REG - 3M Company - 3rd Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 6
03/11/2014 08:05
- Part 6: For the preceding part double click ID:nRSC9102Ve
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 option will continue throughout the balance of 2014 and is expected to be
completed in 2017.
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 2014.
In February 2014, the Company submitted its most recent environmental assessment report to the Illinois Environmental
Protection Agency summarizing the levels of PFCs in the soil, groundwater and surface water at or near its manufacturing
facility in Cordova, Illinois. The Company will continue to monitor PFCs at the site and is engaged in discussions with the
Illinois EPA concerning next steps for the site. In August 2014, the Illinois EPA approved a request by the Company to
establish a groundwater management zone at the site, 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, 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.
Also, 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) granted the Company's motion to abate the case, effectively putting the case on hold pending the resolution of
class certification issues in the first action described above, filed in the same court in 2002. 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 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 defendants in the case include 3M, Daikin America, Inc., Synagro-WWT,
Inc., Synagro South, LLC, and Biological Processors of America. 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 first case filed there. In May 2013, the court
stayed the case due to co-defendant Synagro's bankruptcy filing. The parties are to report the status of the bankruptcy to
the court on or before December 31, 2014.
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 biosolids from one or more of its wastewater treatment plants onto agricultural lands
and local area landfills. Accordingly, 3M requested that if the Court finds that the State is entitled to any of the
damages the State seeks, 3M seeks 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. In a
separate but related action, the Company filed suit 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.
The State of New Jersey filed suit in 2005 against Occidental Chemical Corporation, Tierra Solutions Inc., Maxus Energy
Corporation and five other companies seeking cleanup and removal costs and other damages associated with the presence of
dioxin and other hazardous substances in the sediment of a 17-mile stretch of the Passaic River in New Jersey. In June
2009, the Company, along with more than 250 other companies, was served with a third-party complaint by Tierra Solutions
Inc. and Maxus Energy Corporation seeking contribution towards the cost and damages asserted or incurred for investigation
and remediation of discharges to the Passaic River. The third-party complaint seeks to spread those costs among the
third-party defendants, including 3M. Allegations asserted against 3M relate to its use of two commercial drum conditioning
facilities in New Jersey. In March 2013, 3M and other third party defendants entered into a settlement agreement with the
state of New Jersey for an amount that is not material to 3M. In December 2013, the Court approved the settlement and
entered the Consent Judgment. The settlement resolves claims or potential claims by the State of New Jersey regarding
discharges or alleged discharges into the Passaic River by the settling parties, and precludes certain cost recovery
actions by the third-party plaintiffs. The settlement with the State of New Jersey does not include release from potential
federal claims yet to be asserted. Total costs for the remedy currently proposed by EPA could easily exceed $1 billion.
While the Company does not yet have a basis for estimating its potential exposure in the yet to be asserted EPA claim, the
Company currently believes its allocable share of the possible loss, if any, is likely to be a fraction of one percent of
the total costs because of the Company's limited potential involvement at this site.
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 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, with the exception of the Passaic River litigation, where
the Company's potential exposure, if any, is likely to be a fraction of one percent of the total costs.
Environmental Liabilities and Insurance Receivables
As of September 30, 2014, the Company had recorded liabilities of $26 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, 2014, the Company had recorded liabilities of $44 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, 2014, 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
In October 2012, four plaintiffs filed purported class actions against Ceradyne, Inc., its directors, 3M, and Cyborg
Acquisition Corporation (a direct wholly owned subsidiary of 3M) in connection with 3M's proposed acquisition of Ceradyne.
Two suits were filed in California Superior Court for Orange County, and two were filed in the Delaware Chancery Court. The
suits alleged that the defendants breached and/or aided and abetted the breach of their fiduciary duties to Ceradyne by
seeking to sell Ceradyne through an allegedly unfair process and for an unfair price and on unfair terms, and/or by
allegedly failing to make adequate disclosures to Ceradyne stockholders regarding the acquisition of Ceradyne. 3M completed
its acquisition of Ceradyne in November 2012. In November 2012, the parties reached a settlement with the California
plaintiffs for an amount that is not material to the Company, while the Delaware plaintiffs dismissed their complaints
without prejudice. The settlement will bind all former Ceradyne shareholders and has received preliminary approval from the
California court. A final approval hearing was held in July 2013, and the California Court denied approval of the
settlement. The plaintiffs filed a motion for reconsideration of the denial of approval of the settlement, which motion was
denied by the California court. The plaintiffs then filed a motion for leave to amend their complaint, which motion was
denied without prejudice in January 2014. By stipulation in February 2014, plaintiffs agreed to voluntarily dismiss claims
against 3M and Cyborg Acquisition Corporation without prejudice. In March 2014, the Court entered its Order dismissing 3M
and Cyborg Acquisition Corporation from the action without prejudice.
