and mix of those claims, the average cost of defending and resolving claims, and in maintaining
trial readiness (ii) trial and appellate outcomes, (iii) the law and procedure applicable to these claims, and (iv) the
financial viability of other co-defendants and insurers.
In the first nine months of 2017, the Company made payments for legal fees and settlements of $44 million related to the
respirator mask/asbestos litigation, $10 million of which occurred in the third quarter of 2017. As of September 30, 2017,
the Company had an accrual for respirator mask/asbestos liabilities (excluding Aearo accruals) of $551 million. This
accrual represents the Company's best estimate of probable loss and reflects an estimation period for future claims that
may be filed against the Company approaching the year 2050. The Company cannot estimate the amount or upper end of the
range of amounts by which the liability may exceed the accrual the Company has established because of the (i) inherent
difficulty in projecting the number of claims that have not yet been asserted or the time period in which future claims may
be asserted, (ii) the complaints nearly always assert claims against multiple defendants where the damages alleged are
typically not attributed to individual defendants so that a defendant's share of liability may turn on the law of joint and
several liability, which can vary by state, (iii) the multiple factors described above that the Company considers in
estimating its liabilities, and (iv) the several possible developments described above that may occur that could affect the
Company's estimate of liabilities.
As of September 30, 2017, the Company's receivable for insurance recoveries related to the respirator mask/asbestos
litigation was $4 million. The Company is seeking coverage under the policies of certain insolvent and other insurers. Once
those claims for coverage are resolved, the Company will have collected substantially all of its remaining insurance
coverage for respirator mask/asbestos claims.
Respirator Mask/Asbestos Litigation - Aearo Technologies
On April 1, 2008, a subsidiary of the Company purchased the stock of Aearo Holding Corp., the parent of Aearo Technologies
("Aearo"). Aearo manufactured and sold various products, including personal protection equipment, such as eye, ear, head,
face, fall and certain respiratory protection products.
As of September 30, 2017, Aearo and/or other companies that previously owned and operated Aearo's respirator business
(American Optical Corporation, Warner-Lambert LLC, AO Corp. and Cabot Corporation ("Cabot")) are named defendants, with
multiple co-defendants, including the Company, in numerous lawsuits in various courts in which plaintiffs allege use of
mask and respirator products and seek damages from Aearo and other defendants for alleged personal injury from workplace
exposures to asbestos, silica-related, or other occupational dusts found in products manufactured by other defendants or
generally in the workplace.
As of September 30, 2017, the Company, through its Aearo subsidiary, had accruals of $18 million for product liabilities
and defense costs related to current and future Aearo-related asbestos and silica-related claims. Responsibility for legal
costs, as well as for settlements and judgments, is currently shared in an informal arrangement among Aearo, Cabot,
American Optical Corporation and a subsidiary of Warner Lambert and their respective insurers (the "Payor Group").
Liability is allocated among the parties based on the number of years each company sold respiratory products under the "AO
Safety" brand and/or owned the AO Safety Division of American Optical Corporation and the alleged years of exposure of the
individual plaintiff. Aearo's share of the contingent liability is further limited by an agreement entered into between
Aearo and Cabot on July 11, 1995. This agreement provides that, so long as Aearo pays to Cabot a quarterly fee of $100,000,
Cabot will retain responsibility and liability for, and indemnify Aearo against, any product liability claims involving
exposure to asbestos, silica, or silica products for respirators sold prior to July 11, 1995. Because of the difficulty in
determining how long a particular respirator remains in the stream of commerce after being sold, Aearo and Cabot have
applied the agreement to claims arising out of the alleged use of respirators involving exposure to asbestos, silica or
silica products prior to January 1, 1997. With these arrangements in place, Aearo's potential liability is limited to
exposures alleged to have arisen from the use of respirators involving exposure to asbestos, silica, or silica products on
or after January 1, 1997. To date, Aearo has elected to pay the quarterly fee. Aearo could potentially be exposed to
additional claims for some part of the pre-July 11, 1995 period covered by its agreement with Cabot if Aearo elects to
discontinue its participation in this arrangement, or if Cabot is no longer able to meet its obligations in these matters.
