REG - 3M Company - 3rd Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 7
01/11/2017 07:06
- Part 7: For the preceding part double click ID:nRSA1805Vf
% (7.3) % 10.6 % (10.6) %
Operating income (millions) $ 394 $ 304 $ 920 $ 716
Percent change 29.9 % (9.5) % 28.5 % (18.4) %
Percent of sales 27.9 % 24.3 % 24.0 % 20.6 %
The Electronics and Energy segment includes solutions that improve the dependability, cost-effectiveness, and performance
of electronic devices; electrical products, including infrastructure protection; telecommunications networks; and power
generation and distribution. This segment's electronics solutions include optical film solutions for the electronic display
industry; high-performance fluids and abrasives; high-temperature and display tapes; flexible circuits, which use
electronic packaging and interconnection technology; and touch systems products. This segment's energy solutions include
pressure sensitive tapes and resins; electrical insulation; infrastructure products that provide both protection and
detection solutions; a wide array of fiber-optic and copper-based telecommunications systems; and renewable energy
component solutions for the solar and wind power industries.
Third Quarter 2017 results:
Sales in Electronics and Energy totaled $1.4 billion, up 13.1 percent in U.S. dollars. Organic local-currency sales
increased 13.2 percent, divestitures reduced sales by 0.1 percent, and foreign currency translation was flat.
Total sales within the electronics-related businesses were up 18 percent and energy-related businesses sales were up 3
percent. Total sales increased 19 percent in Asia Pacific.
On an organic local-currency sales basis:
· Sales increased 18 percent in 3M's electronics-related businesses, with increases in both display materials and
systems and electronics materials solutions, as the businesses drove increased inclusion in OEM platforms globally,
including semiconductor manufacturing, electronic assembly, data center and automotive electrification.
· Sales increased 2 percent in 3M's energy-related businesses, as sales increases in electrical markets were partially
offset by sales declines in telecommunications.
· Sales increased 20 percent in Asia Pacific, where 3M's electronics business is concentrated.
Divestitures:
· In December 2016, 3M sold the assets of its cathode battery technology out-licensing business, with annual sales of
approximately $10 million.
Operating income:
· Operating income margins increased 3.6 percentage points, driven by underlying productivity gains related to organic
local-currency sales growth. Incremental strategic investments reduced margins by 0.3 percentage points.
First Nine Months 2017 results:
Sales in Electronics and Energy totaled $3.8 billion, up 10.6 percent in U.S. dollars. Organic local-currency sales
increased 11.0 percent, divestitures reduced sales by 0.2 percent, and foreign currency translation reduced sales by 0.2
percent.
Total sales within the electronics-related businesses were up 17 percent while energy-related businesses were flat. Total
sales increased 17 percent in Asia Pacific.
On an organic local-currency sales basis:
· Sales increased 17 percent in 3M's electronics-related businesses, with increases in both display materials and
systems and electronics materials solutions, as the businesses drove increased inclusion in OEM platforms in addition to
strengthened demand in consumer electronics.
· Sales were flat in 3M's energy-related businesses, as sales growth in electrical markets was offset by declines in
telecommunications.
· Sales increased 18 percent in Asia Pacific, where 3M's electronics business is concentrated.
Divestitures:
· In December 2016, 3M sold the assets of its cathode battery technology out-licensing business, with annual sales of
approximately $10 million.
Operating income:
· Operating income margins increased 3.4 percentage points, as benefits from higher organic volume were partially
offset by first nine months of 2017 footprint and portfolio actions. These actions resulted in a year-on-year operating
income margin reduction of 1.9 percentage points.
Consumer Business:
Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Sales (millions) $ 1,236 $ 1,210 $ 3,415 $ 3,390
Sales change analysis:
Organic local-currency 1.9 % 2.9 % 0.5 % 2.7 %
Translation 0.3 1.1 0.2 (0.8)
Total sales change 2.2 % 4.0 % 0.7 % 1.9 %
Operating income (millions) $ 307 $ 317 $ 724 $ 836
Percent change (3.2) % 8.2 % (13.4) % 5.5 %
Percent of sales 24.8 % 26.2 % 21.2 % 24.7 %
The Consumer segment serves markets that include consumer retail, office retail, office business to business, home
improvement, drug and pharmacy retail, and other markets. Products in this segment include office supply products,
stationery products, construction and home improvement products (do-it-yourself), home care products, protective material
products, certain consumer retail personal safety products, and consumer health care products.
Third Quarter 2017 results:
Sales in Consumer totaled $1.2 billion, up 2.2 percent in U.S. dollars. Organic local-currency sales increased 1.9 percent,
while foreign currency translation increased sales by 0.3 percent.
