REG - 3M Company - Annual Financial Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 2
01/04/2016 14:49
- Part 2: For the preceding part double click ID:nRSO0010Pa
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 14 "Commitments and Contingencies" within the Notes to Consolidated Financial Statements.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
3M's general offices, corporate research laboratories, and certain division laboratories are located in St. Paul,
Minnesota. The Company operates 88 manufacturing facilities in 29 states. The Company operates 127 manufacturing and
converting facilities in 37 countries outside the United States.
3M owns the majority of its physical properties. 3M's physical facilities are highly suitable for the purposes for which
they were designed. Because 3M is a global enterprise characterized by substantial intersegment cooperation, properties are
often used by multiple business segments.
Item 3. Legal Proceedings.
Discussion of legal matters is incorporated by reference from Part II, Item 8, Note 14, "Commitments and Contingencies," of
this document, and should be considered an integral part of Part I, Item 3, "Legal Proceedings."
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. For the year 2015, 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 annual
report.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Equity compensation plans' information is incorporated by reference from Part III, Item 12, "Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters," of this document, and should be considered an integral
part of Item 5. At January 31, 2016, there were 84,607 shareholders of record. 3M's stock is listed on the New York Stock
Exchange, Inc. (NYSE), the Chicago Stock Exchange, Inc., and the SWX Swiss Exchange. Cash dividends declared and paid
totaled $1.025 per share for each of the second, third, and fourth quarters of 2015. Cash dividends declared in the fourth
quarter of 2014 included a dividend paid in November 2014 of $0.855 per share and a dividend paid in March 2015 of $1.025
per share. Cash dividends declared and paid totaled $0.855 per share for each of the second and third quarters of 2014.
Cash dividends declared in the fourth quarter of 2013 include a dividend paid in March 2014 of $0.855 per share. Stock
price comparisons follow:
Stock price comparisons (NYSE composite transactions)
(Per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter Total
2015 High $ 170.50 $ 167.70 $ 157.94 $ 160.09 $ 170.50
2015 Low 157.74 153.92 134.00 138.57 134.00
2014 High $ 139.29 $ 145.53 $ 147.87 $ 168.16 $ 168.16
2014 Low 123.61 132.02 138.43 130.60 123.61
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 2014, 3M's Board of Directors authorized the repurchase of up to $12 billion of 3M's
outstanding common stock, with no pre-established end date. In February 2016, 3M's Board of Directors replaced the
Company's February 2014 repurchase program with a new repurchase program. This new program authorizes 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, 2015 1,628,420 $ 161.61 1,628,420 $ 6,440
February 1-28, 2015 1,451,986 $ 166.64 1,449,538 $ 6,198
March 1-31, 2015 2,001,351 $ 164.58 2,000,848 $ 5,869
Total January 1-March 31, 2015 5,081,757 $ 164.22 5,078,806 $ 5,869
April 1-30, 2015 2,937,143 $ 160.60 2,934,726 $ 5,398
May 1-31, 2015 3,966,294 $ 160.30 3,966,100 $ 4,762
June 1-30, 2015 4,294,763 $ 157.50 4,294,763 $ 4,085
Total April 1-June 30, 2015 11,198,200 $ 159.30 11,195,589 $ 4,085
July 1-31, 2015 4,943,483 $ 154.28 4,943,483 $ 3,323
August 1-31, 2015 2,428,004 $ 144.75 2,428,004 $ 2,971
September 1-30, 2015 2,371,046 $ 140.13 2,369,922 $ 2,639
Total July 1-September 30, 2015 9,742,533 $ 148.46 9,741,409 $ 2,639
October 1-31, 2015 1,922,628 $ 151.09 1,922,628 $ 2,349
November 1-30, 2015 2,052,151 $ 157.89 2,051,444 $ 2,025
December 1-31, 2015 3,669,029 $ 152.01 3,669,029 $ 1,467
Total October 1-December 31, 2015 7,643,808 $ 153.36 7,643,101 $ 1,467
Total January 1-December 31, 2015 33,666,298 $ 155.56 33,658,905 $ 1,467
(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 6. Selected Financial Data.
