REG - 3M Company - 3rd Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 5
02/11/2016 07:07
- Part 5: For the preceding part double click ID:nRSB0531Od
gathering of exposure and use information, risk assessment, and
consideration of regulatory approaches. In October 2016, the European Commission notified the World Trade Organization of a
draft regulation to restrict PFOA and its related substances under the EU's REACH Regulation (Registration, Evaluation,
Authorization, and Restriction of Chemicals). If adopted, the regulation would restrict PFOA and its related substances to
concentrations no greater than 25 parts per billion in constituents of other substances, in mixtures, and in articles. As
the database of studies of both chemicals 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 (superseding the provisional levels established by the
EPA in 2009 of 400 parts per trillion for PFOA and 200 parts per trillion 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 parts per trillion. 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. The EPA is reporting results from this exercise on a
rolling basis that will continue in 2016. Through July 2016, the EPA has reported results for 4,909 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. 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 2016.
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.
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 September 2015, the court
issued a scheduling order staying discovery pending mediation which occurred in January 2016, but did not resolve the case
and the parties continue their negotiations. A hearing on class certification is scheduled for November 2016.
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 plaintiff's trespass claims with prejudice, negligence claims for personal injuries, and private nuisance
claims, and denied the motion to dismiss the plaintiff's 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.
In September and October 2016, five purported class actions were filed against 3M and other defendants in U.S. District
Court - three in the District of Colorado and two in the Eastern District of 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 at current or
former airports and air force military bases located in Colorado and Pennsylvania.
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 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 injury to, destruction of, and
loss of use of certain of the State's natural resources under the Minnesota Environmental Response and Liability Act
(MERLA) and the Minnesota Water Pollution Control Act (MWPCA), as well as statutory nuisance and common law claims of
trespass, nuisance, and negligence with respect to the presence of PFCs in the groundwater, surface water, fish or other
aquatic life, and sediments (the "NRD Lawsuit"). The State also seeks declarations under MERLA that 3M is responsible for
all damages the State may suffer in the future for injuries to natural resources from releases of PFCs into the
environment, and under MWPCA that 3M is responsible for compensation for future loss or destruction of fish, aquatic life,
and other damages.
In November 2011, the Metropolitan Council filed a motion to intervene and a complaint in the NRD Lawsuit seeking
compensatory damages and other legal, declaratory and equitable relief, including reasonable attorneys' fees, for costs and
fees that the Metropolitan Council alleges it will be required to assess at some time in the future if the MPCA imposes
restrictions on Metropolitan Council's PFOS discharges to the Mississippi River, including the installation and maintenance
of a water treatment system. The Metropolitan Council's intervention motion was based on several theories, including common
law negligence, and statutory claims under MERLA for response costs, and under the Minnesota Environmental Rights Act
(MERA) for declaratory and equitable relief against 3M for PFOS and other PFC pollution of the waters and sediments of the
Mississippi River. 3M did not object to the motion to intervene. In January 2012, 3M answered the Metropolitan Council's
complaint and filed a counterclaim alleging that the Metropolitan Council discharges PFCs to the Mississippi River and
discharges PFC-containing sludge and bio solids from one or more of its wastewater treatment plants onto agricultural lands
and local area landfills. Accordingly, 3M's complaint against the Metropolitan Council asks that if the court finds that
the State is entitled to any of the damages it seeks, 3M be awarded contribution and apportionment from the Metropolitan
Council, including attorneys' fees, under MERLA, and contribution from and liability for the Metropolitan Council's
proportional share of damages awarded to the State under the MWPCA, as well as under statutory nuisance and common law
theories of trespass, nuisance, and negligence. 3M also seeks declaratory relief under MERA.
