REG - 3M Company - 3rd Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 5
01/11/2017 07:06
- Part 5: For the preceding part double click ID:nRSA1805Vd
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 asked that if the court finds that
the State is entitled to any of the damages it sought, 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 sought declaratory relief under MERA. In May 2017, the Metropolitan
Council paid 3M approximately $1 million and agreed to dismiss its claims against 3M. As part of the settlement agreement,
3M agreed to dismiss its claims against the Metropolitan Council.
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. Trial of the NRD Lawsuit is scheduled to begin in February 2018. 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. In February 2017, Covington settled this lawsuit with a payment by Covington or its insurer to 3M that is
not material to 3M's results of operations or financial condition.
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, 2017, the Company had recorded liabilities of $38 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 $8 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, 2017, the Company had recorded liabilities of $27 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. During the first
quarter of 2017, the Company collected from its insurer the outstanding receivable of $15 million related to "other
environmental liabilities."
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
Department of Labor Investigation
The U.S. Department of Labor (DOL) notified 3M in April 2015 that it had commenced an investigation of 3M's pension plan
pursuant to the federal Employee Retirement Income Security Act of 1974, as amended (ERISA). The DOL has stated its
investigation relates to certain private equity investments, plan expenses, securities lending, and distributions of plan
benefits. In response to certain DOL requests, 3M produced documents and made employees available for interviews. In
December 2016, the DOL issued certain subpoenas to 3M and 3M Investment Management Corp. relating to this investigation. 3M
has produced additional responsive documents and is cooperating with the DOL in its investigation. 3M anticipates that the
DOL will conclude its investigation in the first half of 2018.
Product Liability Litigation
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. The Company reached an agreement in principle to settle those two cases and finalized the
settlement during the second quarter of 2017. The amounts agreed to in each of these settlements were not material to the
Company's consolidated results of operations or financial condition.
As of September 30, 2017, the Company is a named defendant in lawsuits involving approximately 3,850 plaintiffs (compared
to approximately 1,260 plaintiffs at December 31, 2016), 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. The federal court has set a trial-ready date in the second quarter of 2018 for the
two federal court bellwether cases. The parties are negotiating a trial date for the remaining state court bellwether
candidate. 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, 2017, there are two
lawsuits pending that were brought by dentists and dental practices against 3M. The complaints allege 3M marketed and sold
defective Lava Ultimate material used for dental crowns to dentists 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 and costs. One lawsuit, pending in
the U.S. District Court for the District of Minnesota, is a class action that names 39 plaintiffs and seeks certification
of a class of dentists in the United States and its territories, and alternatively seeks subclasses in 13 states. The other
lawsuit is an individual complaint against 3M in Madison County, Illinois.
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 2016 Long-Term Incentive Plan (LTIP), as discussed in 3M's Current Report on Form 8-K dated May 4, 2017 (which
updated 3M's 2016 Annual Report on Form 10-K), provides for the issuance or delivery of up to 123,965,000 shares of 3M
common stock pursuant to awards granted under the plan. 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. The remaining total shares available for grant under the
LTIP Program are 30,232,906 as of September 30, 2017.
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 the full recognition of compensation
expense by the date an employee is eligible to retire if awards become fully vested upon retirement. Under the LTIP, 3M
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 2017 annual grant stock-based compensation award expense dollars;
therefore, higher stock-based compensation expense is recognized in the first quarter of each fiscal year.
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.
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 for the three
and nine months ended September 30, 2017 and 2016.