(Dollars in millions, except per share amounts) 2015 2014 2013 2012 2011
Years ended December 31:
Net sales $ 30,274 $ 31,821 $ 30,871 $ 29,904 $ 29,611
Net income attributable to 3M 4,833 4,956 4,659 4,444 4,283
Per share of 3M common stock:
Net income attributable to 3M - basic 7.72 7.63 6.83 6.40 6.05
Net income attributable to 3M - diluted 7.58 7.49 6.72 6.32 5.96
Cash dividends declared per 3M common share 3.075 3.59 3.395 2.36 2.20
Cash dividends paid per 3M common share 4.10 3.42 2.54 2.36 2.20
At December 31:
Total assets $ 32,718 $ 31,209 $ 33,304 $ 33,841 $ 31,584
Long-term debt (excluding portion due within one year) and long-term capital lease obligations 8,799 6,764 4,367 4,970 4,549
In 2015, 3M's Board of Directors declared a second, third, and fourth quarter dividend of $1.025 per share, which resulted
in total year 2015 declared dividends of $3.075 per share. In December 2014, 3M's Board of Directors declared a
first-quarter 2015 dividend of $1.025 per share (paid in March 2015), which when added to second, third, and fourth quarter
2014 declared dividends of $0.855 per share, resulted in total year 2014 declared dividends of $3.59 per share. In December
2013, 3M's Board of Directors declared a first-quarter 2014 dividend of $0.855 per share (paid in March 2014). This
resulted in total year 2013 declared dividends of $3.395 per share, with $2.54 per share paid in 2013 and the additional
$0.855 per share paid in March 2014.
Item 7. 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 eight
sections:
· Overview
· Results of Operations
· Performance by Business Segment
· Performance by Geographic Area
· Critical Accounting Estimates
· New Accounting Pronouncements
· Financial Condition and Liquidity
· Financial Instruments
Forward-looking statements in Item 7 may involve risks and uncertainties that could cause results to differ materially from
those projected (refer to the section entitled "Cautionary Note Concerning Factors That May Affect Future Results" in Item
1 and the risk factors provided in Item 1A for discussion of these risks and uncertainties).
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. As
described in Note 16, effective in the third quarter of 2015, within the Health Care business segment, the Company formed
the Oral Care Solutions Division, which combined the former 3M ESPE and 3M Unitek divisions. 3M manages its operations in
five operating business segments: Industrial; Safety and Graphics; Health Care; Electronics and Energy; and Consumer. From
a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis.
Restructuring actions:
During the fourth quarter of 2015, management approved and committed to undertake certain restructuring actions primarily
focused on structural overhead, largely in the U.S., and slower-growing markets, with particular emphasis on EMEA and Latin
America. This impacted approximately 1,700 positions worldwide and resulted in a fourth-quarter 2015 pre-tax charge of $114
million, $88 million after-tax or $0.14 per diluted share.
Earnings per share attributable to 3M common shareholders - diluted:
The following table provides the increase (decrease) in diluted earnings per share for 2015 compared to 2014, and 2014
compared to 2013.
Year ended
December 31,
(Earnings per diluted share) 2015 2014
Same period last year $ 7.49 $ 6.72
Increase/(decrease) in earnings per share - diluted, due to:
Operational benefits 0.40 0.66
Restructuring charges (0.14) -
Acquisitions and divestitures (0.02) -
Foreign exchange impacts (0.43) (0.15)
Income tax rate - (0.08)
Shares of common stock outstanding 0.28 0.34
Current period $ 7.58 $ 7.49
For total year 2015, net income attributable to 3M was $4.833 billion, or $7.58 per diluted share, compared to $4.956
billion, or $7.49 per diluted share, in 2014, an increase of 1.2 percent on a per diluted share basis. Operational benefits
include the combination of selling price increases and raw material cost decreases, partially offset by higher
pension/postretirement benefit costs. Restructuring actions (discussed above) resulted in an after-tax charge of 14 cents
per diluted share. Acquisition and divestiture impacts primarily relate to the Capital Safety and Polypore Separations
Media acquisitions, and the divestitures of the license plate converting business in France and substantially all of the
library systems business. Foreign exchange impacts decreased earnings per diluted share by approximately 43 cents
year-on-year, driven by average year-on-year changes in foreign exchange rates in the Euro of 17 percent, Yen of 12
percent, and Brazil Real of 30 percent. The income tax rate was largely unchanged year-on-year. Weighted-average diluted
shares outstanding in 2015 declined 3.7 percent year-on-year to 637.2 million, which increased earnings per diluted share
by approximately 28 cents. Refer to the section entitled "Results of Operations" for further discussion.
