REG - 3M Company - 3rd Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 6
02/11/2016 07:07
- Part 6: For the preceding part double click ID:nRSB0531Oe
Sales were flat in dollar terms in the third quarter of
2016 and decreased 0.9 percent in the first nine months of 2016 when compared to the same periods last year. In the third
quarter of 2016, organic local-currency sales (which includes organic volume impacts plus selling price impacts) decreased
0.8 percent, with positive sales growth in Consumer, Safety and Graphics, and Health Care, more than offset by decreases in
Industrial, and Electronics and Energy. Total Company operating income margins expanded by 0.4 percentage points when
compared to the third quarter last year. Each of 3M's business groups posted operating income margins of greater than 22
percent in the third quarter of 2016. Fourth quarter 2015 restructuring actions, as discussed in Note 4, impacted
approximately 1,700 positions worldwide, contributing to an estimated pre-tax savings of approximately $95 million for the
first nine months of 2016.
Additional discussion of third quarter and first nine months results follows.
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, 2016 compared to 2015.
Three months ended Nine months ended
(Earnings per diluted share) September 30, 2016 September 30, 2016
Same period last year $ 2.05 $ 5.92
Increase/(decrease) in earnings per share - diluted, due to:
Operational benefits 0.06 0.14
Acquisitions and divestitures - 0.10
Foreign exchange impacts (0.02) (0.11)
Net interest expense (0.01) (0.03)
Income tax rate 0.03 0.06
Shares of common stock outstanding 0.04 0.20
Current period $ 2.15 $ 6.28
Net income attributable to 3M increased 10 cents and 36 cents per diluted share in the third quarter and first nine months
of 2016, respectively, when compared to the same periods last year. Operational benefits increased earnings, helped by
lower defined benefit pension and postretirement expenses. Operational benefits also included the combination of higher
selling prices and lower raw material costs, in addition to productivity benefits related to the fourth quarter 2015
restructuring. These operational benefits were partially offset by the impact of organic sales volume declines and lower
asset utilization.
Acquisition and divestiture impacts, which are measured for the first twelve months post-transaction, related to the
acquisitions of Membrana and Capital Safety (third quarter 2015) and Semfinder (September 2016, discussed in Note 2), and
the divestitures of Polyfoam (first quarter 2016), the library systems business (fourth quarter 2015/first quarter 2016),
and the license plate converting business in France (fourth quarter 2015). On a combined basis, these
acquisition/divestiture year-on-year impacts had a minimal impact on earnings per share in the third quarter and increased
earnings by 10 cents per diluted share in the first nine months of 2016, respectively, driven by solid performances from
2015 acquisitions and divestiture gains.
Foreign currency impacts (net of hedging) decreased pre-tax earnings by approximately $20 million and $110 million
year-on-year in the third quarter and first nine months of 2016, respectively, excluding the impact of foreign currency
changes on tax rates. This is equivalent to a year-on-year decrease of 2 cents and 11 cents per diluted share for the third
quarter and first nine months of 2016, respectively.
Over the past few years, 3M has taken actions to better optimize its capital structure and reduce its cost of capital by
adding debt. These actions have led to an increase in interest expense year-on-year in the third quarter and first nine
months of 2016, largely due to higher average debt balances.
The income tax rate was 28.5 percent in the third quarter of 2016, a decline of 1.1 percentage points versus last year's
third quarter, and 28.3 percent in the first nine months of 2016, a decline of 0.8 percentage points versus last year's
first nine months. The third quarter and first nine months 2016 change in tax rate was driven by a number of factors as
referenced in Note 6, including the first quarter 2016 adoption of Accounting Standards Update (ASU) No. 2016-09 (discussed
in Note 1).
Weighted-average diluted shares outstanding in the third quarter and first nine months of 2016 declined 2 percent and 3.2
percent year-on-year, respectively, which benefited earnings per share. The benefits from share repurchases, net of
issuances, were partially offset by the adoption of ASU No. 2016-09, which increased the calculated number of diluted
shares.
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, 2016 and 2015. 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.
Three months ended September 30,
2016 2015 % change
Net Oper. Net Oper. Net Oper.