Stock-Based Compensation Expense
Three months ended Nine months ended
September 30, September 30,
(Millions) 2017 2016 2017 2016
Cost of sales $ 9 $ 8 $ 41 $ 39
Selling, general and administrative expenses 45 36 186 166
Research, development and related expenses 6 7 39 39
Stock-based compensation expenses $ 60 $ 51 $ 266 $ 244
Income tax benefits $ (35) $ (49) $ (257) $ (248)
Stock-based compensation expenses (benefits), net of tax $ 25 $ 2 $ 9 $ (4)
Stock Option Program
The following table summarizes stock option activity during the nine months ended September 30, 2017:
Weighted
Average
Weighted Remaining Aggregate
Number of Average Contractual Intrinsic Value
Options Exercise Price Life (months) (millions)
Under option -
January 1 36,196,232 $ 112.07
Granted:
Annual 5,409,628 175.93
Exercised (5,203,405) 90.05
Canceled (137,827) 161.38
September 30 36,264,628 $ 124.57 72 $ 3,095
Options exercisable
September 30 25,532,812 $ 107.67 59 $ 2,610
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, 2017, there was $85 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 $526 million and $573 million during the nine months
ended September 30, 2017 and 2016, respectively. Cash received from options exercised was $468 million and $630 million for
the nine months ended September 30, 2017 and 2016, respectively. The Company's actual tax benefits realized for the tax
deductions related to the exercise of employee stock options were $179 million and $212 million for the nine months ended
September 30, 2017 and 2016, respectively.
For the primary 2017 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
2017
Exercise price $ 175.76
Risk-free interest rate 2.1 %
Dividend yield 2.5 %
Expected volatility 17.3 %
Expected life (months) 78
Black-Scholes fair value $ 23.51
Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period.
For the 2017 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 life 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, 2017:
Weighted
Average
Number of Grant Date
Awards Fair Value
Nonvested balance -
As of January 1 2,185,046 $ 145.64
Granted
Annual 604,256 176.10
Other 2,986 179.64
Vested (761,484) 126.78
Forfeited (39,352) 157.63
As of September 30 1,991,452 $ 161.90
As of September 30, 2017, there was $93 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 22 months. The total fair value of restricted stock units and restricted stock that vested during the
nine months ended September 30, 2017 and 2016 was $135 million and $145 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 $44
million and $54 million for the nine months ended September 30, 2017 and 2016, 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 2017 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. The 2017
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, 2017:
Weighted
Average
Number of Grant Date
Awards Fair Value
Undistributed balance -
As of January 1 656,278 $ 142.98
Granted 198,910 190.84
Distributed (313,942) 124.88
Performance change 107,034 173.58
Forfeited (10,769) 169.38
As of September 30 637,511 $ 171.52
As of September 30, 2017, there was $36 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 $55 million and $54 million for the nine
months ended September 30, 2017 and 2016, respectively. 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, 2017 and
2016.
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 2017, as part of 3M's continuing effort to improve the alignment of its businesses around
markets and customers the Company made the following changes:
1. Integrated the former Renewable Energy Division into existing divisions;
2. Combined two divisions to form the Automotive and Aerospace Solutions Division; and
3. Consolidated U.S. customer account activity - impacting dual credit reporting
Integration of former Renewable Energy Division
· The (i) solar and wind and (ii) energy product lines (along with certain technology previously included in Corporate
and Unallocated) of the former Renewable Energy Division (RED) were integrated into the existing Electrical Markets
Division and Electronics Materials Solutions Division, respectively, within the Electronics and Energy business segment. In
addition, the former RED's window film product lines were moved into the Commercial Solutions Division within the Safety
and Graphics business segment. This change resulted in a decrease in previously reported net sales and operating income for
total year 2016 of $203 million and $38 million, respectively, in the Electronics and Energy segment. These decreases were
offset by a $207 million and $29 million increase in previously reported total year 2016 net sales and operating income,
respectively, in the Safety and Graphics business segment and a $4 million decrease and $9 million increase in previously
reported net sales and operating income, respectively, in Corporate and Unallocated.
Creation of Automotive and Aerospace Solutions Division
· The former Automotive Division and Aerospace and Commercial Transportation Division (both within the Industrial
business segment) were combined to create the Automotive and Aerospace Solutions Division. Because this realignment was
within the Industrial business segment, it had no impact on business segment reporting.
Consolidation of U.S. customer account activity - impacting dual credit reporting
· The Company consolidated its customer account activity in the U.S. into more centralized sales districts to better
serve customers. As discussed further below, 3M business segment reporting measures include dual credit to business
segments for certain U.S. sales and related operating income. This dual credit is based on which business segment provides
customer account activity ("sales district") with respect to a particular product sold in the U.S. Previously, a customer
in the U.S. may have been aligned to several sales districts associated with multiple divisions or segments based on the
individual products the customer purchased across 3M's portfolio. The alignment of U.S. customer accounts to fewer, more
focused sales districts therefore changed the attribution of dual credit across 3M's business segments. As a result,
previously reported aggregate business segment net sales and operating income for total year 2016 increased $163 million
and $36 million, respectively, offset by similar increases in the elimination of dual credit net sales and operating income
amounts.