In April 2012, 3M filed a motion to disqualify the State of Minnesota's counsel, Covington & Burling, LLP (Covington). In
October 2012, the court granted 3M's motion to disqualify Covington as counsel to the State and the State and Covington
appealed the court's disqualification to the Minnesota Court of Appeals. In July 2013, the Minnesota Court of Appeals
affirmed the district court's disqualification order. In October 2013, the Minnesota Supreme Court granted both the State's
and Covington's petition for review of the decision of the Minnesota Court of Appeals. In April 2014, the Minnesota Supreme
Court affirmed in part, reversed in part, and remanded the case to the district court for further proceedings. The district
court took evidence on the disqualification issues at a hearing in October 2015. In February 2016, the district court ruled
that Covington violated the professional ethics rule against representing a client (here the State of Minnesota) in the
same or substantially related matter where that person's interests are materially adverse to the interests of a former
client (3M). The district court, however, denied 3M's motion to disqualify Covington because it further found that 3M
impliedly waived by delaying to assert the conflict. Other activity in the case, which had been stayed pending the outcome
of the disqualification issue, has resumed. A trial date has not yet been set. In a separate but related action, the
Company filed suit in the Ramsey County District Court against Covington for breach of its fiduciary duties to the Company
and for breach of contract arising out of Covington's representation of the State of Minnesota in the NRD Lawsuit. In
September 2016, the court granted 3M's motion for leave to amend the complaint to plead punitive damages.
For environmental litigation matters described in this section for which a liability, if any, has been recorded, the
Company believes the amount recorded, as well as the possible loss or range of loss in excess of the established accrual is
not material to the Company's consolidated results of operations or financial condition. For those matters for which a
liability has not been recorded, the Company believes any such liability is not probable and estimable and the Company is
not able to estimate a possible loss or range of loss at this time.
Environmental Liabilities and Insurance Receivables
As of September 30, 2016, the Company had recorded liabilities of $44 million for estimated "environmental remediation"
costs based upon an evaluation of currently available facts with respect to each individual site and also recorded related
insurance receivables of $11 million. The Company records liabilities for remediation costs on an undiscounted basis when
they are probable and reasonably estimable, generally no later than the completion of feasibility studies or the Company's
commitment to a plan of action. Liabilities for estimated costs of environmental remediation, depending on the site, are
based primarily upon internal or third-party environmental studies, and estimates as to the number, participation level and
financial viability of any other potentially responsible parties, the extent of the contamination and the nature of
required remedial actions. The Company adjusts recorded liabilities as further information develops or circumstances
change. The Company expects that it will pay the amounts recorded over the periods of remediation for the applicable sites,
currently ranging up to 20 years.
As of September 30, 2016, the Company had recorded liabilities of $31 million for "other environmental liabilities" based
upon an evaluation of currently available facts to implement the Settlement Agreement and Consent Order with the MPCA, the
remedial action agreement with ADEM, and to address trace amounts of perfluorinated compounds in drinking water sources in
the City of Oakdale, Minnesota, as well as presence in the soil and groundwater at the Company's manufacturing facilities
in Decatur, Alabama, and Cottage Grove, Minnesota, and at two former disposal sites in Washington County, Minnesota
(Oakdale and Woodbury). The Company expects that most of the spending will occur over the next four years. As of September
30, 2016, the Company's receivable for insurance recoveries related to "other environmental liabilities" was $15 million.
It is difficult to estimate the cost of environmental compliance and remediation given the uncertainties regarding the
interpretation and enforcement of applicable environmental laws and regulations, the extent of environmental contamination
and the existence of alternative cleanup methods. Developments may occur that could affect the Company's current
assessment, including, but not limited to: (i) changes in the information available regarding the environmental impact of
the Company's operations and products; (ii) changes in environmental regulations, changes in permissible levels of specific
compounds in drinking water sources, or changes in enforcement theories and policies, including efforts to recover natural
resource damages; (iii) new and evolving analytical and remediation techniques; (iv) success in allocating liability to
other potentially responsible parties; and (v) the financial viability of other potentially responsible parties and
third-party indemnitors. For sites included in both "environmental remediation liabilities" and "other environmental
liabilities," at which remediation activity is largely complete and remaining activity relates primarily to operation and
maintenance of the remedy, including required post-remediation monitoring, the Company believes the exposure to loss in
excess of the amount accrued would not be material to the Company's consolidated results of operations or financial
condition. However, for locations at which remediation activity is largely ongoing, the Company cannot estimate a possible
loss or range of loss in excess of the associated established accruals for the reasons described above.