(Dollars in millions) Sales Income Sales Income Sales Income
Business Segments
Industrial $ 2,582 $ 591 $ 2,557 $ 578 1.0 % 2.0 %
Safety and Graphics 1,448 364 1,417 324 2.2 % 12.3 %
Health Care 1,361 429 1,346 432 1.1 % (0.6) %
Electronics and Energy 1,293 312 1,397 344 (7.5) % (9.1) %
Consumer 1,209 317 1,162 293 4.0 % 8.3 %
Corporate and Unallocated 2 (69) 1 (58) - -
Elimination of Dual Credit (186) (40) (168) (37) - -
Total Company $ 7,709 $ 1,904 $ 7,712 $ 1,876 - % 1.5 %
Three months ended September 30, 2016
Organic
Worldwide local- Total
Sales Change Analysis currency sales
By Business Segment sales Acquisitions Divestitures Translation change
Industrial (1.1) % 1.6 % (0.2) % 0.7 % 1.0 %
Safety and Graphics 2.0 % 2.1 % (2.2) % 0.3 % 2.2 %
Health Care 1.5 % - % - % (0.4) % 1.1 %
Electronics and Energy (8.1) % - % - % 0.6 % (7.5) %
Consumer 2.9 % - % - % 1.1 % 4.0 %
Total Company (0.8) % 0.8 % (0.5) % 0.5 % - %
Sales in U.S. dollars in the third quarter of 2016 were flat compared to the same period in 2015, with a decrease in
organic local-currency sales (which includes organic volume impacts plus selling price impacts), offset by the combination
of acquisitions (net of divestiture activity) and foreign currency translation. Total company organic local-currency sales
decreased 0.8 percent, with growth in Consumer, Safety and Graphics, and Health Care more than offset by declines in
Industrial, and Electronics and Energy. All of 3M's five business segments achieved operating income margins in excess of
22 percent. Worldwide operating income margins for the third quarter of 2016 were 24.7 percent, compared to 24.3 percent
for the third quarter of 2015.
3M continued to invest for long-term success through research and development, commercialization and acquisitions.
Acquisitions increased third quarter sales growth by 0.8 percent, which related to acquisitions closed in 2015. In August
2015, 3M (Safety and Graphics Business) acquired Capital Safety, a leading global provider of fall protection equipment. In
August 2015, 3M (Industrial Business) also acquired Membrana, a leading provider of microporous membranes and modules for
filtration in life sciences, industrial and specialty segments. For additional detail on 2015 acquisitions, refer to Note 2
in the Consolidated Financial Statements in 3M's Current Report on Form 8-K dated May 17, 2016 (which updated 3M's 2015
Annual Report on Form 10-K).
Divestitures reduced third quarter sales growth by 0.5 percent. As part of its ongoing portfolio management process, in the
fourth quarter of 2015, 3M (Safety and Graphics Business) divested the license plate converting business in France and
substantially all of the library systems business. 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 (Industrial Business Group) divested the
assets of 3M's pressurized polyurethane foam adhesives business (formerly known as Polyfoam). This business is a provider
of pressurized polyurethane foam adhesive formulations and systems into the residential roofing, commercial roofing and
insulation and industrial foam segments in the United States with annual sales of approximately $20 million. The Company
recorded a pre-tax gain of $40 million in the first quarter of 2016 as a result of the sale of Polyfoam and the remaining
portion of the library systems business. Refer to Note 2 in the Consolidated Financial Statements for additional detail.
Nine months ended September 30,
2016 2015 % change
Net Oper. Net Oper. Net Oper.
(Dollars in millions) Sales Income Sales Income Sales Income
Business Segments
Industrial $ 7,789 $ 1,823 $ 7,845 $ 1,782 (0.7) % 2.3 %
Safety and Graphics 4,359 1,120 4,221 1,023 3.3 % 9.5 %
Health Care 4,148 1,344 4,039 1,280 2.7 % 5.0 %
Electronics and Energy 3,618 749 4,033 907 (10.3) % (17.4) %
Consumer 3,388 836 3,321 792 2.0 % 5.6 %
Corporate and Unallocated 7 (198) (1) (232) - -
Elimination of Dual Credit (529) (116) (482) (106) - -
Total Company $ 22,780 $ 5,558 $ 22,976 $ 5,446 (0.9) % 2.0 %
Nine months ended September 30, 2016
Organic
Worldwide local- Total
Sales Change Analysis currency sales
By Business Segment sales Acquisitions Divestitures Translation change
Industrial (1.4) % 2.1 % (0.2) % (1.2) % (0.7) %
Safety and Graphics 2.2 % 5.3 % (2.3) % (1.9) % 3.3 %
Health Care 4.2 % 0.3 % - % (1.8) % 2.7 %
Electronics and Energy (9.6) % - % - % (0.7) % (10.3) %
Consumer 2.8 % - % - % (0.8) % 2.0 %
Total Company (0.7) % 1.6 % (0.5) % (1.3) % (0.9) %
Sales in U.S. dollars in the first nine months of 2016 decreased 0.9 percent, substantially impacted by foreign currency
translation, which reduced sales by 1.3 percent. Total company organic local-currency sales (which includes organic volume
impacts plus selling price impacts) decreased 0.7 percent, with growth in Health Care, Consumer, and Safety and Graphics
more than offset by declines in Industrial, and Electronics and Energy. Four of 3M's five business segments achieved
operating income margins in excess of 23 percent. Worldwide operating income margins for the first nine months of 2016 were
24.4 percent, compared to 23.7 percent for the first nine months of 2015.