The financial information presented herein reflects the impact of the preceding business segment reporting changes for all
periods presented.
Business Segment Information
Three months ended Nine months ended
September 30, September 30,
(Millions) 2017 2016 2017 2016
Net Sales
Industrial $ 2,764 $ 2,603 $ 8,193 $ 7,856
Safety and Graphics 1,529 1,500 4,603 4,538
Health Care 1,476 1,371 4,339 4,176
Electronics and Energy 1,414 1,250 3,838 3,468
Consumer 1,236 1,210 3,415 3,390
Corporate and Unallocated 1 2 5 5
Elimination of Dual Credit (248) (227) (726) (653)
Total Company $ 8,172 $ 7,709 $ 23,667 $ 22,780
Operating Income
Industrial $ 614 $ 595 $ 1,762 $ 1,837
Safety and Graphics 410 372 1,661 1,152
Health Care 471 431 1,317 1,350
Electronics and Energy 394 304 920 716
Consumer 307 317 724 836
Corporate and Unallocated (100) (65) (225) (189)
Elimination of Dual Credit (55) (50) (160) (144)
Total Company $ 2,041 $ 1,904 $ 5,999 $ 5,558
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 reflects
additional ("dual") credit to another business segment when the customer account activity ("sales district") with respect
to the particular product sold to the external customer in the U.S. is provided by a different business segment. This
additional dual credit is largely reflected at the division level. For example, certain respirators are primarily sold by
the Personal Safety Division within the Safety and Graphics business segment; however, a sales district within the
Industrial business segment provides the contact for sales of the product to particular customers in the U.S. market. In
this example, the non-primary selling segment (Industrial) would also receive credit for the associated net sales initiated
though its sales district 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.
Certain sales and operating income results for electronic bonding product lines are equally divided between the Electronics
and Energy business segment and the Industrial business segment.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM*
To the Shareholders 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, 2017,
and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended
September 30, 2017 and 2016 and the consolidated statements of cash flows for the nine-month periods ended September 30,
2017 and 2016. 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, 2016, 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
9, 2017, 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 4, 2017, 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, 2016, 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
October 31, 2017
* 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.
As described in 3M's Quarterly Reports on Form 10-Q for the periods ended March 31, 2017 and June 30, 2017, and also in
3M's Current Report on Form 8-K dated May 4, 2017 (which updated 3M's 2016 Annual Report on Form 10-K), effective in the
first quarter of 2017, the Company changed its business segment reporting in its continued effort to improve the alignment
of businesses around markets and customers. These changes included the integration of the former Renewable Energy Division
into existing divisions, the combination of two divisions to form the Automotive and Aerospace Solutions Division, and
consolidation of U.S. customer account activity, impacting dual credit reporting. Business 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 4, 2017.
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.
Earnings per share attributable to 3M common shareholders - diluted:
The following table provides the increase (decrease) in diluted earnings per share for the three months and nine months
ended September 30, 2017 compared to 2016.
Three months ended Nine months ended
(Earnings per diluted share) September 30, 2017 September 30, 2017
Same period last year $ 2.15 $ 6.28
Increase/(decrease) in earnings per share - diluted, due to:
Organic growth/productivity 0.23 0.53
Foreign exchange impacts (0.03) (0.12)
Income tax rate 0.01 0.21
Shares of common stock outstanding/net interest 0.02 0.08
Divestiture gains - 0.56
Operating loss/(income) from divested businesses 0.01 -
Incremental strategic investments (0.06) (0.46)
Current period $ 2.33 $ 7.08
Earnings per diluted share increased 18 cents (or 8.4 percent) and 80 cents (or 12.7 percent) in the third quarter and
first nine months of 2017, respectively, when compared to the same periods last year. Organic growth/productivity includes
benefits from higher organic local-currency sales, raw material cost decreases, and business transformation, which is
having a positive impact on 3M's productivity efforts. These benefits were partially offset by higher defined benefit
pension expenses. During both the third quarter and first nine months of 2017, organic growth was the primary driver for
the year-on-year benefit.