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 does not make finished goods, but
sells filter media to competitors of 3M's respirator and furnace filter businesses. 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. The special master's recommendations were
forwarded to the court in September 2013. On April 21, 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 the amount of approximately $26 million. In July 2014, 3M filed a notice of appeal of the judgment
to the U.S. Court of Appeals for the Federal Circuit. The parties will submit their briefs over the next several months.
Oral argument is expected in May or June 2015, with a decision to follow thereafter.
For commercial litigation matters described in this section for which a liability has not been recorded, the Company
believes that 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, with the exception of the TransWeb matter, where the Company's range of potential exposure, if any,
could be approximately $26 million.
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 is not dispositive of liability or damages and is subject to numerous factual and legal
challenges that will be raised with the court. The commercial court may take from six months to one year to render its
decision.
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. 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 on an amicable basis claims of two other customers arising
out of the same issue.
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 12. Stock-Based Compensation
The 3M 2008 Long-Term Incentive Plan, as discussed in 3M's Current Report on Form 8-K dated May 15, 2014 (which updated
3M's 2013 Annual Report on Form 10-K), provides for the issuance or delivery of up to 100 million shares of 3M common stock
pursuant to awards granted under the plan. Awards under this plan may be issued in the form of Incentive Stock Options,
Nonqualified Stock Options, Progressive Stock Options, Stock Appreciation Rights, Restricted Stock Units, Restricted Stock,
Other Stock Awards, and Performance Units and Performance Shares. The remaining total shares available for grant under the
2008 Long Term Incentive Plan Program are 29,004,028 as of September 30, 2014.
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 five years
of service. This retiree-eligible population represents 33 percent of the 2014 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.
Amounts recognized in the financial statements with respect to stock-based compensation programs, which include stock
options, restricted stock units, restricted stock, 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 nine
months ended September 30, 2014 and 2013.
Stock-Based Compensation Expense
Three months ended Nine months ended
September 30, September 30,
(Millions) 2014 2013 2014 2013
Cost of sales $ 9 $ 5 $ 42 $ 23
Selling, general and administrative expenses 31 36 143 149
Research, development and related expenses 7 6 36 25
Stock-based compensation expenses $ 47 $ 47 $ 221 $ 197
Income tax benefits $ (14) $ (14) $ (67) $ (59)
Stock-based compensation expenses, net of tax $ 33 $ 33 $ 154 $ 138
The following table summarizes stock option activity during the nine months ended September 30, 2014:
Stock Option Program
Number ofOptions Weighted Average ExercisePrice Weighted Average RemainingContractualLife (months) AggregateIntrinsic Value(millions)
Under option -
January 1 43,938,778 $ 83.84
Granted:
Annual 5,736,183 126.77
Exercised (7,765,197) 82.63
Canceled (189,110) 104.46
September 30 41,720,654 $ 89.88 66 $ 2,161
Options exercisable
September 30 29,955,673 $ 81.43 51 $ 1,805
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, 2014, there was $73 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
23 months. The total intrinsic values of stock options exercised were $437 million and $444 million during the nine months
ended September 30, 2014 and 2013, respectively. Cash received from options exercised was $642 million and $1.282 billion
for the nine months ended September 30, 2014 and 2013, respectively. The Company's actual tax benefits realized for the tax
deductions related to the exercise of employee stock options were $161 million and $164million during the nine months ended
September 30, 2014 and 2013, respectively.
For the primary 2014 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.
Annual
Stock Option Assumptions 2014
Exercise price $ 126.72
Risk-free interest rate 1.9 %
Dividend yield 2.6 %
Expected volatility 20.8 %
Expected life (months) 75
Black-Scholes fair value $ 19.63
Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period.