On an organic local-currency sales basis:
· Sales grew in consumer health care, home improvement, and home care.
· Strong performance in consumer brands, such as CommandTM damage-free mounting, ScotchBlueTM painter's tape and
FiltreteTM home filtration products, helped drive organic growth year-on-year.
· The stationery and office supplies business declined due to continued channel inventory adjustments, primarily in
the U.S. office retail and wholesale market.
Operating income:
· Operating income margins declined 1.4 percentage points year-on-year, in part due to incremental strategic
investments, which reduced margins by 1.1 percentage points.
First Nine Months 2017 results:
Sales in Consumer totaled $3.4 billion, up 0.7 percent in U.S. dollars. Organic local-currency sales increased 0.5 percent,
while foreign currency translation increased sales by 0.2 percent.
On an organic local-currency sales basis:
· Sales grew in home improvement, consumer health care, and home care.
· The stationery and office supplies business declined due to channel inventory adjustments, primarily in the U.S.
office retail and wholesale market.
Operating income:
· Operating income margins declined 3.5 percentage points year-on-year, in part due to incremental strategic
investments, which reduced margins by 2.6 percentage points.
FINANCIAL CONDITION AND LIQUIDITY
3M continues its transition to a better-optimized capital structure and is adding leverage at a measured pace. The strength
and stability of 3M's business model and strong free cash flow capability, together with proven capital markets access,
enable the Company to implement this strategy. Investing in 3M's businesses to drive organic growth remains the first
priority for capital deployment, including research and development, capital expenditures, and commercialization
capability. Investment in organic growth will be supplemented by complementary acquisitions. 3M will also continue to
return cash to shareholders through dividends and share repurchases. Sources for cash availability in the United States,
such as ongoing cash flow from operations and access to capital markets, have historically been sufficient to fund dividend
payments to shareholders and share repurchases, as well as funding U.S. acquisitions and other items as needed. For those
international earnings considered to be reinvested indefinitely, the Company currently has no plans or intentions to
repatriate these funds for U.S. operations. However, if these international funds are needed for operations in the U.S., 3M
would be required to accrue and pay U.S. taxes to repatriate them. See Note 8 in 3M's Current Report on Form 8-K dated May
4, 2017, for further information on earnings considered to be reinvested indefinitely.
3M's primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances. 3M believes it
will have continuous access to the commercial paper market. 3M's commercial paper program permits the Company to have a
maximum of $5 billion outstanding with a maximum maturity of 397 days from date of issuance. At September 30, 2017, there
was approximately $225 million in commercial paper issued and outstanding.
Total Debt:
The Company's total debt was approximately $11.7 billion at both September 30, 2017 and December 31, 2016. In May 2016, 3M
issued 500 million Euro aggregate principal amount of 5.75-year fixed rate medium-term notes due February 2022 with a
coupon rate of 0.375% and 500 million Euro aggregate principal amount of 15-year fixed rate medium-term notes due 2031 with
a coupon rate of 1.50%. In September 2016, 3M issued $600 million aggregate principal amount of five-year fixed rate
medium-term notes due 2021 with a coupon rate of 1.625%, $650 million aggregate principal amount of 10-year fixed rate
medium-term notes due 2026 with a coupon rate of 2.250%, and $500 million aggregate principal amount of 30-year fixed rate
medium-term notes due 2046 with a coupon rate of 3.125%. All of these 2016 issuances were under the medium-term notes
program (Series F).
In September 2016, 3M repaid $1 billion aggregate principal amount of fixed rate medium-term notes that matured. In June
2017, 3M repaid $650 million aggregate principal amount of fixed rate medium-term notes that matured.
In October 2017, 3M issued $650 million aggregate principal amount of 5.5-year fixed rate medium-term notes due 2023 with a
coupon rate of 2.25%, $850 million aggregate principal amount of 10-year fixed rate medium-term notes due 2027 with a
coupon rate of 2.875%, and $500 million aggregate principal amount of 30-year fixed rate medium-term notes due 2047 with a
coupon rate of 3.625%.
The proceeds from the debt issuance will be used to fund the notes repurchase described below, the purchase of Scott Safety
(refer to Note 2 for details), and for general corporate purposes.
In October 2017, 3M, via cash tender offers, repurchased $305 million aggregate principal amount of its outstanding notes.
This included $110 million of its $330 million principal amount of 6.375% notes due 2028 and $195 million of its $750
million principal amount of 5.70% notes due 2037. The Company will reflect an early debt extinguishment charge of
approximately $95 million in the fourth quarter of 2017 within interest expense associated with the differential between
the carrying value and the amount paid to acquire the tendered notes and related expenses.