For total year 2014, net income attributable to 3M was $4.956 billion, or $7.49 per diluted share, compared to $4.659
billion, or $6.72 per diluted share, in 2013, an increase of 11.5 percent on a per diluted share basis. Operational
benefits include a significant benefit from the combination of selling price increases and raw material cost decreases,
plus profit leverage on organic volume growth. Foreign exchange impacts decreased earnings per diluted share by
approximately 15 cents per diluted share. The income tax rate was 28.9 percent in 2014, up 0.8 percentage points versus
2013, which decreased earnings per diluted share by approximately 8 cents. Weighted-average diluted shares outstanding in
2014 declined 4.6 percent year-on-year to 662.0 million, which increased earnings per diluted share by approximately 34
cents.
Fourth-quarter 2015 sales and operating income results:
Fourth-quarter 2015 net income attributable to 3M was $1.038 billion, or $1.66 per diluted share, compared to $1.179
billion, or $1.81 per diluted share, in the fourth quarter of 2014. Fourth-quarter 2015 sales totaled $7.3 billion, a
decrease of 5.4 percent from the fourth quarter of 2014. 3M achieved organic local-currency sales growth (which includes
organic volume and selling price impacts) in Health Care, and Consumer, with declines in Industrial, Safety and Graphics,
and Electronics and Energy. Organic local-currency sales increased 4.5 percent in Health Care, led by health information
systems, food safety, oral care, drug delivery systems, and critical and chronic care. Organic local-currency sales
increased 2.7 percent in the Consumer business segment, with positive growth in the construction and home improvement
business, stationery and office supplies, and home care, while consumer health care declined. Organic local-currency sales
declined 1.8 percent in Industrial, with sales growth in 3M purification and automotive OEM more than offset by declines in
industrial adhesives and tapes, abrasives, and advanced materials. Organic local-currency sales declined 2.5 percent in
Safety and Graphics, with sales declines in personal safety partially offset by sales growth in roofing granules, and
commercial solutions, while traffic safety and security was flat. Electronics and Energy organic local-currency sales
growth declined 7.7 percent, with decreases in electronic-related sales in both electronics materials solutions, and
display materials and systems. Energy-related organic local-currency sales declined in renewable energy, communications
markets, and electrical markets. For the Company in total, organic-local currency sales declined 1.1 percent, with organic
volume declines of 2.3 percent partially offset by higher selling prices which added 1.2 percent. Acquisitions added 1.9
percent to sales, which related to the March 2015 acquisition of Ivera Medical Corp. (Ivera), the August 2015 acquisition
of Capital Safety Group S.A.R.L. (Capital Safety), and the August 2015 acquisition of Polypore International Inc.'s
Separations Media business (Polypore). Divestitures reduced sales by 0.4 percent, related to the January 2015 sale of the
global static business, and the fourth quarter sale of the license converting business in France, along with substantially
all of the library systems business. Foreign currency translation reduced sales by 5.8 percent year-on-year.
From a geographic area perspective, fourth-quarter 2015 organic local-currency sales grew 1.1 percent in EMEA. Organic
local-currency sales declined 0.4 percent in the United States, 0.6 percent in Latin America/Canada, and 2.7 percent in
Asia Pacific. In EMEA, Central/East Europe showed solid local-currency sales growth in the quarter, while West Europe was
up slightly, and Middle East/Africa declined. Organic local-currency sales in the United States declined, as 3M experienced
weak end-market demand in its industrial-related businesses. The consumer-oriented businesses (Health Care and Consumer)
continued to deliver positive organic growth. Organic local-currency sales in Latin America/Canada declined. In Latin
America, Mexico continued its trend of strong organic growth, increasing 7 percent, while Brazil declined 6 percent.