For the 2014 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.
The following table summarizes restricted stock and restricted stock unit activity during the nine months ended September
30, 2014:
Restricted Stock Units and Restricted Stock
Weighted Average
Restricted Stock Units and Number of Grant Date
Restricted Stock Awards Fair Value
Nonvested balance -
As of January 1 3,105,361 $ 92.31
Granted:
Annual 798,615 126.79
Other 27,668 142.83
Vested (1,091,410) 90.43
Forfeited (51,287) 98.21
As of September 30 2,788,947 $ 103.31
As of September 30, 2014, 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 24 months. The total fair value of restricted stock units and restricted stock that vested during the
nine months ended September 30, 2014 and 2013 was $144 million and $113 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 $42 million for the nine months ended September 30, 2014 and 2013, respectively.
Restricted stock units granted under the 3M 2008 Long-Term Incentive Plan 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, except for performance shares which do not earn dividends. 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 performance criteria for these performance shares (Organic Sales Growth, Return on Invested Capital and
sales from new products) were selected because the Company believes that they are important drivers of long-term
shareholder 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 first performance shares,
which were granted in 2008, were distributed in 2011. Performance shares do not accrue dividends during the performance
period. Therefore, the grant date fair value is determined by reducing the closing stock price on the date of grant by the
net present value of dividends during the performance period.
The following table summarizes performance share activity during the nine months ended September 30, 2014:
Weighted Average
Number of Grant Date
Performance Shares Awards Fair Value
Undistributed balance -
As of January 1 895,635 $ 88.12
Granted 298,898 124.41
Distributed (277,357) 84.74
Performance change 65,653 110.72
Forfeited (33,679) 109.31
As of September 30 949,150 $ 101.34
As of September 30, 2014, there was $26 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. During the nine months ended September 30, 2014 and September 30, 2013, the total fair value of performance shares
that were distributed were $35 million and $52 million, respectively. The Company's actual tax benefits realized for the
tax deductions related to the distribution of performance shares for the nine months ended September 30, 2014 and September
30, 2013 were $11 million and $16 million, respectively.
NOTE 13. 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 operating business segments: Industrial; Safety and Graphics;
Electronics and Energy; Health Care; 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. These segments have worldwide responsibility for virtually all 3M product lines. 3M is not dependent on any
single product/service or market. 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 2014, 3M transferred a product line between divisions within different business segments
and made other changes within business segments in its continuing effort to improve the alignment of its businesses around
markets and customers.
The product move between business segments was as follows:
• The movement of the Fire Protection product line from the Building and Commercial Services Division (Safety and
Graphics business segment) to the Industrial Adhesives and Tapes Division (Industrial business segment). This product move
resulted in an increase in net sales for total year 2013 of $73 million in the Industrial business segment offset by a
corresponding decrease in the Safety and Graphics business segment.
In addition, other changes within business segments were as follows:
• The combination of certain existing divisions/departments into new divisions. Within the Electronics and Energy
business segment, the new divisions include the Electrical Markets Division (which includes the former Infrastructure
Protection Division), and the Electronic Solutions Division (which includes the former 3M Touch Systems, Inc.). Within the
Safety and Graphics business segment, the new Commercial Solutions Division was created from the combination of the former
Architectural Markets Department, the former Building and Commercial Services Division and the former Commercial Graphics
Division. None of these combinations crossed business segments.
• The renaming of the former Aerospace and Aircraft Maintenance Division within the Industrial business segment to
the Aerospace and Commercial Transportation Division.
• The movement of certain product lines between various divisions within the same business segment.
Effective in the second quarter of 2014, within the Electronics and Energy business segment, 3M combined three existing
divisions into two new divisions. A large portion of both the Electronics Markets Materials Division and the Electronic
Solutions Division were combined to form the Electronics Materials Solutions Division, which focuses on semiconductor and
electronics materials and assembly solutions. The Optical Systems Division, the remaining portion of the Electronic
Solutions Division and a portion of the Electronics Markets Materials Division were combined to form the Display Materials
and Systems Division, which focuses on delivering light, color and user interface solutions.
The financial information presented herein reflects the impact of the preceding product move between business segments for
all periods presented.