As of September 30, 2017, the total amount of debt issued as part of the medium-term notes program (Series F), inclusive of
debt issued in 2011, 2012, 2014, 2015 and the 2016 debt referenced above (excluding the October 2017 issuance above), is
approximately $11.1 billion (utilizing the foreign exchange rates applicable at the time of issuance for the Euro
denominated debt). Information with respect to long-term debt issuances and maturities for the periods presented is
included in Note 10 of 3M's Current Report on Form 8-K dated May 4, 2017 (which updated 3M's 2016 Annual Report on Form
10-K) .
The strength of 3M's capital structure and significant ongoing cash flows provide 3M proven access to capital markets.
Additionally, the Company's maturity profile is staggered to help ensure refinancing needs in any given year are reasonable
in proportion to the total portfolio. 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's ongoing transition to a
more optimized capital structure, financed with additional low-cost debt, could impact 3M's credit rating in the future.
Effective February 24, 2017, the Company updated its "well-known seasoned issuer" (WKSI) shelf registration statement,
which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M's
previous shelf registration dated May 16, 2014. In May 2016, in connection with the WKSI shelf, 3M entered into an amended
and restated distribution agreement relating to the future issuance and sale (from time to time) of the Company's
medium-term notes program (Series F), up to the aggregate principal amount of $18 billion, which was an increase from the
previous aggregate principal amount up to $9 billion of the same Series.
In March 2016, 3M amended and restated its existing $2.25 billion five-year revolving credit facility expiring in August
2019 to a $3.75 billion five-year revolving credit facility expiring in March 2021. This credit agreement includes a
provision under which 3M may request an increase of up to $1.25 billion (at lenders' discretion), bringing the total
facility up to $5.0 billion. This revolving credit facility is undrawn at September 30, 2017. Under the $3.75 billion
credit agreement, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at
not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the
four consecutive quarters then ended to total interest expense on all funded debt for the same period. At September 30,
2017, this ratio was approximately 42 to 1. Debt covenants do not restrict the payment of dividends. Apart from the
committed facilities, $290 million in stand-alone letters of credit and bank guarantees were also issued and outstanding at
September 30, 2017. These lines of credit are utilized in connection with normal business activities.
Cash, Cash Equivalents and Marketable Securities:
At September 30, 2017, 3M had $3.4 billion of cash, cash equivalents and marketable securities, of which approximately $3.3
billion was held by the Company's foreign subsidiaries and approximately $140 million was held by the United States. These
balances are invested in bank instruments and other high-quality fixed income securities. At December 31, 2016, cash, cash
equivalents and marketable securities held by the Company's foreign subsidiaries and by the United States totaled
approximately $2.35 billion and $350 million, respectively.
Net Debt (non-GAAP measure):
Net debt is not defined under U.S. GAAP and may not be computed the same as similarly titled measures used by other
companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term
marketable securities. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be
important indicators of liquidity and financial position. The following table provides net debt as of September 30, 2017,
and December 31, 2016.
(Millions) September 30, 2017 December 31, 2016 Change
Total debt $ 11,663 $ 11,650 $ 13
Less: Cash, cash equivalents and marketable securities 3,434 2,695 739
Net debt (non-GAAP measure) $ 8,229 $ 8,955 $ (726)
In the first nine months of 2017, net debt decreased by $726 million to a net debt balance of $8.2 billion, impacted by the
increase in cash and cash equivalents and marketable securities.
Balance Sheet:
3M's strong balance sheet and liquidity provide the Company with significant flexibility to take advantage of numerous
opportunities going forward. The Company will continue to invest in its operations to drive growth, including continual
review of acquisition opportunities.
The Company uses working capital measures that place emphasis and focus on certain working capital assets. These measures
include working capital, accounts receivable turns, and inventory turns.
Working Capital (non-GAAP measure):
(Millions) September 30, 2017 December 31, 2016 Change
Current assets $ 13,656 $ 11,726 $ 1,930
Less: Current liabilities (6,598) (6,219) (379)
Working capital (non-GAAP measure) $ 7,058 $ 5,507 $ 1,551
Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month to month
depending on short-term liquidity needs. Working capital is not defined under U.S. generally accepted accounting principles
and may not be computed the same as similarly titled measures used by other companies. The Company defines working capital
as current assets minus current liabilities. Working capital increased $1.551 billion compared to December 31, 2016.