Organic local-currency sales in Asia Pacific declined 2.7 percent. Three of five business groups posted positive growth in
the Asia Pacific region, led by Health Care and Consumer, while Electronics and Energy declined. Within Asia Pacific,
organic local-currency sales declined by 3 percent in both Japan and China/Hong Kong.
Operating income in the fourth quarter of 2015 was 20.5 percent of sales, compared to 21.5 percent of sales in the fourth
quarter of 2014, a decrease of 1.0 percentage points. Restructuring charges reduced operating income margins by 1.6
percentage points. In addition, higher pension/postretirement benefit costs reduced margins. These impacts were partially
offset by a benefit from the combination of selling price increases and raw material cost decreases.
Year 2015 sales and operating income results:
Sales totaled $30.3 billion, a decrease of 4.9 percent from 2014. From a business segment perspective, organic
local-currency sales increased 3.7 percent in Health Care, 3.4 percent in Consumer, 2.4 percent in Safety and Graphics, and
0.7 percent in Industrial, while sales declined 1.9 percent in Electronics and Energy. From a geographic area perspective,
2015 organic local-currency sales grew 2.1 percent in the United States, 1.5 percent in Latin America/Canada, 0.9 percent
in Asia Pacific, and 0.8 percent in EMEA. For the Company in total, organic local-currency sales grew 1.3 percent, with
higher organic volumes contributing 0.2 percent and selling price increases contributing 1.1 percent. Acquisitions added
0.8 percent to sales, while divestitures reduced sales by 0.2 percent. Foreign currency translation reduced sales by 6.8
percent year-on-year. Refer to the sections entitled "Performance by Business Segment" and "Performance by Geographic Area"
for additional detail.
Operating income in 2015 was 22.9 percent of sales, compared to 22.4 percent of sales in 2014, an increase of 0.5
percentage points. These results included a benefit from the combination of selling price increases and raw material cost
decreases, partially offset by higher pension/postretirement benefit costs. Refer to the section entitled "Results of
Operations" for further discussion.
Year 2014 sales and operating income results:
For total year 2014, net income attributable to 3M was $4.956 billion, or $7.49 per diluted share, compared to $4.659
billion, or $6.72 per diluted share, in 2013, an increase of 11.5 percent on a per diluted share basis. Sales totaled $31.8
billion, an increase of 3.1 percent from 2013. From a business segment perspective, organic local-currency sales grew 5.8
percent in Health Care, 5.4 percent in Safety and Graphics, 5.2 percent in Electronics and Energy, 4.9 percent in
Industrial, and 3.9 percent in Consumer. From a geographic area perspective, 2014 organic local-currency sales grew 6.3
percent in Asia Pacific, 4.9 percent in the United States, 4.5 percent in Latin America/Canada, and 3.2 percent in EMEA.
For the Company in total, organic local-currency sales grew 4.9 percent, with higher organic volumes contributing 3.9
percent and selling price increases contributing 1.0 percent. Acquisitions added 0.1 percent to sales, driven by the Treo
acquisition. Foreign currency translation reduced sales by 1.9 percent year-on-year.
Operating income in 2014 was 22.4 percent of sales, compared to 21.6 percent of sales in 2013, an increase of 0.8
percentage points. These results included a benefit from the combination of selling price increases and raw material cost
decreases, lower pension/postretirement benefit costs, and profit leverage on organic volume growth. These factors were
partially offset by strategic investments and other factors. Refer to the section entitled "Results of Operations" for
further discussion.
Sales and operating income by business segment:
The following table contains sales and operating income results by business segment for the years ended December 31, 2015
and 2014. In addition to the discussion below, refer to the section entitled "Performance by Business Segment" and
"Performance by Geographic Area" 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 16 for additional
information on business segments, including Elimination of Dual Credit.
2015 vs 2014
2015 2014 % change
Net % of Oper. Net % of Oper. Net Oper.