In March 2015, 3M (Health Care Business) acquired Ivera Medical Corp., a manufacturer of health care products that
disinfect and protect devices used for access into a patient's bloodstream. Additional acquisition and divestiture impacts
that impacted nine months ended September 30, 2016 results are provided in the preceding third quarter discussion.
Sales by geographic area:
Percent change information compares the third quarter and first nine months of 2016 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, 2016
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 3,160 $ 2,328 $ 1,481 $ 742 $ (2) $ 7,709
% of worldwide sales 41.0 % 30.2 % 19.2 % 9.6 % - 100.0 %
Components of net sales change:
Volume - organic (0.1) % (1.9) % (2.0) % (4.2) % - (1.4) %
Price (0.2) (0.3) 1.0 5.4 - 0.6
Organic local-currency sales (0.3) (2.2) (1.0) 1.2 - (0.8)
Acquisitions 0.7 0.6 1.4 0.7 - 0.8
Divestitures (0.6) (0.2) (0.7) (0.3) - (0.5)
Translation - 3.4 (2.1) (1.2) - 0.5
Total sales change (0.2) % 1.6 % (2.4) % 0.4 % - - %
Sales in U.S. dollars increased 1.6 percent in Asia Pacific and 0.4 percent in Latin America/Canada, while sales declined
0.2 percent in the United States and 2.4 percent in EMEA. Currency impacts increased third quarter 2016 worldwide sales
growth by 0.5 percent.
Worldwide selling prices rose 0.6 percent in the third quarter of 2016. 3M has been raising selling prices in a number of
developing countries to help offset the impact of currency devaluations. 3M also continues to generate positive selling
price changes across most of its businesses, boosted by world-class innovation and strong new product flow, both of which
are important elements of the 3M business model.
Foreign currency translation increased year-on-year sales in Asia Pacific, which was partially offset by Latin
America/Canada and EMEA foreign currency translation decreases. The foreign currency translation increases were led by
Japan and Brazil, which had a 14.2 percent and 13.5 percent translation impact, respectively, as the Japanese Yen and
Brazilian Real strengthened versus the U.S. dollar compared to third quarter 2015 by 20 percent and 14 percent,
respectively.
In Latin America/Canada, organic local-currency sales grew 1.2 percent, led by Safety and Graphics at 5 percent, Health
Care at 3 percent, and Consumer at 2 percent. Organic local-currency sales declined 1 percent in Industrial, and 6 percent
in Electronics and Energy. Organic local-currency sales grew 5 percent in Mexico and 2 percent in Brazil, while Canada
declined 3 percent.
In the United States, organic local-currency sales declined was 0.3 percent, with growth of 4 percent in Consumer and 3
percent in Safety and Graphics more than offset by declines of 1 percent in Health Care, 3 percent in Industrial, and 5
percent in Electronics and Energy. Industrial third quarter organic sales improved slightly versus the first half of 2016,
with further improvement expected in the fourth quarter of 2016.
In EMEA, organic local-currency sales decreased 1 percent. West Europe local currency sales increased 1 percent, led by
Germany, Sweden, and Spain. This was more than offset by a decline of 9 percent in the rest of EMEA, impacted by ongoing
challenges in Turkey and Saudi Arabia. Organic local-currency sales growth in EMEA was 2 percent in Health Care, while
Industrial was flat. Organic local-currency sales declined 2 percent in Safety and Graphics, 4 percent in Electronics and
Energy, and 5 percent in Consumer.
In Asia Pacific, organic local-currency sales declined 2.2 percent. Organic local-currency sales growth was led by Consumer
and Health Care at 6 percent, Safety and Graphics at 4 percent, and Industrial at 1 percent. Electronics and Energy
declined 10 percent, as 3M continues to experience persistent market challenges across most consumer electronics
applications. Organic local-currency sales increased 1 percent in Japan while China/Hong Kong decreased 2 percent.
Excluding electronics, organic local-currency sales in Japan increased 1 percent while China/Hong Kong increased 4
percent.
Nine months ended September 30, 2016
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 9,198 $ 6,685 $ 4,725 $ 2,174 $ (2) $ 22,780
% of worldwide sales 40.4 % 29.4 % 20.7 % 9.5 % - 100.0 %
Components of net sales change:
Volume - organic 0.1 % (4.3) % - % (3.1) % - (1.5) %
Price - (0.2) 1.2 6.5 - 0.8
Organic local-currency sales 0.1 (4.5) 1.2 3.4 - (0.7)
Acquisitions 1.8 0.9 2.3 1.8 - 1.6
Divestitures (0.6) (0.2) (0.7) (0.3) - (0.5)
Translation - 0.2 (2.2) (9.2) - (1.3)
Total sales change 1.3 % (3.6) % 0.6 % (4.3) % - (0.9) %
Sales in U.S. dollars increased 1.3 percent in the United States and increased 0.6 percent in EMEA, while sales declined
3.6 percent in Asia Pacific, and 4.3 percent in Latin America/Canada. Currency impacts reduced first nine months 2016
worldwide sales growth by 1.3 percent. Worldwide selling prices rose 0.8 percent in the first nine months of 2016.