In March 2012, Cabot CSC Corporation and Cabot Corporation filed a lawsuit against Aearo in the Superior Court of Suffolk
County, Massachusetts seeking declaratory relief as to the scope of Cabot's indemnity obligations under the July 11, 1995
agreement, including whether Cabot has retained liability for coal workers' pneumoconiosis claims, and seeking damages for
breach of contract. In 2014, the court granted Aearo's motion for summary judgment on two claims, but declined to rule on
two issues: the specific liability for certain known coal mine dust lawsuits; and Cabot's claim for allocation of liability
between injuries allegedly caused by exposure to coal mine dust and injuries allegedly caused by exposure to silica dust.
Following additional discovery, the parties filed new motions for summary judgment. In February 2016, the court ruled in
favor of Aearo on these two remaining issues, and ordered that Cabot, and not Aearo, is solely responsible for all
liability for the coal mine dust lawsuits under the 1995 agreement. In May 2017, the Massachusetts Court of Appeals
affirmed the trial court order in favor of Aearo.
Developments may occur that could affect the estimate of Aearo's liabilities. These developments include, but are not
limited to: (i) significant changes in the number of future claims, (ii) significant changes in the average cost of
resolving claims, (iii) significant changes in the legal costs of defending these claims, (iv) significant changes in the
mix and nature of claims received, (v) trial and appellate outcomes, (vi) significant changes in the law and procedure
applicable to these claims, (vii) significant changes in the liability allocation among the co-defendants, (viii) the
financial viability of members of the Payor Group including exhaustion of available insurance coverage limits, and/or (ix)
a determination that the interpretation of the contractual obligations on which Aearo has estimated its share of liability
is inaccurate. The Company cannot determine the impact of these potential developments on its current estimate of Aearo's
share of liability for these existing and future claims. If any of the developments described above were to occur, the
actual amount of these liabilities for existing and future claims could be significantly larger than the amount accrued.
Because of the inherent difficulty in projecting the number of claims that have not yet been asserted, the complexity of
allocating responsibility for future claims among the Payor Group, and the several possible developments that may occur
that could affect the estimate of Aearo's liabilities, the Company cannot estimate the amount or range of amounts by which
Aearo's liability may exceed the accrual the Company has established.
Environmental Matters and Litigation
The Company's operations are subject to environmental laws and regulations including those pertaining to air emissions,
wastewater discharges, toxic substances, and the handling and disposal of solid and hazardous wastes enforceable by
national, state, and local authorities around the world, and private parties in the United States and abroad. These laws
and regulations provide, under certain circumstances, a basis for the remediation of contamination, for restoration of or
compensation for damages to natural resources, and for personal injury and property damage claims. The Company has
incurred, and will continue to incur, costs and capital expenditures in complying with these laws and regulations,
defending personal injury and property damage claims, and modifying its business operations in light of its environmental
responsibilities. In its effort to satisfy its environmental responsibilities and comply with environmental laws and
regulations, the Company has established, and periodically updates, policies relating to environmental standards of
performance for its operations worldwide.
Under certain environmental laws, including the United States Comprehensive Environmental Response, Compensation and
Liability Act of 1980 and similar state laws, the Company may be jointly and severally liable, typically with other
companies, for the costs of remediation of environmental contamination at current or former facilities and at off-site
locations. The Company has identified numerous locations, most of which are in the United States, at which it may have some
liability. Please refer to the section entitled "Environmental Liabilities and Insurance Receivables" that follows for
information on the amount of the accrual.
Environmental Matters
As previously reported, the Company has been voluntarily cooperating with ongoing reviews by local, state, federal
(primarily the U.S. Environmental Protection Agency (EPA)), and international agencies of possible environmental and health
effects of various perfluorinated compounds, including perfluorooctanyl compounds such as perfluorooctanoate ("PFOA"),
perfluorooctane sulfonate ("PFOS"), or similar compounds ("PFCs"). As a result of its phase-out decision in May 2000, the
Company no longer manufactures perfluorooctanyl compounds. The company ceased manufacturing and using the vast majority of
these compounds within approximately two years of the phase-out announcement, and ceased all manufacturing and the last
significant use of this chemistry by the end of 2008. Through its ongoing life cycle management and its raw material
composition identification processes associated with the Company's policies covering the use of all persistent and
bio-accumulative materials, the Company continues to control or eliminate the presence of certain PFCs in purchased
materials or as byproducts in some of 3M's fluorochemical manufacturing processes, products, and waste streams.