Foreign currency impacts (net of hedging) decreased pre-tax earnings by approximately $29 million and $108 million
year-on-year in the third quarter and first nine months of 2017, respectively, excluding the impact of foreign currency
changes on tax rates. This is equivalent to a year-on-year decrease of 3 cents and 12 cents per diluted share for the third
quarter and first nine months of 2017, respectively.
The effective income tax rate was 28.3 percent in the third quarter of 2017, a decrease of 0.2 percentage points versus
last year's third quarter, and 26.1 percent in the first nine months of 2017, a decline of 2.2 percentage points versus
last year's first nine months. The third quarter and first nine months 2017 change in tax rate was driven by a number of
factors as referenced in Note 6.
Lower shares outstanding, partially offset by higher interest expense, increased earnings per share. Weighted-average
diluted shares outstanding in the third quarter and first nine months of 2017 declined 1.0 percent and 1.3 percent
year-on-year, respectively, which benefited earnings per share. The decrease in the outstanding weighted-average diluted
shares relates to the Company's purchase of $380 million and $1.6 billion of its own stock in the third quarter and first
nine months of 2017, respectively. Higher net interest expense was largely due to higher U.S. average debt balances and
higher interest rates.
The third quarter and first nine months of 2017 had year-on-year operating income impacts from the following divestitures:
Polyfoam and the remaining portion of the library system business (both in first quarter 2016), protective films business
and cathode battery technology out-license business (both in fourth quarter 2016), prescription safety eyewear business
(January 2017), and identity management business and tolling and automated license/number plate recognition business (both
in the second quarter of 2017).
There was no incremental gain on divestiture impact during the third quarter of 2017. The pre-tax operating income increase
during the first nine months of 2017 was approximately $450 million year-on-year, which is equivalent to a year-on-year
increase of 56 cents per diluted share (largely related to the identify management business).
Divestiture lost operating loss/(income) impacts, which are measured for the first twelve months post-transaction,
increased pre-tax earnings by approximately $10 million and decreased pre-tax earnings by approximately $2 million for the
third quarter and first nine months of 2017, respectively.
Operating income results include year-on-year incremental strategic investments that decreased pre-tax earnings by
approximately $48 million and $362 million in the third quarter and first nine months of 2017, respectively. These
incremental strategic investments are comprised of 3M's investments in growth initiatives and optimization of its portfolio
and supply chain footprint. Additional discussion on strategic investments is provided later within "Divestitures and
Strategic Investments" and also within the "Results of Operations" section.
Sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the three months and nine months
ended September 30, 2017 and 2016. In addition to the discussion below, refer to the section entitled "Performance by
Business Segment" later in MD&A for a more detailed discussion of the sales and operating income results of the Company and
its respective business segments (including Corporate and Unallocated). Refer to Note 14 for additional information on
business segments, including Elimination of Dual Credit. Further discussion of the Company's operating income results is in
the section entitled "Operating Income" within the "Results of Operations" section.
Three months ended September 30,
2017 2016 % change
Net Oper. Net Oper. Net Oper.