In Latin America/Canada, organic local-currency sales grew 3.4 percent, led by Health Care at 6 percent, and Industrial at
5 percent, and Safety and Graphics at 4 percent. Organic local-currency sales were flat in Consumer and declined 2 percent
in Electronics and Energy. Organic local-currency sales grew 7 percent in Mexico and 1 percent in Brazil.
In EMEA, organic local-currency sales increased 1.2 percent. West Europe grew 2 percent while Central/East Europe and
Middle East/Africa were flat. Organic local-currency sales growth in EMEA was led by Health Care at 4 percent and
Industrial at 2 percent, while sales were flat for both Safety and Graphics and Electronics and Energy. Organic
local-currency sales declined 4 percent in Consumer.
In the United States, organic local-currency sales grew 0.1 percent, with growth of 4 percent in Consumer, 3 percent in
Safety and Graphics, and 2 percent in Health Care, largely offset by declines in Electronics and Energy of 2 percent and
Industrial of 4 percent.
In Asia Pacific, organic local-currency sales declined 4.5 percent. Organic local-currency sales growth was led by Health
Care at 8 percent, Consumer at 6 percent, and Safety and Graphics at 1 percent, while Industrial declined 2 percent.
Electronics and Energy declined 14 percent, as 3M continues to experience persistent market challenges across most consumer
electronics applications. Organic local-currency sales declined 3 percent in Japan and 5 percent in China/Hong Kong.
Excluding electronics, organic local-currency sales in Japan increased 1 percent while China/Hong Kong was flat.
Managing currency risks:
3M utilizes a number of tools to hedge currency risk related to earnings. 3M uses natural hedges such as pricing,
productivity, hard currency and hard currency-indexed billings, and localizing source of supply. 3M also uses financial
hedges to mitigate currency risk. In the case of more liquid currencies, 3M hedges a portion of its aggregate exposure,
using a 12, 24 or 36 month horizon, depending on the currency in question. In the second quarter of 2014, 3M began
extending its hedging tenor for certain major currencies, most notably the Euro and Yen, from a previous term of 12 months
to a term of 24 months, and in the first quarter of 2015 extended this to 36 months. For less liquid currencies, financial
hedging is frequently more expensive with more limitations on tenor. Thus this risk is largely managed via local
operational actions using natural hedging tools as discussed above. In either case, 3M's hedging approach is designed to
mitigate a portion of foreign currency risk and reduce volatility, ultimately allowing time for 3M's businesses to respond
to changes in the marketplace.
Financial condition:
3M generated $4.453 billion of operating cash flows in the first nine months of 2016, an increase of $371 million when
compared to the first nine months of 2015. Refer to the section entitled "Financial Condition and Liquidity" later in MD&A
for a discussion of items impacting cash flows.
In February 2016, 3M's Board of Directors authorized the repurchase of up to $10 billion of 3M's outstanding common stock,
with no pre-established end date. In the first nine months of 2016, the Company purchased $2.829 billion of its own stock,
compared to $4.104 billion of stock purchases in the first nine months of 2015. As of September 30, 2016, approximately $8
billion remained available under the February 2016 authorization. The Company expects to purchase $3.5 billion to $4.5
billion of its own stock in 2016. In February 2016, 3M's Board of Directors declared a first quarter 2016 dividend of $1.11
per share, an increase of 8 percent. This marked the 58th consecutive year of dividend increases for 3M. In May 2016, 3M's
Board of Directors declared a second quarter 2016 dividend of $1.11 per share, and in August 2016 declared a third quarter
2016 dividend of $1.11 per share.
3M's debt to total capital ratio (total capital defined as debt plus equity) was 51 percent at September 30, 2016, and 48
percent at December 31, 2015. 3M currently has an AA- credit rating with a stable outlook from Standard & Poor's and has an
A1 credit rating with a stable outlook from Moody's Investors Service. The Company generates significant ongoing cash flow
and has proven access to capital markets funding throughout business cycles.
3M expects to contribute approximately $400 million of cash to its global defined benefit pension and postretirement plans
in 2016. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2016.
RESULTS OF OPERATIONS
Net Sales:
Refer to the preceding sections entitled "Sales and operating income by business segment" and "Sales and operating income
by geographic area" for discussion of sales change.