Regulatory activities concerning PFOA and/or PFOS continue in the United States, Europe and elsewhere, and before certain
international bodies. These activities include gathering of exposure and use information, risk assessment, and
consideration of regulatory approaches. As the database of studies of both PFOA and PFOS has expanded, the EPA has
developed human health effects documents summarizing the available data from these studies. In February 2014, the EPA
initiated external peer review of its draft human health effects documents for PFOA and PFOS. The peer review panel met in
August 2014. In May 2016, the EPA announced lifetime health advisory levels for PFOA and PFOS at 70 parts per trillion
(ppt) (superseding the provisional levels established by the EPA in 2009 of 400 ppt for PFOA and 200 ppt for PFOS). Where
PFOA and PFOS are found together, EPA recommends that the concentrations be added together, and the lifetime health
advisory for PFOA and PFOS combined is also 70 ppt. Lifetime health advisories, while not enforceable, serve as guidance
and are benchmarks for determining if concentrations of chemicals in tap water from public utilities are safe for public
consumption. In an effort to collect exposure information under the Safe Drinking Water Act, the EPA published on May 2,
2012 a list of unregulated substances, including six PFCs, required to be monitored during the period 2013-2015 by public
water system suppliers to determine the extent of their occurrence. Through January 2017, the EPA reported results for
4,920 public water supplies nationwide. Based on the 2016 lifetime health advisory, 13 public water supplies exceed the
level for PFOA and 46 exceed the level for PFOS (unchanged from the July 2016 EPA summary). A technical advisory issued by
EPA in September 2016 on laboratory analysis of drinking water samples stated that 65 public water supplies had exceeded
the combined level for PFOA and PFOS. These results are based on one or more samples collected during the period 2012-2015
and do not necessarily reflect current conditions of these public water supplies. EPA reporting does not identify the
sources of the PFOA and PFOS in the public water supplies.
The Company is continuing to make progress in its work, under the supervision of state regulators, to address its historic
disposal of PFC-containing waste associated with manufacturing operations at the Decatur, Alabama, Cottage Grove,
Minnesota, and Cordova, Illinois plants.
As previously reported, the Company entered into a voluntary remedial action agreement with the Alabama Department of
Environmental Management (ADEM) to address the presence of PFCs in the soil at the Company's manufacturing facility in
Decatur, Alabama. Pursuant to a permit issued by ADEM, for approximately twenty years, the Company incorporated its
wastewater treatment plant sludge containing PFCs in fields at its Decatur facility. After a review of the available
options to address the presence of PFCs in the soil, ADEM agreed that the preferred remediation option is to use a
multilayer cap over the former sludge incorporation areas on the manufacturing site with subsequent groundwater migration
controls and treatment. Implementation of that plan continues and is expected to be completed in 2018.
The Company continues to work with the Minnesota Pollution Control Agency (MPCA) pursuant to the terms of the previously
disclosed May 2007 Settlement Agreement and Consent Order to address the presence of certain PFCs in the soil and
groundwater at former disposal sites in Washington County, Minnesota (Oakdale and Woodbury) and at the Company's
manufacturing facility at Cottage Grove, Minnesota. Under this agreement, the Company's principal obligations include (i)
evaluating releases of certain PFCs from these sites and proposing response actions; (ii) providing treatment or
alternative drinking water upon identifying any level exceeding a Health Based Value ("HBV") or Health Risk Limit ("HRL")
(i.e., the amount of a chemical in drinking water determined by the Minnesota Department of Health (MDH) to be safe for
human consumption over a lifetime) for certain PFCs for which a HBV and/or HRL exists as a result of contamination from
these sites; (iii) remediating identified sources of other PFCs at these sites that are not controlled by actions to
remediate PFOA and PFOS; and (iv) sharing information with the MPCA about certain perfluorinated compounds. During 2008,
the MPCA issued formal decisions adopting remedial options for the former disposal sites in Washington County, Minnesota
(Oakdale and Woodbury). In August 2009, the MPCA issued a formal decision adopting remedial options for the Company's
Cottage Grove manufacturing facility. During the spring and summer of 2010, 3M began implementing the agreed upon remedial
options at the Cottage Grove and Woodbury sites. 3M commenced the remedial option at the Oakdale site in late 2010. At each
location the remedial options were recommended by the Company and approved by the MPCA. Remediation work has been completed
at the Oakdale and Woodbury sites, and they are in an operational maintenance mode. Remediation will continue at the
Cottage Grove site during 2017.
In August 2014, the Illinois EPA approved a request by the Company to establish a groundwater management zone at its
manufacturing facility in Cordova, Illinois, which includes ongoing pumping of impacted site groundwater, groundwater
monitoring, and routine reporting of results.