Current asset balance changes increased working capital by $1.930 billion, driven by increases in accounts receivable, and
inventories (discussed further below), plus increases in cash. Current liability balance changes decreased working capital
by $379 million, largely due to increases in other current liabilities and accrued payroll, partially offset by decreases
in short-term debt. 3M believes working capital is meaningful to investors as a measure of operational efficiency and
short-term financial health.
Accounts Receivable and Inventory Turns (non-GAAP measures):
Accounts receivable and inventory turns are not defined under U.S. generally accepted accounting principles and may not be
computed the same as similarly titled measures used by other companies. 3M defines accounts receivable turns as quarterly
net sales multiplied by 4 divided by ending accounts receivable - net, and defines inventory turns as quarterly
manufacturing cost multiplied by 4 divided by ending inventory. 3M believes accounts receivable turns is meaningful to
investors as a measure of how efficiently the Company manages credit and collects from its customers. For inventory turns
calculation purposes, manufacturing cost is defined as cost of sales less freight and engineering costs. 3M believes
inventory turns is meaningful to investors as a measure of how quickly inventory is sold. Details of these calculations
follow.
Accounts receivable turns (non-GAAP measure)
(Millions, except turns) September 30, 2017 December 31, 2016
Quarterly net sales $ 8,172 $ 7,329
Ending accounts receivable - net $ 5,156 $ 4,392
Accounts receivable turns 6.34 6.67
Inventory turns (non-GAAP measure)
(Millions, except turns) September 30, 2017 December 31, 2016
Quarterly cost of sales $ 4,045 $ 3,716
Less: Freight and engineering $ 165 $ 160
Manufacturing cost $ 3,880 $ 3,556
Ending inventory $ 3,975 $ 3,385
Inventory turns 3.91 4.20
Concerning accounts receivable, higher September 2017 sales compared to December 2016 sales contributed to the accounts
receivable increase. On a seasonal basis, both accounts receivable and inventory turns are historically higher at year-end,
driven by lower year-end accounts receivable and inventory balances.
Cash Flows:
Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts in
the Consolidated Statement of Cash Flows exclude the effects of acquisitions, divestitures and exchange rate impacts on
cash and cash equivalents, which are presented as separate line items within the statement of cash flows. Thus, the amounts
presented in the following operating, investing and financing activities tables reflect changes in balances from period to
period adjusted for these effects.
Cash Flows from Operating Activities:
Nine months ended
September 30,
(Millions) 2017 2016
Net income including noncontrolling interest $ 4,344 $ 3,902
Depreciation and amortization 1,195 1,090
Company pension contributions (311) (320)
Company postretirement contributions (3) (3)
Company pension expense 207 144
Company postretirement expense 37 36
Stock-based compensation expense 266 244
Gain on sale of businesses (490) (40)
Income taxes (deferred and accrued income taxes) 144 55
Accounts receivable (595) (469)
Inventories (436) (15)
Accounts payable (25) (107)
Other - net 47 (64)
Net cash provided by operating activities $ 4,380 $ 4,453
Cash flows from operating activities can fluctuate significantly from period to period, as pension funding decisions, tax
timing differences and other items can significantly impact cash flows.
In the first nine months of 2017, cash flows provided by operating activities decreased $73 million compared to the same
period last year. Factors that decreased operating cash flows were increases in accounts receivable and inventories. The
combination of accounts receivable, inventories and accounts payable increased working capital by $1.056 billion in the
first nine months of 2017, compared to the working capital increases of $591 million in the first nine months of 2016.
Additional discussion on working capital changes is provided earlier in the "Financial Condition and Liquidity" section.
Cash Flows from Investing Activities:
Nine months ended
September 30,
(Millions) 2017 2016
Purchases of property, plant and equipment (PP&E) $ (914) $ (984)
Proceeds from sale of PP&E and other assets 18 18
Acquisitions, net of cash acquired (12) (17)
Purchases and proceeds from maturities and sale of marketable securities and investments, net (310) (242)
Proceeds from sale of businesses, net of cash sold 862 56
Other - net 2 (4)
Net cash used in investing activities $ (354) $ (1,173)
Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and
increasing manufacturing efficiency. 3M invests in renewal and maintenance programs, which pertain to cost reduction, cycle
time, maintaining and renewing current capacity, pollution reduction, and compliance. Costs related to maintenance,
ordinary repairs, and certain other items are expensed. 3M also invests in new growth capacity, both through expansion of
current facilities and by building new facilities. 3M also invests in corporate laboratory facilities and information
technology (IT). The Company expects 2017 capital spending to be approximately $1.4 billion.
Refer to Note 2 for information on acquisitions and divestitures. The Company is actively considering additional
acquisitions, investments and strategic alliances, and from time to time may also divest certain businesses. Proceeds from
sale of businesses in the first nine months of 2017 relate to the divestiture of the assets of the prescription safety
eyewear, identity management, and tolling and automated license/number plate recognition businesses within the Safety and
Graphics business segment.