(Dollars in millions) Sales Total Income Sales Total Income Sales Income
Business Segments
Industrial $ 10,328 34.1 % $ 2,263 $ 10,990 34.5 % $ 2,389 (6.0) % (5.3) %
Safety and Graphics 5,515 18.2 % 1,305 5,732 18.0 % 1,296 (3.8) % 0.7 %
Health Care 5,420 17.9 % 1,724 5,572 17.5 % 1,724 (2.7) % - %
Electronics and Energy 5,220 17.2 % 1,102 5,604 17.6 % 1,115 (6.8) % (1.1) %
Consumer 4,422 14.6 % 1,046 4,523 14.2 % 995 (2.2) % 5.2 %
Corporate and Unallocated 1 - % (355) 4 - % (251) - -
Elimination of Dual Credit (632) (2.0) % (139) (604) (1.8) % (133) - -
Total Company $ 30,274 100.0 % $ 6,946 $ 31,821 100.0 % $ 7,135 (4.9) % (2.6) %
Sales in 2015 decreased 4.9 percent, substantially impacted by foreign currency translation, which reduced sales by 6.8
percent. Sales in U.S. dollars declined in Consumer by 2.2 percent, Health Care by 2.7 percent, Safety and Graphics by 3.8
percent, Industrial by 6.0 percent, and Electronics and Energy by 6.8 percent. Total company organic local-currency sales
growth (which includes organic volume and selling price impacts) was 1.3 percent, acquisitions added 0.8 percent,
divestitures reduced sales by 0.2 percent, and foreign currency translation reduced sales by 6.8 percent. All of 3M's five
business segments posted operating income margins of approximately 21 percent or more in 2015. Worldwide operating income
margins for 2015 were 22.9 percent, compared to 22.4 percent for 2014.
Sales in 2014 increased 3.1 percent, led by Health Care at 4.5 percent, Electronics and Energy at 3.9 percent, Industrial
at 3.1 percent, Safety and Graphics at 2.7 percent, and Consumer at 2.0 percent. Total company organic local-currency sales
growth (which includes organic volume and selling price impacts) was 4.9 percent, acquisitions added 0.1 percent, and
foreign currency translation reduced sales by 1.9 percent. All of 3M's five business segments posted operating income
margins of approximately 20 percent or more in 2014. Worldwide operating income margins for 2014 were 22.4 percent,
compared to 21.6 percent for 2013.
Financial condition:
3M generated $6.4 billion of operating cash flow in 2015, a decrease of $206 million when compared to 2014. This followed
an increase of $809 million when comparing 2014 to 2013. 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, which replaced the Company's February 2014 repurchase
program. This new program has no pre-established end date. In 2015, 2014, and 2013, the Company purchased more than $5
billion of its own stock each year. The Company expects to purchase $4 billion to $6 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. 3M's debt to total capital ratio (total capital defined
as debt plus equity) was 48 percent at December 31, 2015, 34 percent at December 31, 2014, and 25 percent at December 31,
2013. The Company has an AA- credit rating, with a stable outlook, from Standard & Poor's and an Aa3 credit rating, with a
negative outlook, from Moody's Investors Service. The Company has significant cash on hand and sufficient additional access
to capital markets to meet its funding needs.
Raw materials:
In 2015, the Company experienced declining costs for most raw material categories and transportation fuel, due largely to
the significant price decreases in crude oil. This in turn drove year-on-year cost decreases in many feedstock categories,
including petroleum based materials, minerals, metals and wood pulp based products. To date the Company is receiving
sufficient quantities of all raw materials to meet its reasonably foreseeable production requirements. It is impossible to
predict future shortages of raw materials or the impact any such shortages would have. 3M has avoided disruption to its
manufacturing operations through careful management of existing raw material inventories and development and qualification
of additional supply sources. 3M manages commodity price risks through negotiated supply contracts, price protection
agreements and forward contracts.