In May 2017, the MDH issued new HBVs for PFOS and PFOA. The new HBVs are 35 ppt for PFOA and 27 ppt for PFOS. In connection
with its announcement, the MDH stated that "Drinking water with PFOA and PFOS, even at the levels above the updated values,
does not represent an immediate health risk. These values are designed to reduce long-term health risks across the
population and are based on multiple safety factors to protect the most vulnerable citizens, which makes them
overprotective for most of the residents in our state."
The Company cannot predict what additional regulatory actions arising from the foregoing proceedings and activities, if
any, may be taken regarding such compounds or the consequences of any such actions.
Environmental Litigation
As previously reported, a former employee filed a purported class action lawsuit in 2002 in the Circuit Court of Morgan
County, Alabama (the St. John case), seeking unstated damages and alleging that the plaintiffs suffered fear, increased
risk, subclinical injuries, and property damage from exposure to certain perfluorochemicals at or near the Company's
Decatur, Alabama, manufacturing facility. The court in 2005 granted the Company's motion to dismiss the named plaintiff's
personal injury-related claims on the basis that such claims are barred by the exclusivity provisions of the state's
Workers Compensation Act. The plaintiffs' counsel filed an amended complaint in November 2006, limiting the case to
property damage claims on behalf of a purported class of residents and property owners in the vicinity of the Decatur
plant. In June 2015, the plaintiffs filed an amended complaint adding additional defendants, including BFI Waste Management
Systems of Alabama, LLC; BFI Waste Management of North America, LLC; the City of Decatur, Alabama; Morgan County, Alabama;
Municipal Utilities Board of Decatur; and Morgan County, Alabama, d/b/a Decatur Utilities.
In 2005, the judge in a second purported class action lawsuit filed by three residents of Morgan County, Alabama, seeking
unstated compensatory and punitive damages involving alleged damage to their property from emissions of certain
perfluorochemical compounds from the Company's Decatur, Alabama, manufacturing facility that formerly manufactured those
compounds (the Chandler case) granted the Company's motion to abate the case, effectively putting the case on hold pending
the resolution of class certification issues in the St. John case. Despite the stay, plaintiffs filed an amended complaint
seeking damages for alleged personal injuries and property damage on behalf of the named plaintiffs and the members of a
purported class. No further action in the case is expected unless and until the stay is lifted.
In February 2009, a resident of Franklin County, Alabama, filed a purported class action lawsuit in the Circuit Court of
Franklin County (the Stover case) seeking compensatory damages and injunctive relief based on the application by the
Decatur utility's wastewater treatment plant of wastewater treatment sludge to farmland and grasslands in the state that
allegedly contain PFOA, PFOS and other perfluorochemicals. The named plaintiff seeks to represent a class of all persons
within the State of Alabama who have had PFOA, PFOS, and other perfluorochemicals released or deposited on their property.
In March 2010, the Alabama Supreme Court ordered the case transferred from Franklin County to Morgan County. In May 2010,
consistent with its handling of the other matters, the Morgan County Circuit Court abated this case, putting it on hold
pending the resolution of the class certification issues in the St. John case.
In October 2015, West Morgan-East Lawrence Water & Sewer Authority (Water Authority) filed an individual complaint against
3M Company, Dyneon, L.L.C, and Daikin America, Inc., in the U.S. District Court for the Northern District of Alabama. The
complaint also includes representative plaintiffs who brought the complaint on behalf of themselves, and a class of all
owners and possessors of property who use water provided by the Water Authority and five local water works to which the
Water Authority supplies water (collectively, the "Water Utilities"). The complaint seeks compensatory and punitive damages
and injunctive relief based on allegations that the defendants' chemicals, including PFOA and PFOS from their manufacturing
processes in Decatur, have contaminated the water in the Tennessee River at the water intake, and that the chemicals cannot
be removed by the water treatment processes utilized by the Water Authority. In September 2016, the court granted 3M's
motion to dismiss plaintiffs' trespass claims with prejudice, negligence claims for personal injuries, and private nuisance
claims, and denied the motion to dismiss the plaintiffs' negligence claims for property damage, public nuisance, abatement
of nuisance, battery and wantonness.