Operating Expenses:
Three months ended Nine months ended
September 30, September 30,
(Percent of net sales) 2016 2015 Change 2016 2015 Change
Cost of sales 49.9 % 50.3 % (0.4) % 49.7 % 50.3 % (0.6) %
Selling, general and administrative expenses 19.9 19.8 0.1 20.1 20.2 (0.1)
Research, development and related expenses 5.5 5.6 (0.1) 5.8 5.8 -
Operating income 24.7 % 24.3 % 0.4 % 24.4 % 23.7 % 0.7 %
3M expects global defined benefit pension and postretirement expense in 2016 (before settlements, curtailments, special
termination benefits and other) to decrease by approximately $320 million pre-tax when compared to 2015, which impacts cost
of sales; selling, general and administrative expenses (SG&A); and research, development and related expenses (R&D). Refer
to 3M's Current Report on Form 8-K dated May 17, 2016 (MD&A section entitled Critical Accounting Estimates - Pension and
Postretirement Obligations and Note 11, Pension and Postretirement Benefit Plans) for background concerning the change to
the spot yield curve approach and other factors, which will result in decreased expenses in 2016. The year-on-year decrease
in defined benefit pension and postretirement expense for the third quarter and first nine months of 2016 was $73 million
and $238 million, respectively. The first nine months of 2015 includes the impact of a first quarter 2015 Japan pension
curtailment gain of $17 million.
The Company is investing in an initiative called business transformation, with these investments impacting cost of sales,
SG&A, and R&D. Business transformation encompasses the ongoing multi-year phased implementation of an enterprise resource
planning (ERP) system on a worldwide basis, as well as changes in processes and internal/external service delivery across
3M. As of September 30, 2016, 3M has deployed this ERP system in 15 countries, and in four of 3M's largest European
distribution centers.
Cost of Sales:
Cost of sales includes manufacturing, engineering and freight costs.
Cost of sales as a percent of net sales was 49.9 percent in the third quarter of 2016 and 49.7 percent in the first nine
months of 2016, compared to 50.3 percent in the same periods last year, a year-on-year improvement of 0.4 percentage points
and 0.6 percentage points, respectively. Cost of sales, measured as a percent of net sales, decreased due to selling price
increases and raw material cost decreases. Selling prices increased net sales year-on-year by 0.6 percent and 0.8 percent
in the third quarter and first nine months, respectively, while raw material cost deflation in both the third quarter and
first nine months was favorable by approximately 3.5 percent year-on-year. In addition, cost of sales decreased due to
lower defined benefit pension and postretirement expense (of which a portion impacts cost of sales). These benefits were
partially offset by foreign currency impacts (net of hedging).
Selling, General and Administrative Expenses:
SG&A was flat in the third quarter of 2016 and declined 1.3 percent in the first nine months of 2016, when compared to the
same periods last year, with year-to-date results benefiting from first quarter 2016 divestiture gains (as discussed in
Note 2), foreign currency translation, and productivity benefits related to the fourth quarter 2015 restructuring. In
addition, lower defined benefit pension and postretirement expense benefited SG&A. SG&A, measured as a percent of net
sales, was 20.1 percent of net sales in the first nine months of 2016 compared to 20.2 percent in the first nine months of
2015.
Research, Development and Related Expenses:
R&D, measured as a percent of net sales, was 5.5 percent of net sales and 5.6 percent of net sales for the three months
ended September 30, 2016 and 2015, respectively. R&D, measured as a percent of net sales, was 5.8 percent of net sales for
both the nine months ended September 30, 2016 and 2015. R&D in dollars decreased $2 million in the third quarter of 2016
and decreased $16 million in the first nine months of 2016 compared to the same periods last year, benefitting from lower
defined benefit pension and postretirement expense. 3M continued to invest in its key growth initiatives, including more
R&D aimed at disruptive innovation programs with the potential to create entirely new markets and disrupt existing
markets.
Operating Income:
3M uses operating income as one of its primary business segment performance measurement tools. Refer to the table below for
a reconciliation of operating income margins for the three months and nine months ended September 30, 2016 versus the same
periods last year.
Three months ended Nine months ended
(Percent of net sales) September 30, 2016 September 30, 2016
Same period last year 24.3 % 23.7 %
Increase/(decrease) in operating income margin, due to:
Selling price and raw material impact 1.0 1.1
Pension and postretirement benefit costs 0.9 1.0
Productivity from restructuring 0.4 0.4
Strategic investments (0.4) (0.3)
Foreign exchange impacts (0.5) (0.3)
Acquisitions (0.1) (0.1)
Organic volume and utilization (0.9) (0.9)
Legal and other - (0.2)
Current period 24.7 % 24.4 %
Operating income margins were 24.7 percent in the third quarter of 2016, compared to 24.3 percent in the third quarter of
2015, an improvement of 0.4 percentage points. Operating income margins in the first nine months of 2016 improved
year-on-year by 0.7 percentage points. 3M continues to benefit from the combination of higher selling prices and lower raw
material costs, plus lower year-on-year defined benefit pension and postretirement expense, in addition to productivity
benefits related to the fourth quarter 2015 restructuring. Items that reduced operating income margins included strategic
investments, as 3M took actions to better optimize its manufacturing footprint and accelerated growth investments across
its businesses, in addition to foreign currency impacts (net of hedging). Acquisitions had a minimal impact on operating
income margins due to solid performances from both Capital Safety and Membrana. Organic volume declines and related
utilization impacts included the impact of lower asset utilization, primarily in the Industrial, and Electronics and Energy
businesses. The "legal and other" item in the preceding table for the first nine months of 2016 largely related to a second
quarter 2016 unfavorable arbitration ruling on an insurance claim (discussed in Note 12), which was partially offset by
first quarter 2016 divestiture gains.