Other Matters
Commercial Litigation
3M sued TransWeb Corporation in Minnesota in 2010 for infringement of several 3M patents covering fluorination and
hydrocharging of filter media used in 3M's respirators and furnace filters. TransWeb filed a declaratory judgment action in
and successfully moved the litigation to the U.S. District Court for the District of New Jersey, seeking a declaration of
invalidity and non-infringement of 3M's patents, and further alleging that 3M waited too long to enforce its rights.
TransWeb also alleged 3M obtained the patents through inequitable conduct and that 3M's attempt to enforce the patents
constituted a violation of the antitrust laws. In November 2012, a jury returned a verdict in favor of TransWeb on all but
one count, including findings that 3M's patents were invalid and not infringed, and that 3M had committed an antitrust
violation by seeking to enforce a patent it had obtained fraudulently. The jury also recommended that the court find 3M had
committed inequitable conduct in obtaining the patents, and that the patents were therefore unenforceable. Since the vast
majority of TransWeb's claim for treble antitrust damages was in the form of its attorneys' fees and expenses in connection
with the defense of the patent case, the parties agreed that the measure of damages would not go to the jury, but rather
would be submitted to a special master after the trial. In April, 2014, the court issued an order denying 3M's motions to
set aside the jury's verdict. In addition, the court found two 3M patents unenforceable due to inequitable conduct. The
court accepted the special master's recommendation as to the amount of attorneys' fees to be awarded as damages, and
entered judgment against 3M. In July 2014, 3M filed a notice of appeal of the judgment to the U.S. Court of Appeals for the
Federal Circuit. In February 2016, the U.S. Court of Appeals for the Federal Circuit issued its decision affirming the
lower court's judgment. In March 2016, 3M paid TransWeb $27 million in full satisfaction of the judgment.
Andover Healthcare filed an infringement suit against 3M in May 2013 in the U.S. District Court for the District of
Delaware. Andover also filed a related infringement action against 3M and 3M Deutschland GmbH in December 2013 in Mannheim,
Germany. In both cases, Andover alleges that certain of 3M's self-adherent wraps, including Coban Latex Free and Nexcare No
Hurt Latex Free wraps, infringe Andover's U.S. and German patents. 3M denies that it infringes Andover's patents, asserts
that the patents are invalid, and claims that Andover should be precluded from any recovery, in part because of its long
delay in bringing this action. 3M and Andover have each filed motions for summary judgment. In October 2016, the court
denied all pending summary judgment motions filed by both parties. Trial in the U.S. matter is scheduled for November 2016.
A hearing in the German infringement case occurred in September 2014. In November 2014, the German trial court issued a
decision ordering the appointment of an expert to assist with analysis of whether 3M's products infringe Andover's German
patent. Separately, 3M filed a nullity action in Germany, challenging the validity of Andover's German patent. At a hearing
in July 2015, the German patent court revoked Andover's German patents. Andover has appealed that decision and, in April
2016, the German trial court stayed the infringement proceedings during the pendency of Andover's appeal. No liability has
been recorded in the Andover litigation, as the Company believes that any such liability is not probable and estimable.
Product Liability Litigation
Électricité de France (EDF) filed a lawsuit against 3M France in the French courts in 2006 claiming commercial loss and
property damage after experiencing electrical network failures which EDF claims were caused by allegedly defective 3M
transition splices. The French Court of Appeals at Versailles affirmed the commercial trial court's decision that the
transition splices conformed to contract specifications and that EDF thoroughly analyzed and tested the splices before
purchase and installation. The Court of Appeals, however, ordered a court-appointed expert to study the problem and issue a
technical opinion on the cause of the network failures. The court-appointed expert submitted his report to the commercial
court in May 2014. The expert found potential defects in 3M's product and found that EDF incurred damages in excess of 100
million euros. The expert's opinion was not dispositive of liability or damages and subject to numerous factual and legal
challenges that could be raised with the court. In June 2016, the parties reached an agreement to resolve this dispute; the
agreement includes confidential terms that, when taking into account 3M's insurance coverage, were not material to the
Company's consolidated results of operations or financial condition.