(Dollars in millions) Sales Income Sales Income Sales Income
Business Segments
Industrial $ 2,764 $ 614 $ 2,603 $ 595 6.2 % 3.1 %
Safety and Graphics 1,529 410 1,500 372 1.9 % 10.5 %
Health Care 1,476 471 1,371 431 7.7 % 9.3 %
Electronics and Energy 1,414 394 1,250 304 13.1 % 29.9 %
Consumer 1,236 307 1,210 317 2.2 % (3.2) %
Corporate and Unallocated 1 (100) 2 (65) - -
Elimination of Dual Credit (248) (55) (227) (50) - -
Total Company $ 8,172 $ 2,041 $ 7,709 $ 1,904 6.0 % 7.2 %
Three months ended September 30, 2017
Organic
Worldwide local- Total
Sales Change Analysis currency sales
By Business Segment sales Divestitures Translation change
Industrial 6.1 % (0.6) % 0.7 % 6.2 %
Safety and Graphics 6.0 (4.9) 0.8 1.9
Health Care 6.9 - 0.8 7.7
Electronics and Energy 13.2 (0.1) - 13.1
Consumer 1.9 - 0.3 2.2
Total Company 6.6 % (1.2) % 0.6 % 6.0 %
Sales in U.S. dollars in the third quarter of 2017 increased 6.0 percent compared to the same period in 2016, with
increases in organic local-currency sales (which includes organic volume impacts plus selling price impacts) and foreign
currency translation, partially offset by divestiture impacts. Total company organic local-currency sales increased 6.6
percent, with growth in all business segments. Worldwide operating income margins for the third quarter of 2017 were 25.0
percent, compared to 24.7 percent for the third quarter of 2016, with operating income margins greater than 22 percent
across all five business segments.
Divestitures reduced third quarter sales growth by 1.2 percent. As part of its ongoing portfolio management process, 3M
sold its protective films business and cathode battery technology out-license business (both in fourth quarter 2016). In
addition, 3M sold its prescription safety eyewear business (January 2017), its identify management business (May 2017), and
its tolling and automated license/number plate recognition business (June 2017). Refer to Note 2 in the Consolidated
Financial Statements for additional detail.
Nine months ended September 30,
2017 2016 % change
Net Oper. Net Oper. Net Oper.
(Dollars in millions) Sales Income Sales Income Sales Income
Business Segments
Industrial $ 8,193 $ 1,762 $ 7,856 $ 1,837 4.3 % (4.1) %
Safety and Graphics 4,603 1,661 4,538 1,152 1.4 % 44.2 %
Health Care 4,339 1,317 4,176 1,350 3.9 % (2.4) %
Electronics and Energy 3,838 920 3,468 716 10.6 % 28.5 %
Consumer 3,415 724 3,390 836 0.7 % (13.4) %
Corporate and Unallocated 5 (225) 5 (189) - -
Elimination of Dual Credit (726) (160) (653) (144) - -
Total Company $ 23,667 $ 5,999 $ 22,780 $ 5,558 3.9 % 7.9 %
Nine months ended September 30, 2017
Organic
Worldwide local- Total
Sales Change Analysis currency sales
By Business Segment sales Divestitures Translation change
Industrial 5.2 % (0.6) % (0.3) % 4.3 %
Safety and Graphics 4.6 (3.0) (0.2) 1.4
Health Care 4.1 - (0.2) 3.9
Electronics and Energy 11.0 (0.2) (0.2) 10.6
Consumer 0.5 - 0.2 0.7
Total Company 5.0 % (0.9) % (0.2) % 3.9 %
Sales in U.S. dollars in the first nine months of 2017 increased 3.9 percent, with an increase in organic local-currency
sales partially offset by divestiture and foreign currency translation impacts. Total company organic local-currency sales
increased 5.0 percent, with growth in all business segments. All five of 3M's business segments achieved operating income
margins in excess of 21 percent. Worldwide operating income margins for the first nine months of 2017 were 25.3 percent,
compared to 24.4 percent for the first nine months of 2016, helped by a net benefit from divestiture gains, net of lost
operating income, partially offset by incremental strategic investments. Organic volume growth also benefited results.
In the first quarter of 2016, 3M completed the sale of the remaining portions of its library systems business. Also, in the
first quarter of 2016, 3M divested the assets of 3M's pressurized polyurethane foam adhesives business (formerly known as
Polyfoam). These businesses were formerly part of the Company's Safety and Graphics business and Industrial business,
respectively. Additional acquisition and divestiture impacts that impacted the first nine months ended September 30, 2017
are provided in the preceding third quarter discussion.
Sales by geographic area:
Percent change information compares the third quarter and first nine months of 2017 with the same periods last year, unless
otherwise indicated. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a
combined basis. Additional discussion of geographic area impacts by business segment is provided in the Performance by
Business Segment section.
Three months ended September 30, 2017
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 3,223 $ 2,580 $ 1,589 $ 784 $ (4) $
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