Purchases of marketable securities and investments and proceeds from maturities and sale of marketable securities and
investments are primarily attributable to asset-backed securities, certificates of deposit/time deposits, commercial paper,
and other securities, which are classified as available-for-sale. Refer to Note 7 for more details about 3M's diversified
marketable securities portfolio. Purchases of investments include additional survivor benefit insurance, plus cost method
and equity investments.
Cash Flows from Financing Activities:
Nine months ended
September 30,
(Millions) 2017 2016
Change in short-term debt - net $ 60 $ (498)
Repayment of debt (maturities greater than 90 days) (650) (992)
Proceeds from debt (maturities greater than 90 days) - 2,832
Total cash change in debt $ (590) $ 1,342
Purchases of treasury stock (1,564) (2,829)
Proceeds from issuances of treasury stock pursuant to stock option and benefit plans 582 741
Dividends paid to shareholders (2,104) (2,014)
Other - net (23) (20)
Net cash used in financing activities $ (3,699) $ (2,780)
Total debt was approximately $11.7 billion at both September 30, 2017 and year-end 2016. Changes in short-term debt
includes the net impact of repayments and borrowings by international subsidiaries, in addition to commercial paper
issuances, if any. Refer to the preceding "Total Debt" section for discussion of repayment of debt and proceeds from debt
issuances.
Repurchases of common stock are made to support the Company's stock-based employee compensation plans and for other
corporate purposes. 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. The Company expects full-year 2017 gross share repurchases will
be in the range of $2.0 billion to $2.5 billion. For more information, refer to the table titled "Issuer Purchases of
Equity Securities" in Part II, Item 2. The Company does not utilize derivative instruments linked to the Company's stock.
3M has paid dividends each year since 1916. In February 2017, 3M's Board of Directors declared a first-quarter 2017
dividend of $1.175 per share, an increase of 6 percent. This is equivalent to an annual dividend of $4.70 per share and
marked the 59th consecutive year of dividend increases for 3M. In May 2017, 3M's Board of Directors declared a
second-quarter 2017 dividend of $1.175 per share. In August 2017, 3M's Board of Directors declared a third-quarter 2017
dividend of $1.175 per share.
Other cash flows from financing activities may include various other items, such as distributions to or sales of
noncontrolling interests, changes in cash overdraft balances, and principal payments for capital leases.
Free Cash Flow (non-GAAP measure):
Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting principles (GAAP).
Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP
and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net
cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the
entire free cash flow amount is available for discretionary expenditures. The Company defines free cash flow conversion as
free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flow conversion
are meaningful to investors as they are useful measures of performance and the Company uses these measures as an indication
of the strength of the company and its ability to generate cash. The first quarter of each year is typically 3M's seasonal
low for free cash flow and free cash flow conversion. Below find a recap of free cash flow for the nine months ended
September 30, 2017 and 2016.
Nine months ended
September 30,
(Millions) 2017 2016
Major GAAP Cash Flow Categories
Net cash provided by operating activities $ 4,380 $ 4,453
Net cash provided by (used in) investing activities (354) (1,173)
Net cash used in financing activities (3,699) (2,780)
Free Cash Flow (non-GAAP measure)
Net cash provided by operating activities $ 4,380 $ 4,453
Purchases of property, plant and equipment (PP&E) (914) (984)
Free cash flow $ 3,466 $ 3,469
Net income attributable to 3M $ 4,335 $ 3,895
Free cash flow conversion 80 % 89 %
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The Company may also make forward-looking statements in other reports filed with the Securities and
Exchange Commission, in materials delivered to shareholders and in press releases. In addition, the Company's
representatives may from time to time make oral forward-looking statements.
Forward-looking statements relate to future events and typically address the Company's expected future business and
financial performance. Words such as "plan," "expect," "aim," "believe," "project," "target," "anticipate," "intend,"
"estimate," "will," "should," "could," "forecast" and other words and terms of similar meaning, typically identify such
forward-looking statements. In particular, these include, among others, statements relating to:
· the Company's strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of
financial performance, and market position,
· worldwide economic, political, and capital markets conditions, such as interest rates, foreign currency exchange
rates, financial conditions of our suppliers and customers, and natural and other disasters or climate change affecting the
operations of the Company or its suppliers and customers,
· new business opportunities, product development, and future performance or results of current or anticipated
products,
· the scope, nature or impact of acquisitions, strategic alliances and divestitures,
· the outcome of contingencies, such as legal and regulatory proceedings,
· future levels of indebtedness, common stock repurchases and capital spending,
· future availability of and access to credit markets,
· pension and postretirement obligation assumptions and future contributions,
· asset impairments,
· tax liabilities,
· information technology security, and
· the effects of changes in tax, environmental and other laws and regulations in the United States and other countries
in which we operate.