Interest Expense and Income:
Three months ended Nine months ended
September 30, September 30,
(Millions) 2016 2015 2016 2015
Interest expense $ 50 $ 38 $ 135 $ 104
Interest income (8) (7) (20) (18)
Total $ 42 $ 31 $ 115 $ 86
Interest expense was higher in the third quarter and first nine months of 2016 compared to the same periods last year,
largely due to higher average debt balances.
Provision for Income Taxes:
Three months ended Nine months ended
September 30, September 30,
(Percent of pre-tax income) 2016 2015 2016 2015
Effective tax rate 28.5 % 29.6 % 28.3 % 29.1 %
The effective tax rate for the third quarter of 2016 was 28.5 percent, compared to 29.6 percent in the third quarter of
2015, a decrease of 1.1 percentage points. The effective tax rate for the first nine months of 2016 was 28.3 percent,
compared to 29.1 percent in the first nine months of 2015, a decrease of 0.8 percentage points. The change in tax rates was
driven by a number of factors as referenced in Note 6, including the 2016 adoption of ASU No. 2016-09 (discussed in Note
1). The company currently expects that its effective tax rate for total year 2016 will be approximately 29.0 percent.
The effective tax rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits,
changes in tax laws and employee share-based payment accounting; as well as recurring factors, such as the geographic mix
of income before taxes.
Net Income Attributable to Noncontrolling Interest:
Three months ended Nine months ended
September 30, September 30,
(Millions) 2016 2015 2016 2015
Net income attributable to noncontrolling interest $ 2 $ 2 $ 7 $ 7
Net income attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M
ownership interests in 3M consolidated entities. The primary noncontrolling interest relates to 3M India Limited, of which
3M's effective ownership is 75 percent.
Currency Effects:
3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by approximately $20
million for the three months ended September 30, 2016, and decreased pre-tax income by approximately $110 million for the
nine months ended September 30, 2016. This estimate includes the effect of translating profits from local currencies into
U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and
abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange
rate risks and any impacts from swapping Venezuelan bolivars into U.S. dollars. 3M estimates that year-on-year derivative
and other transaction gains and losses decreased pre-tax income by approximately $45 million for both the three and nine
months ended September 30, 2016.
New Accounting Pronouncements:
Information regarding new accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which modifies
certain accounting aspects for share-based payments to employees including, among other elements, the accounting for income
taxes and forfeitures, as well as classifications in the statement of cash flows. The Company early adopted ASU No. 2016-09
as of January 1, 2016. Prospectively beginning January 1, 2016, excess tax benefits/deficiencies have been reflected as
income tax benefit/expense in the statement of income resulting in a $35 million tax benefit in the quarter ended September
30, 2016, and $175 million benefit for the nine months ended September 30, 2016. 3M typically experiences the largest
volume of stock option exercises and restricted stock unit vestings in the first quarter of its fiscal year. Refer to Note
1 for additional detail.
PERFORMANCE BY BUSINESS SEGMENT
Disclosures related to 3M's business segments are provided in Note 14. The reportable segments are Industrial; Safety and
Graphics; Health Care; Electronics and Energy; and Consumer.
Corporate and Unallocated:
In addition to these five operating business segments, 3M assigns certain costs to Corporate and Unallocated, which is
presented separately in the preceding business segments table and in Note 14. Corporate and Unallocated includes a variety
of miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain
insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and
certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the Company 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.
Corporate and Unallocated operating income in the third quarter and first nine months of 2016, when compared to the same
periods last year, decreased by $11 million and improved by $34 million, respectively. 3M's defined benefit pension and
postretirement expense allocation to Corporate and Unallocated decreased by $54 million and $180 million, respectively, in
the third quarter and first nine months of 2016 when compared to the same periods last year. The third quarter and first
nine months decrease in pension and postretirement benefit expense was partially offset by an increase in expense related
to accruals for respirator mask/asbestos liabilities (discussed in Note 12). The first nine months of 2016 was also
impacted by an unfavorable second quarter 2016 arbitration ruling related to respirator mask/asbestos litigation (also
discussed in Note 12).