One customer obtained an order in the French courts against 3M Purification SAS (a French subsidiary) in October 2011
appointing an expert to determine the amount of commercial loss and property damage allegedly caused by allegedly defective
3M filters used in the customer's manufacturing process. An Austrian subsidiary of this same customer also filed a claim
against 3M Austria GmbH (an Austrian subsidiary) and 3M Purification SAS in the Austrian courts in September 2012 seeking
damages for the same issue. Those two cases are still pending. Another customer filed a lawsuit against 3M Deutschland GmbH
(a German subsidiary) in the German courts in March 2012 seeking commercial loss and property damage allegedly caused by
the same 3M filters used in that customer's manufacturing process; the Company has resolved the claims in the German
litigation. The Company has also settled without litigation the claims of two other customers arising out of the same
issue. The amounts paid are not material to the Company's consolidated results of operations or financial condition.
As of September 30, 2016, the Company is a named defendant in approximately 830 lawsuits (compared to approximately 122
lawsuits at December 31, 2015), most of which are pending in federal or state court in Minnesota, in which the plaintiffs
claim they underwent various joint arthroplasty, cardiovascular, and other surgeries and later developed surgical site
infections due to the use of the Bair Hugger patient warming system. The complaints seek damages and other relief based on
theories of strict liability, negligence, breach of express and implied warranties, failure to warn, design and
manufacturing defect, fraudulent and/or negligent misrepresentation/concealment, unjust enrichment, and violations of
various state consumer fraud, deceptive or unlawful trade practices and/or false advertising acts. One case, from the U.S.
District Court for the Western District of Tennessee is a putative nationwide class action. The U.S. Judicial Panel on
Multidistrict Litigation (MDL) granted the plaintiffs' motion to transfer and consolidate all cases pending in federal
courts to the U.S. District Court for the District of Minnesota to be managed in a multi-district proceeding during the
pre-trial phase of the litigation. In June 2016, the Company was served with a putative class action filed in the Ontario
Superior Court of Justice for all Canadian residents who underwent various joint arthroplasty, cardiovascular, and other
surgeries and later developed surgical site infections due to the use of the Bair Hugger patient warming system. The
representative plaintiff seeks relief (including punitive damages) under Canadian law based on theories similar to those
asserted in the MDL. The Bair Hugger product line was acquired by 3M as part of the 2010 acquisition of Arizant, Inc., a
leading manufacturer of patient warming solutions designed to prevent hypothermia and maintain normal body temperature in
surgical settings. No liability has been recorded for this matter because the Company believes that any such liability is
not probable and estimable at this time.
In September 2011, 3M Oral Care launched Lava Ultimate CAD/CAM dental restorative material. The product was originally
indicated for inlay, onlay, veneer, and crown applications. In June 2015, 3M Oral Care voluntarily removed crown
applications from the product's instructions for use, following reports from dentists of patients' crowns debonding,
requiring additional treatment. The product remains on the market for other applications. 3M communicated with the U.S.
Food and Drug Administration, as well as regulators outside the United States. 3M also informed customers and distributors
of its action, offered to accept return of unused materials and provide refunds. As of September 30, 2016, seven complaints
have been filed in the U.S. District Court for the District of Minnesota and one complaint was filed in the U.S. District
Court for the Southern District of Florida, each seeking certification of a class action of dentists in the United States
and its territories related to the Lava Ultimate dental crowns. The complaints allege 3M marketed and sold defective Lava
Ultimate dental crowns to dentists throughout the country and, under various theories, seek monetary damages (replacement
costs and business reputation loss), punitive damages, disgorgement of profits, injunction from marketing and selling Lava
Ultimate for use in dental crowns, statutory penalties, and attorneys' fees. The plaintiffs in one of the cases filed in
the District of Minnesota have moved the U.S. Judicial Panel on Multidistrict Litigation (MDL) to transfer and consolidate
all pending cases to the District of Minnesota to be managed in an MDL proceeding during the pre-trial phase of the
litigation. 3M opposed that motion and filed a motion instead to transfer the one case pending in the Southern District of
Florida to the District of Minnesota, where it can be consolidated with the other seven pending cases for both pretrial and
trial. Oral argument on the MDL motion occurred in July 2016. In August 2016, the U.S. Judicial Panel on Multidistrict
Litigation denied the plaintiff's motion to consolidate all pending cases to be managed in an MDL proceeding for the
pre-trial phase of the litigation. The court in the Southern District of Florida granted 3M's motion to transfer the action
pending there to the District of Minnesota. All eight putative class action cases are in the process of being consolidated
into one case for both pre-trial and trial. In September and October 2016, two individual complaints were filed against 3M
- one in Madison County, Illinois and the other in the U.S. District Court for the Northern District of New York. The
complaints allege that 3M marketed and sold defective Lava Ultimate material for dental crowns to the plaintiffs, and under
various theories, seek compensatory damages and statutory penalties, including attorneys' fees and costs.