The Company assumes no obligation to update or revise any forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject
to risks and uncertainties. Actual future results and trends may differ materially from historical results or those
reflected in any such forward-looking statements depending on a variety of factors. Important information as to these
factors can be found in this document, including, among others, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the headings of "Overview," "Financial Condition and Liquidity" and annually in
"Critical Accounting Estimates." Discussion of these factors is incorporated by reference from Part II, Item 1A, "Risk
Factors," of this document, and should be considered an integral part of Part I, Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." For additional information concerning factors that may cause
actual results to vary materially from those stated in the forward-looking statements, see our reports on Form 10-K, 10-Q
and 8-K filed with the SEC from time to time.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the context of Item 3, 3M is exposed to market risk due to the risk of loss arising from adverse changes in foreign
currency exchange rates, interest rates and commodity prices. Changes in those factors could impact the Company's results
of operations and financial condition. For a discussion of sensitivity analysis related to these types of market risks,
refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in 3M's Current Report on Form 8-K
dated May 4, 2017 (which updated 3M's 2016 Annual Report on Form 10-K). There have been no material changes in information
that would have been provided in the context of Item 3 from the end of the preceding year until September 30, 2017.
However, the Company does provide risk management discussion in various places in this Quarterly Report on Form 10-Q,
primarily in the Derivatives note.
Item 4. Controls and Procedures.
a. The Company carried out an evaluation, under the supervision and with the participation of its management, including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's
"disclosure controls and procedures" (as defined in the Exchange Act Rule 13a-15(e)) as of the end of the period covered by
this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective.
b. There was no change in the Company's internal control over financial reporting that occurred during the Company's most
recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
The Company is implementing an enterprise resource planning ("ERP") system on a worldwide basis, which is expected to
improve the efficiency of certain financial and related transaction processes. The gradual implementation is expected to
occur in phases over the next several years. The implementation of a worldwide ERP system will likely affect the processes
that constitute our internal control over financial reporting and will require testing for effectiveness.
The Company completed implementation with respect to elements of certain processes/sub-processes in limited
subsidiaries/locations and will continue to roll out the ERP system over the next several years. As with any new
information technology application we implement, this application, along with the internal controls over financial
reporting included in this process, was appropriately considered within the testing for effectiveness with respect to the
implementation in these instances. We concluded, as part of its evaluation described in the above paragraphs, that the
implementation of the ERP system in these circumstances has not materially affected our internal control over financial
reporting.
3M COMPANY
FORM 10-Q
For the Quarterly Period Ended September 30, 2017
PART II. Other Information
Item 1. Legal Proceedings.
Discussion of legal matters is incorporated by reference from Part I, Item 1, Note 12, "Commitments and Contingencies" of
this document, and should be considered an integral part of Part II, Item 1, "Legal Proceedings."
Item 1A. Risk Factors.
Provided below is a cautionary discussion of what we believe to be the most important risk factors applicable to the
Company. Discussion of these factors is incorporated by reference into and considered an integral part of Part I, Item 2,
"Management's Discussion and Analysis of Financial Conditions and Results of Operations."
* Results are impacted by the effects of, and changes in, worldwide economic, political, and capital markets conditions.
The Company operates in more than 70 countries and derives approximately 60 percent of its revenues from outside the United
States. The Company's business is subject to global competition and geopolitical risks and may be adversely affected by
factors in the United States and other countries that are beyond its control, such as slower economic growth, disruptions
in financial markets, economic downturns in the form of either contained or widespread recessionary conditions, inflation,
elevated unemployment levels, sluggish or uneven recovery, government deficit reduction and other austerity measures in
specific countries or regions, or in the various industries in which the Company operates; social, political or labor
conditions in specific countries or regions; natural and other disasters or climate change affecting the operations of the
Company or its customers and suppliers; or adverse changes in the availability and cost of capital, interest rates, tax
rates, tax laws, or exchange control, ability to expatriate earnings and other regulations in the jurisdictions in which
the Company operates.
* Change in the Company's credit ratings could increase cost of funding. The Company's credit ratings are important to 3M's
cost of capital. The major rating agencies routinely evaluate the Company's credit profile and assign debt ratings to 3M.