Operating Business Segments:
Information related to 3M's business segments for the third quarter and first nine months of both 2016 and 2015 is
presented in the tables that follow. Organic local-currency sales include both organic volume impacts plus selling price
impacts. Acquisition impacts, if any, are measured separately for the first twelve months post-transaction. The divestiture
impacts, if any, foreign currency translation impacts and total sales change are also provided for each business segment.
Any references to EMEA relate to Europe, Middle East and Africa on a combined basis.
Industrial Business:
Three months ended Nine months ended
September 30, September 30,
2016 2015 2016 2015
Sales (millions) $ 2,582 $ 2,557 $ 7,789 $ 7,845
Sales change analysis:
Organic local currency (1.1) % (0.4) % (1.4) % 1.2 %
Acquisitions 1.6 0.7 2.1 0.2
Divestitures (0.2) - (0.2) -
Translation 0.7 (8.0) (1.2) (7.6)
Total sales change 1.0 % (7.7) % (0.7) % (6.2) %
Operating income (millions) $ 591 $ 578 $ 1,823 $ 1,782
Percent change 2.0 % (5.7) % 2.3 % (3.4) %
Percent of sales 22.9 % 22.6 % 23.4 % 22.7 %
The Industrial segment serves a broad range of markets, such as automotive original equipment manufacturer (OEM) and
automotive aftermarket (auto body shops and retail), electronics, appliance, paper and printing, packaging, food and
beverage, and construction. Industrial products include tapes, a wide variety of coated, non-woven and bonded abrasives,
adhesives, advanced ceramics, sealants, specialty materials, 3M purification (filtration products), closure systems for
personal hygiene products, acoustic systems products, and components and products that are used in the manufacture, repair
and maintenance of automotive, marine, aircraft and specialty vehicles. 3M is also a leading global supplier of precision
grinding technology serving customers in the area of hard-to-grind precision applications in industrial, automotive,
aircraft and cutting tools. 3M develops and produces advanced technical ceramics for demanding applications in the
automotive, oil and gas, solar, industrial, electronics and defense industries.
Third Quarter 2016 results:
Sales in Industrial totaled $2.6 billion, up 1.0 percent in U.S. dollars. Organic local-currency sales decreased 1.1
percent, acquisitions added 1.6 percent, divestitures reduced sales by 0.2 percent, and foreign currency translation
increased sales by 0.7 percent. The organic local-currency sales decline reflected the continued economic challenges in the
global industrial sector. Manufacturing activity in the U.S. remained soft in the third quarter, which impacted portions of
3M's Industrial business.
On an organic local-currency sales basis:
· Sales declined 1.1 percent. 3M anticipates growth in Industrial to turn positive in the fourth quarter of 2016.
· Sales grew in automotive OEM and automotive aftermarket, which was offset by declines across the rest of the
portfolio.
· Sales declined in 3M purification, industrial adhesives and tapes, aerospace commercial transportation, and
abrasives.
· Sales also declined in advanced materials, primarily due to persistent weakness in the oil and gas end markets.
· Geographically, sales increased 1 percent in Asia Pacific, while EMEA was flat. Latin America/Canada declined 1
percent and the United States declined 3 percent. In the U.S., Industrial third quarter organic sales change improved
slightly versus the first half of 2016, with further improvement expected in the fourth quarter of 2016.
Acquisitions and divestitures:
· Acquisition sales growth related to the August 2015 acquisition of Membrana, a leading provider of microporous
membranes and modules for filtration in the life sciences, industrial, and specialty segments.
· 3M completed its sale of the assets of 3M's pressurized polyurethane foam adhesives business (formerly known as
Polyfoam) in January 2016 as discussed in Note 2.
Operating income:
· Operating income margins increased by 0.3 percentage points to 22.9 percent, helped by fourth quarter 2015
restructuring actions, and lower raw material costs.
· Acquisition impacts resulted in a net operating income margin penalty of 0.3 percentage points.
In October 2016, 3M completed the sale of the assets of its temporary protective films business to Pregis LLC. This
business is a provider of adhesive-backed temporary protective films used in a broad range of industries with annual sales
of approximately $50 million.
First Nine Months 2016 results:
Sales in Industrial totaled $7.8 billion, down 0.7 percent in U.S. dollars. Organic local-currency sales decreased 1.4
percent, acquisitions added 2.1 percent, divestitures reduced sales by 0.2 percent, and foreign currency translation
reduced sales by 1.2 percent. The organic local-currency decline reflected the continued economic challenges in the global
industrial sector.
On an organic local-currency sales basis:
· Sales grew in automotive OEM, and automotive aftermarket.
· Sales declined in 3M purification, abrasives, industrial adhesives and tapes, and aerospace commercial
transportation.
· Sales also declined in advanced materials, primarily due to persistent weakness in the oil and gas end markets.