For product liability litigation matters described in this section for which a liability has been recorded, the Company
believes the amount recorded is not material to the Company's consolidated results of operations or financial condition. In
addition, the Company is not able to estimate a possible loss or range of loss in excess of the established accruals at
this time.
NOTE 13. Stock-Based Compensation
The 3M 2008 Long-Term Incentive Plan (LTIP), as discussed in 3M's Current Report on Form 8-K dated May 17, 2016 (which
updated 3M's 2015 Annual Report on Form 10-K), provides for the issuance or delivery of up to 100 million shares of 3M
common stock (including additional shareholder approvals subsequent to 2008) pursuant to awards granted under the plan. In
May 2016, shareholders approved the 2016 LTIP, providing an additional 23,965,000 shares, increasing the number of approved
shares to 123,965,000 shares. The 2016 LTIP succeeds the 3M 2008 LTIP. Awards may be issued in the form of incentive stock
options, nonqualified stock options, progressive stock options, stock appreciation rights, restricted stock, restricted
stock units, other stock awards, and performance units and performance shares. Awards denominated in shares of common stock
other than options and Stock Appreciation Rights, count against the 123,965,000 share limit as 3.38 shares for every one
share covered by such award (for full value awards with grant dates prior to May 11, 2010), as 2.87 shares for every one
share covered by such award (for full value awards with grant dates on or after May 11, 2010 and prior to May 8, 2012), as
3.50 shares for every one share covered by such award (for full value awards with grant dates on or after of May 8, 2012
and prior to May 10, 2016), or as 2.50 shares for every one share covered by such award (for full value awards with grant
dates of May 10, 2016 or later). The remaining total shares available for grant under the LTIP Program are 35,855,889 as of
September 30, 2016.
The Company's annual stock option and restricted stock unit grant is made in February to provide a strong and immediate
link between the performance of individuals during the preceding year and the size of their annual stock compensation
grants. The grant to eligible employees uses the closing stock price on the grant date. Accounting rules require
recognition of expense under a non-substantive vesting period approach, requiring compensation expense recognition when an
employee is eligible to retire. Employees are considered eligible to retire at age 55 and after having completed ten years
of service. This retiree-eligible population represents 35 percent of the 2016 annual grant stock-based compensation award
expense dollars; therefore, higher stock-based compensation expense is recognized in the first quarter.
In addition to the annual grants, the Company makes other minor grants of stock options, restricted stock units and other
stock-based grants. The Company issues cash settled restricted stock units and stock appreciation rights in certain
countries. These grants do not result in the issuance of common stock and are considered immaterial by the Company.
During the first quarter of 2016, the Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment
Accounting. The adoption is required to be implemented prospectively and resulted in income tax benefits of $35 million and
$175 million in the third quarter and first nine months of 2016, respectively. See Note 1 for additional information
regarding ASU No. 2016-09.
Amounts recognized in the financial statements with respect to stock-based compensation programs, which include stock
options, restricted stock, restricted stock units, performance shares and the General Employees' Stock Purchase Plan
(GESPP), are provided in the following table. Capitalized stock-based compensation amounts were not material.