Pension and postretirement defined benefit/contribution plans:
On a worldwide basis, 3M's pension and postretirement plans were 86 percent funded at year-end 2015. The primary U.S.
qualified pension plan, which is approximately 69 percent of the worldwide pension obligation, was 91 percent funded and
the international pension plans were 90 percent funded. The U.S. non-qualified pension plan is not funded due to tax
considerations and other factors. Asset returns in 2015 for the primary U.S. qualified pension plan was 0.7%, as 3M
strategically invests in both growth assets and fixed income matching assets to manage its funded status. For the primary
U.S. qualified pension plan, the expected long-term rate of return on an annualized basis for 2016 is 7.50%, down 0.25%
from 2015. The primary U.S. qualified pension plan year-end 2015 discount rate was 4.47%, up 0.37 percentage points from
the year-end 2014 discount rate of 4.10%. The increase in U.S. discount rates resulted in a decreased valuation of the
projected benefit obligation (PBO), however the plan's funded status decreased slightly in 2015 as the growth in the PBO
increased at a greater rate than the plan assets returned in 2015. Additional detail and discussion of international plan
asset returns and discount rates is provided in Note 11 (Pension and Postretirement Benefit Plans).
3M expects to contribute approximately $100 million to $200 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. 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. Refer to "Critical Accounting Estimates" within MD&A and Note 11 (Pension and Postretirement Benefit Plans) for
additional information concerning 3M's pension and post-retirement plans.
Beginning on January 1, 2016, with respect to defined contribution plans, the Company reduced its match on employee 401(k)
contributions for U.S. employees. Previously, based on the date the employee was hired, up to 6% of eligible compensation
was matched in cash at rates of 60%, 75% or 100%. Beginning in 2016, 5% of eligible compensation will be matched at rates
of 45%, 60% or 100%, respectively. The reduction in the company's match is anticipated to reduce 2016 defined contribution
pension expense by approximately $35 million.
RESULTS OF OPERATIONS
Net Sales:
2015 2014
U.S. Intl. Worldwide U.S. Intl. Worldwide
Net sales (millions) $ 12,049 $ 18,225 $ 30,274 $ 11,714 $ 20,107 $ 31,821
% of worldwide sales 39.8 % 60.2 % 36.8 % 63.2 %
Components of net sales change:
Volume - organic 1.7 % (0.5) % 0.2 % 4.4 % 3.8 % 3.9 %
Price 0.4 1.4 1.1 0.5 1.2 1.0
Organic local-currency sales 2.1 0.9 1.3 4.9 5.0 4.9
Acquisitions 1.2 0.5 0.8 0.2 - 0.1
Divestitures (0.4) (0.1) (0.2) (0.1) - -
Translation - (10.7) (6.8) - (3.0) (1.9)
Total sales change 2.9 % (9.4) % (4.9) % 5.0 % 2.0 % 3.1 %
In 2015, organic local-currency sales grew 1.3 percent, with increases of 2.1 percent in the United States, 1.5 percent in
Latin America/Canada, 0.9 percent in Asia Pacific, and 0.8 percent in EMEA. Organic local-currency sales growth was 1.6
percent across developing markets, and 1.2 percent in developed markets. Worldwide organic local-currency sales grew 3.7
percent in Health Care, 3.4 percent in Consumer, 2.4 percent in Safety and Graphics, and 0.7 percent in Industrial, while
sales declined 1.9 percent in Electronics and Energy. Acquisitions added 0.8 percent to worldwide growth, while
divestitures reduced worldwide growth by 0.2 percent. Foreign currency translation reduced worldwide sales growth by 6.8
percent.
Worldwide selling prices rose 1.1 percent in 2015. Selling prices continue to be supported by technology innovation, which
is a key fundamental strength of the Company, helping to drive unique customer solutions and an increasing flow of new
products.
In 2014, organic local-currency sales grew 4.9 percent, with increases of 6.3 percent in Asia Pacific, 4.9 percent in the
United States, 4.5 percent in Latin America/Canada, and 3.2 percent in EMEA. Organic local-currency sales grew 5.6 percent
across developing markets, and 4.5 percent in developed markets. Worldwide organic local-currency sales grew 5.8 percent in
Health Care, 5.4 percent in Safety and Graphics, 5.2 percent in Electronics and Energy, 4.9 percent in Industrial, and 3.9
percent in Consumer. Acquisitions added 0.1 percent to worldwide growth and foreign currency translation reduced worldwide
sales growth by 1.9 percent.
Refer to the sections entitled "Performance by Business Segment" and "Performance by Geographic Area" later in MD&A for
additional discussion of sales change.