· Geographically, sales increased 5 percent in Latin America/Canada and 2 percent in EMEA, while Asia Pacific declined
2 percent and the United States declined 4 percent.
Acquisitions and divestitures:
· Acquisition sales growth related to the August 2015 acquisition of Membrana, a leading provider of microporous
membranes and modules for filtration in the life sciences, industrial, and specialty segments.
· 3M completed its sale of the assets of 3M's pressurized polyurethane foam adhesives business (formerly known as
Polyfoam) in January 2016 as discussed in Note 2.
Operating income:
· Operating income margins increased by 0.7 percentage points to 23.4 percent, helped by fourth quarter 2015
restructuring actions, and lower raw material costs.
· In addition, the gain on sale of the Polyfoam business was partially offset by acquisition impacts, which resulted
in a net operating income margin benefit of 0.2 percentage points.
Safety and Graphics Business:
Three months ended Nine months ended
September 30, September 30,
2016 2015 2016 2015
Sales (millions) $ 1,448 $ 1,417 $ 4,359 $ 4,221
Sales change analysis:
Organic local currency 2.0 % 2.9 % 2.2 % 4.0 %
Acquisitions 2.1 4.2 5.3 1.4
Divestitures (2.2) - (2.3) -
Translation 0.3 (9.3) (1.9) (8.7)
Total sales change 2.2 % (2.2) % 3.3 % (3.3) %
Operating income (millions) $ 364 $ 324 $ 1,120 $ 1,023
Percent change 12.3 % (4.8) % 9.5 % 1.1 %
Percent of sales 25.1 % 22.9 % 25.7 % 24.2 %
The Safety and Graphics segment serves a broad range of markets that increase the safety, security and productivity of
people, facilities and systems. Major product offerings include personal protection products, such as respiratory, hearing,
eye and fall protection equipment; traffic safety and security products, including border and civil security solutions;
commercial solutions, including commercial graphics sheeting and systems, architectural design solutions for surfaces, and
cleaning and protection products for commercial establishments; and roofing granules for asphalt shingles.
Third Quarter 2016 results:
Sales in Safety and Graphics totaled $1.4 billion, an increase of 2.2 percent in U.S. dollars. Organic local-currency sales
increased 2.0 percent, and foreign currency translation increased sales by 0.3 percent. Acquisitions added 2.1 percent,
while divestitures reduced sales by 2.2 percent.
On an organic local-currency sales basis:
· Sales growth was led by roofing granules, as demand remained strong in the shingle market, and by commercial
solutions, with particular strength in the U.S. and Latin America.
· Sales grew slightly in personal safety, while sales declined slightly in traffic safety and security.
· Sales increased 5 percent in Latin America/Canada, 4 percent in Asia Pacific, and 3 percent in the United States.
Sales declined 2 percent in EMEA.
Acquisitions and divestitures:
· Acquisition sales growth reflects the acquisition of Capital Safety in August 2015. Capital Safety is a leading
global provider of fall protection equipment.
· In the fourth quarter of 2015, 3M divested its license plate converting business in France and substantially all of
its library systems business. In the first quarter of 2016, 3M divested the remainder of the library systems business as
discussed in Note 2.
Operating income:
· Operating income totaled $364 million, up 12.3 percent.
· Operating income margins were 25.1 percent of sales, compared to 22.9 percent in the same quarter last year,
benefiting from higher selling prices and lower raw material costs, plus fourth quarter 2015 restructuring actions. In
addition, the third quarter of 2015 was negatively impacted by 1.9 percentage points due to margin dilution related to the
Capital Safety acquisition.
Nine Months 2016 results:
Sales in Safety and Graphics totaled $4.4 billion, an increase of 3.3 percent in U.S. dollars. Organic local-currency sales
increased 2.2 percent, and foreign currency translation reduced sales by 1.9 percent. Acquisitions added 5.3 percent, while
divestitures reduced sales by 2.3 percent.
On an organic local-currency sales basis:
· Sales growth was led by roofing granules, commercial solutions, and personal safety, while sales declined in traffic
safety and security.
· Sales increased 4 percent in Latin America/Canada, 3 percent in the United States and 1 percent in Asia Pacific,
while sales in EMEA were flat.
Acquisitions and divestitures:
· Acquisition sales growth reflects the acquisition of Capital Safety in August 2015. Capital Safety is a leading
global provider of fall protection equipment.
· In the fourth quarter of 2015, 3M divested its license plate converting business in France and substantially all of
its library systems business. In the first quarter of 2016, 3M divested the remainder of the library systems business as
discussed in Note 2.
Operating income:
· Operating income totaled $1.1 billion, up 9.5 percent.
· Operating income margins were 25.7 percent of sales, compared to 24.2 percent in the same period last year,
benefiting from higher selling prices and lower raw material costs, plus fourth quarter 2015 restructuring actions. In
addition, the third quarter of 2015 was
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