This evaluation is based on a number of factors, which include financial strength, business and financial risk, as well as
transparency with rating agencies and timeliness of financial reporting. 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's credit ratings have served to lower 3M's borrowing costs and facilitate access to a variety of lenders. The
Company's ongoing transition to a better-optimized capital structure, financed with additional low-cost debt, could impact
3M's credit rating in the future. Failure to maintain strong investment grade ratings would adversely affect the Company's
cost of funding and could adversely affect liquidity and access to capital markets.
* The Company's results are affected by competitive conditions and customer preferences. Demand for the Company's products,
which impacts revenue and profit margins, is affected by (i) the development and timing of the introduction of competitive
products; (ii) the Company's response to downward pricing to stay competitive; (iii) changes in customer order patterns,
such as changes in the levels of inventory maintained by customers and the timing of customer purchases which may be
affected by announced price changes, changes in the Company's incentive programs, or the customer's ability to achieve
incentive goals; and (iv) changes in customers' preferences for our products, including the success of products offered by
our competitors, and changes in customer designs for their products that can affect the demand for some of the Company's
products.
* Foreign currency exchange rates and fluctuations in those rates may affect the Company's ability to realize projected
growth rates in its sales and earnings. Because the Company's financial statements are denominated in U.S. dollars and
approximately 60 percent of the Company's revenues are derived from outside the United States, the Company's results of
operations and its ability to realize projected growth rates in sales and earnings could be adversely affected if the U.S.
dollar strengthens significantly against foreign currencies.
* The Company's growth objectives are largely dependent on the timing and market acceptance of its new product offerings,
including its ability to continually renew its pipeline of new products and to bring those products to market. This ability
may be adversely affected by difficulties or delays in product development, such as the inability to identify viable new
products, obtain adequate intellectual property protection, or gain market acceptance of new products. There are no
guarantees that new products will prove to be commercially successful.
* The Company's future results are subject to fluctuations in the costs and availability of purchased components,
compounds, raw materials and energy, including oil and natural gas and their derivatives, due to shortages, increased
demand, supply interruptions, currency exchange risks, natural disasters and other factors. The Company depends on various
components, compounds, raw materials, and energy (including oil and natural gas and their derivatives) supplied by others
for the manufacturing of its products. It is possible that any of its supplier relationships could be interrupted due to
natural and other disasters and other events, or be terminated in the future. Any sustained interruption in the Company's
receipt of adequate supplies could have a material adverse effect on the Company. In addition, while the Company has a
process to minimize volatility in component and material pricing, no assurance can be given that the Company will be able
to successfully manage price fluctuations or that future price fluctuations or shortages will not have a material adverse
effect on the Company.
* Acquisitions, strategic alliances, divestitures, and other unusual events resulting from portfolio management actions and
other evolving business strategies, and possible organizational restructuring could affect future results. The Company
monitors its business portfolio and organizational structure and has made and may continue to make acquisitions, strategic
alliances, divestitures and changes to its organizational structure. With respect to acquisitions, future results will be
affected by the Company's ability to integrate acquired businesses quickly and obtain the anticipated synergies.
* The Company's future results may be affected if the Company generates fewer productivity improvements than estimated. The
Company utilizes various tools, such as Lean Six Sigma, and engages in ongoing global business transformation. Business
transformation is defined as changes in processes and internal/external service delivery across 3M to move to more
efficient business models to improve operational efficiency and productivity, while allowing 3M to serve customers with
greater speed and efficiency. This is enabled by the ongoing multi-year phased implementation of an enterprise resource
planning (ERP) system on a worldwide basis. There can be no assurance that all of the projected productivity improvements
will be realized.
* The Company employs information technology systems to support its business, including ongoing phased implementation of an
ERP system as part of business transformation on a worldwide basis over the next several years. Security breaches and other
disruptions to the Company's information technology infrastructure could interfere with the Company's operations,
compromise information belonging to the Company and its customers, suppliers, and employees, exposing the Company to
liability which could adversely impact the Company's business and reputation. In the ordinary course of business, the
Company relies on information technology networks and systems, some of which are managed by third parties, to process,
transmit and store electronic information, and to manage or support a variety of business processes and activities.