Stock-Based Compensation Expense
Three months ended Nine months ended
September 30, September 30,
(Millions) 2016 2015 2016 2015
Cost of sales $ 8 $ 8 $ 39 $ 39
Selling, general and administrative expenses 36 31 166 154
Research, development and related expenses 7 7 39 40
Stock-based compensation expenses $ 51 $ 46 $ 244 $ 233
Income tax benefits $ (49) $ (13) $ (248) $ (74)
Stock-based compensation expenses (benefits), net of tax $ 2 $ 33 $ (4) $ 159
Stock Option Program
The following table summarizes stock option activity during the nine months ended September 30, 2016:
Weighted
Weighted Remaining Aggregate
Number of Average Contractual Intrinsic Value
Options Exercise Price Life (months) (millions)
Under option -
January 1 38,552,445 $ 102.01
Granted:
Annual 5,591,727 147.99
Exercised (7,318,470) 86.67
Canceled (189,747) 148.16
September 30 36,635,955 $ 111.85 72 $ 2,358
Options exercisable
September 30 25,622,123 $ 95.54 59 $ 2,067
Stock options vest over a period from one year to three years with the expiration date at 10 years from date of grant. As
of September 30, 2016, there was $87 million of compensation expense that has yet to be recognized related to non-vested
stock option based awards. This expense is expected to be recognized over the remaining weighted-average vesting period of
22 months. The total intrinsic values of stock options exercised were $573 million and $393 million during the nine months
ended September 30, 2016 and 2015, respectively. Cash received from options exercised was $630 million and $413 million for
the September 30, 2016 and 2015, respectively. The Company's actual tax benefits realized for the tax deductions related to
the exercise of employee stock options were $212 million and $145 million for the nine months ended September 30, 2016 and
2015, respectively.
For the primary 2016 annual stock option grant, the weighted average fair value at the date of grant was calculated using
the Black-Scholes option-pricing model and the assumptions that follow.
Stock Option Assumptions
Annual
2016
Exercise price $ 147.87
Risk-free interest rate 1.5 %
Dividend yield 2.5 %
Expected volatility 20.8 %
Expected life (months) 77
Black-Scholes fair value $ 22.47
Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period.
For the 2016 annual grant date, the Company estimated the expected volatility based upon the average of the most recent one
year volatility, the median of the term of the expected life rolling volatility, the median of the most recent term of the
expected life volatility of 3M stock, and the implied volatility on the grant date. The expected term assumption is based
on the weighted average of historical grants.
Restricted Stock and Restricted Stock Units
The following table summarizes restricted stock and restricted stock unit activity during the nine months ended September
30, 2016:
Weighted
Average
Number of Grant Date
Awards Fair Value
Nonvested balance -
As of January 1 2,441,088 $ 127.47
Granted
Annual 749,068 148.20
Other 8,115 169.00
Vested (933,455) 101.34
Forfeited (39,507) 144.14
As of September 30 2,225,309 $ 145.27
As of September 30, 2016, there was $100 million of compensation expense that has yet to be recognized related to
non-vested restricted stock units and restricted stock. This expense is expected to be recognized over the remaining
weighted-average vesting period of 24 months. The total fair value of restricted stock units and restricted stock that
vested during the nine months ended September 30, 2016 and 2015 was $145 million and $165 million, respectively. The
Company's actual tax benefits realized for the tax deductions related to the vesting of restricted stock units and
restricted stock was $54 million and $62 million for the nine months ended September 30, 2016 and 2015, respectively.
Restricted stock units granted generally vest three years following the grant date assuming continued employment. Dividend
equivalents equal to the dividends payable on the same number of shares of 3M common stock accrue on these restricted stock
units during the vesting period, although no dividend equivalents are paid on any of these restricted stock units that are
forfeited prior to the vesting date. Dividends are paid out in cash at the vest date on restricted stock units. Since the
rights to dividends are forfeitable, there is no impact on basic earnings per share calculations. Weighted average
restricted stock unit shares outstanding are included in the computation of diluted earnings per share.