Business Segment Information Three months ended Nine months ended
September 30, September 30,
(Millions) 2014 2013 2014 2013
Net Sales
Industrial $ 2,772 $ 2,692 $ 8,363 $ 8,068
Safety and Graphics 1,448 1,429 4,365 4,262
Electronics and Energy 1,500 1,449 4,233 4,066
Health Care 1,390 1,328 4,180 3,975
Consumer 1,177 1,153 3,395 3,332
Corporate and Unallocated 3 3 5 6
Elimination of Dual Credit (153) (138) (439) (407)
Total Company $ 8,137 $ 7,916 $ 24,102 $ 23,302
Operating Income
Industrial $ 616 $ 571 $ 1,851 $ 1,753
Safety and Graphics 340 313 1,011 973
Electronics and Energy 338 300 858 733
Health Care 432 426 1,293 1,247
Consumer 272 247 741 719
Corporate and Unallocated (63) (88) (184) (249)
Elimination of Dual Credit (34) (30) (97) (89)
Total Company $ 1,901 $ 1,739 $ 5,473 $ 5,087
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 operating 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, 2014,
and the related consolidated statements of income and comprehensive income, for the three-month and nine-month periods
ended September 30, 2014 and 2013, and the consolidated statement of cash flows for the nine-month periods ended September
30, 2014 and 2013. 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, 2013, 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
13, 2014, except with respect to our opinion on the consolidated financial statements insofar as it relates to the segment
realignments discussed in Notes 3 and 15 as to which the date is May 15, 2014, 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, 2013, 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 30, 2014
________________________________________________________________________________________
* 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
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; Electronics and Energy; Health
Care; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a
combined basis.
As described in 3M's Current Report on Form 8-K dated May 15, 2014 (which updated 3M's 2013 Annual Report on Form 10-K) and
3M's Quarterly Report on Form 10-Q for the period ended March 31, 2014, effective in the first quarter of 2014, 3M
transferred a product line between divisions within different business segments and made other changes within business
segments in its continuing effort to improve the alignment of its businesses around markets and customers. Segment
information presented herein reflects the impact of these changes for all periods presented. 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 15, 2014.
In addition, effective in the second quarter of 2014, within the Electronics and Energy business segment, 3M combined three
existing divisions into two new divisions. A large portion of both the Electronics Markets Materials Division and the
Electronic Solutions Division were combined to form the Electronics Materials Solutions Division, which focuses on
semiconductor and electronics materials and assembly solutions. The Optical Systems Division, the remaining portion of the
Electronic Solutions Division and a portion of the Electronics Markets Materials Division were combined to form the Display
Materials and Systems Division, which focuses on delivering light, color and user interface solutions.
Net income attributable to 3M was $1.303 billion, or $1.98 per diluted share, in the third quarter of 2014, compared to
$1.230 billion, or $1.78 per diluted share, in the third quarter of 2013. Third-quarter 2014 sales increased 2.8 percent to
$8.1 billion. 3M achieved organic local-currency sales growth (which includes organic volume impacts plus selling price
impacts) in all five of its business segments. Organic local-currency sales increased 5.4 percent in Health Care, 4.3
percent in Electronics and Energy, 4.2 percent in Industrial, and 3.1 percent in both the Consumer business segment and
Safety and Graphics business segment. For the Company in total, organic local-currency sales grew 3.9 percent, with higher
organic volumes contributing 3.2 percent and selling price increases contributing 0.7 percent. Acquisitions added 0.1
percent to sales, which related to the April 2014 acquisition of Treo Solutions LLC (Health Care business segment). Foreign
currency translation reduced worldwide sales by 1.2 percent year-on-year, with Latin American/Canada sales reduced by 4.3
percent, Europe sales reduced by 2.1 percent, and Asia Pacific sales reduced by 0.8 percent.
On a geographic basis, third-quarter 2014 organic local-currency sales growth was positive across all major geographic
areas for the sixth consecutive quarter. The United States led with organic local-currency sales growth of 6.0 percent,
including Industrial at 8 percent, Safety and Graphics at 7 percent, and Health Care at 6 percent.