Additionally, the Company collects and stores certain data, including proprietary business information, and may have access
to confidential or personal information in certain of our businesses that is subject to privacy and security laws,
regulations and customer-imposed controls. Despite our cybersecurity measures (including employee and third-party training,
monitoring of networks and systems, and maintenance of backup and protective systems) which are continuously reviewed and
upgraded, the Company's information technology networks and infrastructure may still be vulnerable to damage, disruptions
or shutdowns due to attack by hackers or breaches, employee error or malfeasance, power outages, computer viruses,
telecommunication or utility failures, systems failures, service providers including cloud services, natural disasters or
other catastrophic events. It is possible for such vulnerabilities to remain undetected for an extended period, up to and
including several years. While we have experienced, and expect to continue to experience, these types of threats to the
Company's information technology networks and infrastructure, none of them to date has had a material impact to the
Company. There may be other challenges and risks as the Company upgrades and standardizes its ERP system on a worldwide
basis. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption
in operations, and damage to the Company's reputation, which could adversely affect the Company's business. Although the
Company maintains insurance coverage for various cybersecurity risks, there can be no guarantee that all costs or losses
incurred will be fully insured.
* The Company's defined benefit pension and postretirement plans are subject to financial market risks that could adversely
impact our results. The performance of financial markets and discount rates impact the Company's funding obligations under
its defined benefit plans. Significant changes in market interest rates, decreases in the fair value of plan assets and
investment losses on plan assets, and relevant legislative or regulatory changes relating to defined benefit plan funding
may increase the Company's funding obligations and adversely impact its results of operations and cash flows.
* The Company's future results may be affected by various legal and regulatory proceedings and legal compliance risks,
including those involving product liability, antitrust, intellectual property, environmental, the U.S. Foreign Corrupt
Practices Act and other anti-bribery, anti-corruption, or other matters. The outcome of these legal proceedings may differ
from the Company's expectations because the outcomes of litigation, including regulatory matters, are often difficult to
reliably predict. Various factors or developments can lead the Company to change current estimates of liabilities and
related insurance receivables where applicable, or make such estimates for matters previously not susceptible of reasonable
estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments
or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in future charges
that could have a material adverse effect on the Company's results of operations or cash flows in any particular period.
For a more detailed discussion of the legal proceedings involving the Company and the associated accounting estimates, see
the discussion in Note 12 "Commitments and Contingencies" within the Notes to Consolidated Financial Statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
Repurchases of 3M common stock are made to support the Company's stock-based employee compensation plans and for other
corporate purposes. 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.
Issuer Purchases of Equity
Securities (registered pursuant to
Section 12 of the Exchange Act)
Maximum
Approximate
Dollar Value of
Total Number of Shares that May
Shares Purchased Yet Be Purchased
Total Number of Average Price as Part of Publicly under the Plans
Shares Purchased Paid per Announced Plans or Programs
Period (1) Share or Programs (2) (Millions)
January 1-31, 2017 1,245,580 $ 177.61 1,245,347 $ 6,835
February 1-28, 2017 1,038,362 $ 182.41 1,037,719 $ 6,645
March 1-31, 2017 1,168,893 $ 190.75 1,168,893 $ 6,422
Total January 1-March 31, 2017 3,452,835 $ 183.50 3,451,959 $ 6,422
April 1-30, 2017 934,900 $ 191.64 933,463 $ 6,244
May 1-31, 2017 1,017,290 $ 197.80 1,017,000 $ 6,042
June 1-30, 2017 396,770 $ 208.83 396,770 $ 5,960
Total April 1-June 30, 2017 2,348,960 $ 197.21 2,347,233 $ 5,960
Total January 1-June 30, 2017 5,801,795 $ 189.05 5,799,192 $ 5,960
July 1-31, 2017 431,272 $ 205.00 431,272 $ 5,871
August 1-31, 2017 572,552 $ 204.69 572,552 $ 5,754
September 1-30, 2017 893,559 $ 209.62 893,559 $ 5,567
Total July 1-September 30, 2017 1,897,383 $ 207.08 1,897,383 $ 5,567
Total January 1-September 30, 2017 7,699,178 $ 193.49 7,696,575 $ 5,567
(1) The total number of shares purchased includes: (i) shares purchased under the Board's authorizations described above,
and (ii) shares purchased in connection with the exercise of stock options.
(2) The total number of shares purchased as part of publicly announced plans or programs includes shares purchased under
the Board's authorizations described above.
Item 3. Defaults Upon Senior Securities. - No matters require disclosure.
Item 4. Mine Safety Disclosures. Pursuant to Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the "Act"), the Company is required to disclose, in connection with the mines it operates, information concerning mine
safety violations or other regulatory matters in its periodic reports filed with the SEC. The information concerning mine
safety violations or other regulatory matters required by Section 1503(a) of the Act is included in Exhibit 95 to this
quarterly report.
Item 5. Other Information. - No matters require disclosure.
Item 6. Exhibits.
(12) Calculation of ratio of earnings to fixed charges.
(15) A letter from the Company's independent registered public accounting firm regarding unaudited interim consolidated financial statements.
(31.1) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
(31.2) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
(32.1)
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