Performance Shares
Instead of restricted stock units, the Company makes annual grants of performance shares to members of its executive
management. The 2016 performance criteria for these performance shares (organic volume growth, return on invested capital,
free cash flow conversion, and earning per share growth) were selected because the Company believes that they are important
drivers of long-term stockholder value. The number of shares of 3M common stock that could actually be delivered at the end
of the three-year performance period may be anywhere from 0% to 200% of each performance share granted, depending on the
performance of the Company during such performance period. Non-substantive vesting requires that expense for the
performance shares be recognized over one or three years depending on when each individual became a 3M executive. Prior to
the 2016 performance share grant, performance shares did not accrue dividends during the performance period. Therefore, the
grant date fair value was determined by reducing the closing stock price on the date of grant by the net present value of
dividends during the performance period. The 2016 performance share grant accrues dividends, therefore the grant date fair
value is equal to the closing stock price on the date of grant. Since the rights to dividends are forfeitable, there is no
impact on basic earnings per share calculations. Weighted average performance shares whose performance period is complete
are included in computation of diluted earnings per share.
The following table summarizes performance share activity during the nine months ended September 30, 2016:
Weighted
Average
Number of Grant Date
Awards Fair Value
Undistributed balance -
As of January 1 871,192 $ 120.89
Granted 214,710 159.98
Distributed (367,428) 99.06
Performance change (65,246) 157.21
Forfeited (23,542) 147.99
As of September 30 629,686 $ 142.18
As of September 30, 2016, there was $22 million of compensation expense that has yet to be recognized related to
performance shares. This expense is expected to be recognized over the remaining weighted-average earnings period of 10
months. The total fair values of performance shares that were distributed were $54 million for both the nine months ended
September 30, 2016 and 2015. The Company's actual tax benefits realized for the tax deductions related to the distribution
of performance shares were $15 million for both the nine months ended September 30, 2016 and 2015.
NOTE 14. Business Segments
3M's businesses are organized, managed and internally grouped into segments based on differences in markets, products,
technologies and services. 3M manages its operations in five business segments: Industrial; Safety and Graphics; Health
Care; Electronics and Energy; and Consumer. 3M's five business segments bring together common or related 3M technologies,
enhancing the development of innovative products and services and providing for efficient sharing of business resources.
Transactions among reportable segments are recorded at cost. 3M is an integrated enterprise characterized by substantial
intersegment cooperation, cost allocations and inventory transfers. Therefore, management does not represent that these
segments, if operated independently, would report the operating income information shown. The difference between operating
income and pre-tax income relates to interest income and interest expense, which are not allocated to business segments.
Effective in the first quarter of 2016, 3M made a product line reporting change involving two of its business segments in
its continuing effort to improve the alignment of its businesses around markets and customers.
The change between business segments was as follows:
· Elements of the electronic bonding product lines were previously separately reflected in the Electronics Materials
Solutions Division (Electronics and Energy business segment) and the Industrial Adhesives and Tapes Division (Industrial
business segment). Effective in the first quarter of 2016, certain sales and operating income results for these electronic
bonding product lines in aggregate were equally divided between the Electronics and Energy business segment and Industrial
business segment. This change resulted in a decrease in net sales and operating income for total year 2015 of $33 million
and $7 million, respectively, in the Industrial business segment offset by a corresponding increase in the Electronics and
Energy business segment.
The financial information presented herein reflects the impact of the preceding product line reporting change between
business segments for all periods presented.
Business Segment Information
Three months ended Nine months ended
September 30, September 30,
(Millions) 2016 2015 2016 2015
Net Sales
Industrial $ 2,582 $ 2,557 $ 7,789 $ 7,845
Safety and Graphics 1,448 1,417 4,359 4,221
Health Care 1,361 1,346 4,148 4,039
Electronics and Energy 1,293 1,397 3,618 4,033
Consumer 1,209 1,162 3,388 3,321
Corporate and Unallocated 2 1 7 (1)
Elimination of Dual Credit (186) (168) (529) (482)
Total Company $ 7,709 $ 7,712 $ 22,780 $ 22,976
Operating Income
Industrial $ 591 $ 578 $ 1,823 $ 1,782
Safety and Graphics 364 324 1,120 1,023
Health Care 429 432 1,344 1,280
Electronics and Energy 312 344 749 907
Consumer 317 293 836 792
Corporate and Unallocated (69) (58) (198) (232)
Elimination of Dual Credit (40) (37) (116) (106)
Total Company $ 1,904 $ 1,876 $ 5,558 $ 5,446
Corporate and unallocated operating income includes a variety of miscellaneous items, such as corporate investment gains
and losses, certain derivative gains and losses, certain insurance-related gains and losses, certain litigation and
environmental expenses, corporate restructuring charges and certain under- or over-absorbed costs (e.g. pension,
stock-based compensation) that the Company may choose not to allocate directly to its business segments. Because this
category includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.