Asia Pacific local-currency sales growth was 4.9 percent, led by Health Care at 9 percent, and Electronics and Energy at 7
percent. Based on sales, Electronics and Energy is the largest business segment in Asia Pacific, with results significantly
impacted by electronics-related divisions (Display Materials and Systems Division, and the Electronics Materials Solutions
Division). Organic local-currency sales growth was 7 percent in Japan, or 3 percent without electronics-related businesses.
China/Hong Kong organic local-currency sales growth was 4 percent, or 3 percent without electronics-related businesses,
impacted by a challenging sales growth comparison due to last year's strong third quarter growth. Refer to the Electronic
and Energy business segment section for additional discussion of electronics-related businesses.
In EMEA, organic local-currency sales increased 0.8 percent. Organic local-currency sales growth was led by Middle
East/Africa and Central/East Europe, and declined slightly in West Europe. Organic local-currency sales growth in EMEA was
positive in Health Care, Safety and Graphics, and Industrial, but declined in both Electronics and Energy, and Consumer.
In Latin America/Canada, organic local-currency sales grew 0.4 percent, led by Health Care. Organic sales growth was more
than 10 percent in Mexico, and Brazil grew approximately 4 percent. 3M continues to manage the currency risks related to
Venezuela. Sales were down in the third quarter of 2014 in Venezuela, which reduced organic local-currency sales growth
across Latin American/Canada by 6 percentage points. Since Venezuela is considered highly inflationary, 3M's Venezuelan
subsidiary's functional currency is considered to be that of its parent. As a result, exchange rate effects of remeasuring
Venezuelan Bolivar-denominated sales were reflected in organic local-currency growth as opposed to being part of the
translation element of overall sales change.
Operating income increased 9.4 percent in the third quarter and operating margins were 23.4 percent, a margin increase of
1.4 percentage points year-on-year. These results benefited from the combination of selling price increases and raw
material cost decreases, lower pension and postretirement benefit costs, leverage from organic volume growth, plus
productivity and other items. These benefits were partially offset by the impact of strategic investments. Refer to the
section entitled "Results of Operations" for further discussion.
The income tax rate was 30.3 percent in the third quarter, up 2.9 percentage points versus last year's third quarter. This
higher rate decreased earnings per diluted share by approximately 8 cents. Weighted-average diluted shares outstanding in
the third quarter of 2014 declined 4.9 percent year-on-year to 657.9 million, which increased earnings per diluted share by
approximately 10 cents. Foreign exchange impacts decreased earnings per diluted share by approximately 2 cents.
In the first nine months of 2014, net income attributable to 3M was $3.777 billion, or $5.67 per diluted share, compared to
$3.556 billion, or $5.10 per diluted share, in the first nine months of 2013. First nine months 2014 sales increased 3.4
percent to $24.1 billion. 3M achieved organic local-currency sales growth in all five of its business segments. Organic
local-currency sales increased 5.6 percent in Health Care, 4.9 percent in Electronics and Energy, 4.6 percent in
Industrial, 4.1 percent in Safety and Graphics, and 3.3 percent in Consumer. For the Company in total, organic
local-currency sales grew 4.5 percent, with higher organic volumes contributing 3.5 percent and selling price increases
contributing 1.0 percent. Foreign currency translation reduced worldwide sales by 1.1 percent year-on-year. Foreign
currency translation reduced Latin America/Canada sales by 7.1 percent and Asia Pacific sales by 1.7 percent, while EMEA
sales benefited by 1.2 percent.
The following table contains sales and operating income results by business segment for the three months ended September
30, 2014 and 2013. In addition to the discussion below, refer to the section entitled "Performance by Business Segment"
later in MD&A for a more detailed discussion of the sales and income results of the Company and its respective business
segments (including Corporate and Unallocated). Refer to Note 13 for additional information on business segments, including
Elimination of Dual Credit.
Three months ended September 30,
2014 2013 % change
Net Operating Net Operating Net Operating
(Dollars in millions) Sales Income Sales Income Sales Income
Business Segments
Industrial $ 2,772 $ 616 $ 2,692 $ 571 3.0 % 7.9 %
Safety and Graphics 1,448 340 1,429 313 1.3 8.8
Electronics and Energy 1,500 338 1,449 300 3.5 12.5
Health Care 1,390 432 1,328 426 4.7 1.4
Consumer 1,177 272 1,153
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