In June 2016, the Tennessee Riverkeeper, Inc. (Riverkeeper), a non-profit corporation, filed a lawsuit in the U.S. District
Court for the Northern District of Alabama against 3M; BFI Waste Systems of Alabama; the City of Decatur, Alabama; and the
Municipal Utilities Board of Decatur, Morgan County, Alabama. The complaint alleges that the defendants violated the
Resource Conservation and Recovery Act in connection with the disposal of certain PFCs through their ownership and
operation of their respective sites. The complaint further alleges such practices may present an imminent and substantial
endangerment to health and/or the environment and that Riverkeeper has suffered and will continue to suffer irreparable
harm caused by defendants' failure to abate the endangerment unless the court grants the requested relief, including
declaratory and injunctive relief. The Company believes that the complaint lacks merit.
In July 2016, the City of Lake Elmo filed a lawsuit in the U.S. District Court for the District of Minnesota against 3M
alleging that the City suffered damages from drinking water supplies contaminated with PFCs, including costs to construct
alternative sources of drinking water. Trial is scheduled to begin in January 2019.
In September 2016, the Water Works and Sewer Board of the City of Gadsden, Alabama filed a lawsuit in the Circuit Court of
Etowah County Alabama against 3M and various carpet manufacturers. The complaint alleges that PFCs from the defendants'
facilities contaminated the Coosa River as its raw water source for drinking water and seeks unstated damages for the
installation and operation of a filtration system, expenses to monitor PFC levels, and lost profits and sales.
In November 2016, the Town of Barnstable, Massachusetts filed an individual action in the U.S. District Court for the
District of Massachusetts seeking unstated compensatory and punitive damages and other relief against 3M and other
suppliers of AFFF for alleged contamination of the aquifer supplying drinking water to the Hyannis water system. The town
seeks to recover costs associated with the investigation, treatment, remediation, and monitoring of drinking water supplies
allegedly contaminated with certain PFCs used in AFFF. In January 2017, the County of Barnstable, Massachusetts, filed an
individual action in the U.S. District Court for the District of Massachusetts seeking unstated compensatory and punitive
damages and other relief (including indemnification and contribution in connection with claims asserted against the County
by the Town of Barnstable) against 3M and other suppliers of AFFF for alleged contamination of the aquifer supplying
drinking water to the Hyannis water system.
In January 2017, several hundred plaintiffs sued 3M, its subsidiary Dyneon, and Daikin American in Lawrence and Morgan
Counties, Alabama. The plaintiffs are owners of property, residents, and holders of property interests who receive their
water from the West Morgan-East Lawrence Water and Sewer Authority (Authority). They assert common law claims for
negligence, nuisance, trespass, wantonness, and battery, and they seek injunctive relief and punitive damages. The
plaintiffs contend that the defendants own and operate manufacturing and disposal facilities in Decatur that have released
and continue to release PFOA, PFOS and related chemicals into the groundwater and surface water of their sites, resulting
in discharge into the Tennessee River. The plaintiffs also contend that the defendants have discharged into Bakers Creek
and the Decatur Utilities Dry Creek Wastewater Treatment Plant, which, in turn, discharges wastewater containing these
chemicals into the Tennessee River. The plaintiffs contend that, as a result the alleged discharges, the water supplied by
the Authority to the plaintiffs was, and is, contaminated with PFOA, PFOS, and related chemicals at a level dangerous to
humans.
In May 2017, the Water Works and Sewer Board of the Town of Centre, Alabama filed a lawsuit in the Circuit Court of
Cherokee County Alabama against 3M, DuPont, and various carpet and textile manufacturers. The complaint alleges that PFCs
from the defendants' facilities contaminated the town's raw water source for drinking water and seeks unstated damages for
the installation and operation of a filtration system, expenses to monitor PFC levels, lost profits and sales, and
injunctive relief.
As of September 30, 2017, eleven purported class actions have been filed against 3M and other defendants in federal or
state courts - three in federal court in Colorado, four in federal court in Pennsylvania, and four in state court in New
York. An individual complaint also has been filed in the federal court in Pennsylvania. The complaints seek unstated
damages and other remedies, such as medical monitoring, and allege that the plaintiffs suffered personal injury and
property damage from drinking water supplies contaminated with certain PFCs used in Aqueous Film Forming Foam (AFFF) at
current or former airports and air force military bases located in Colorado, Pennsylvania, and New York.
In December 2010, the State of Minnesota, by its Attorney General Lori Swanson, acting in its capacity as trustee of the
natural resources of the State of Minnesota, filed a lawsuit in Hennepin County District Court against 3M to recover
damages (including unspecified assessment costs and reasonable attorney's fees) for alleged
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