3M business segment reporting measures include dual credit to business segments for certain U.S. sales and related
operating income. Management evaluates each of its five business segments based on net sales and operating income
performance, including dual credit U.S. reporting to further incentivize U.S. sales growth. As a result, 3M provides
additional ("dual") credit to those business segments selling products in the U.S. to an external customer when that
segment is not the primary seller of the product. For example, certain respirators are primarily sold by the Personal
Safety Division within the Safety and Graphics business segment; however, the Industrial business segment also sells this
product to certain customers in its U.S. markets. In this example, the non-primary selling segment (Industrial) would also
receive credit for the associated net sales it initiated and the related approximate operating income. The assigned
operating income related to dual credit activity may differ from operating income that would result from actual costs
associated with such sales. The offset to the dual credit business segment reporting is reflected as a reconciling item
entitled "Elimination of Dual Credit," such that sales and operating income for the U.S. in total are unchanged.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM*
To the Stockholders and Board of Directors of 3M Company:
We have reviewed the accompanying consolidated balance sheet of 3M Company and its subsidiaries as of September 30, 2016,
and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended
September 30, 2016 and 2015 and the consolidated statements of cash flows for the nine-month periods ended September 30,
2016 and 2015. These interim financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).
A review of interim financial information consists principally of applying analytical procedures and making inquiries of
persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is
the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated
interim financial statements for them to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet as of December 31, 2015, and the related consolidated statements of income, comprehensive
income, changes in equity, and cash flows for the year then ended (not presented herein), and in our report dated February
11, 2016, except with respect to our opinion on the consolidated financial statements insofar as it relates to the business
segment reporting changes discussed in Notes 3 and 16 as to which the date is May 17, 2016, which included a paragraph that
described the change in the manner of accounting for marketable securities and deferred tax assets and liabilities, we
expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet information as of December 31, 2015, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
November 1, 2016
* Pursuant to Rule 436(c) of the Securities Act of 1933 ("Act") this should not be considered a "report" within the
meaning of Sections 7 and 11 of the Act and the independent registered public accounting firm liability under Section 11
does not extend to it.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a
reader of 3M's financial statements with a narrative from the perspective of management. 3M's MD&A is presented in the
following sections:
· Overview
· Results of Operations
· Performance by Business Segment
· Financial Condition and Liquidity
· Cautionary Note Concerning Factors That May Affect Future Results
Forward-looking statements in Part I, Item 2 may involve risks and uncertainties that could cause results to differ
materially from those projected (refer to the section entitled "Cautionary Note Concerning Factors That May Affect Future
Results" in Part I, Item 2 and the risk factors provided in Part II, Item 1A for discussion of these risks and
uncertainties).
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. 3M
manages its operations in five operating business segments: Industrial; Safety and Graphics; Health Care; Electronics and
Energy; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a
combined basis. Any references to "Membrana" refer to the former Separations Media business acquired by 3M from Polypore in
2015.
As described in 3M's Quarterly Report on Form 10-Q for the period ended March 31, 2016, and also in 3M's Current Report on
Form 8-K dated May 17, 2016 (which updated 3M's 2015 Annual Report on Form 10-K), effective in the first quarter of 2016,
3M made a product line reporting change involving two of its business segments. Segment information presented herein
reflects the impact of these changes for all periods presented. Refer to Note 14 for additional detail. This quarterly
report on Form 10-Q should be read in conjunction with the Company's consolidated statements and notes included in its
Current Report on Form 8-K dated May 17, 2016.
3M diluted earnings per share increased by approximately 5 percent and 6 percent in the third quarter and first nine months
of 2016, respectively, when compared to the same periods last year.
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