Operating Expenses:
2015 versus 2014 versus
(Percent of net sales) 2015 2014 2013 2014 2013
Cost of sales 50.9 % 51.7 % 52.1 % (0.8) % (0.4) %
Selling, general and administrative expenses 20.4 20.3 20.7 0.1 (0.4)
Research, development and related expenses 5.8 5.6 5.6 0.2 -
Operating income 22.9 % 22.4 % 21.6 % 0.5 % 0.8 %
Pension and postretirement expense increased $165 million in 2015 compared to 2014, compared to a decrease of $162 million
in 2014 compared to 2013. Year 2015 includes the impact of a first-quarter 2015 Japan pension curtailment gain of $17
million. Pension and postretirement expense is recorded in cost of sales; selling, general and administrative expenses
(SG&A); and research, development and related expenses (R&D). Refer to Note 11 (Pension and Postretirement Plans) for
components of net periodic benefit cost and the assumptions used to determine net cost.
The Company is investing in 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.
In the fourth quarter of 2015, as discussed within the Overview section above, 3M incurred restructuring charges impacting
operating expenses as follows:
(Millions) 2015
Cost of sales 40
Selling, general and administrative expenses 62
Research, development and related expenses 12
Total $ 114
Cost of Sales:
Cost of sales includes manufacturing, engineering and freight costs.
Cost of sales, measured as a percent of net sales, was 50.9 percent in 2015, a decrease of 0.8 percentage points from 2014.
Cost of sales as a percent of sales decreased due to the combination of selling price increases and raw material cost
decreases, as selling prices increased net sales by 1.1 percent and raw material cost deflation was favorable by
approximately 3.5 percent year-on-year. In addition, higher pension and postretirement costs (of which a portion impacts
cost of sales) and fourth quarter 2015 restructuring charges, increased cost of sales as a percent of sales.
Cost of sales, measured as a percent of net sales, was 51.7 percent in 2014, a decrease of 0.4 percentage points from 2013.
Cost of sales as a percent of sales decreased due to the combination of selling price increases and raw material cost
decreases, as selling prices increased net sales by 1.0 percent and raw material cost deflation was favorable by
approximately 1.5 percent year-on-year. In addition, lower pension and postretirement costs (of which a portion impacts
cost of sales), along with organic volume leverage, decreased cost of sales as a percent of sales.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses (SG&A) decreased $287 million, or 4.4 percent, in 2015 when compared to 2014.
The translation of foreign currencies into U.S. dollars reduced SG&A expense, as evidenced by our foreign currency
translation impact which reduced worldwide sales by 6.8 percent. This foreign currency translation benefit was partially
offset by higher pension and postretirement expense and fourth quarter 2015 restructuring charges. SG&A, measured as a
percent of sales, increased 0.1 percentage points to 20.4 percent in 2015, compared to 20.3 percent of sales in 2014.
Selling, general and administrative expenses (SG&A) increased $85 million, or 1.3 percent, in 2014 when compared to 2013.
Year 2014 included strategic investments in business transformation, while lower pension and postretirement expense
benefitted SG&A. SG&A, measured as a percent of sales, decreased 0.4 percentage points to 20.3 percent in 2014, compared to
20.7 percent of sales in 2013.
Research, Development and Related Expenses:
Research, development and related expenses (R&D) decreased $7 million, or 0.4 percent, in 2015 compared to 2014. R&D
increased 3.2 percent in 2014 compared to 2013. 3M continued to support its key growth initiatives, including more R&D
aimed at disruptive innovation, which refers to innovation which has the potential to create new markets and disrupt
existing markets. In 2015, like SG&A, R&D spending in U.S. dollars was reduced due to the translation of foreign currencies
into U.S. dollars. These 2015 translation benefits were partially offset by higher pension and postretirement expense in
2015 when compared to 2014. In 2014, increases in R&D, when compared to 2013, were partially offset by lower pension and
postretirement expense. R&D, measured as a percent of sales, was 5.8 percent in 2015, compared to 5.6 percent in both 2014
and 2013.
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 2015 versus 2014, and 2014 versus 2013.
Operating income margin:
Year ended
December 31,
(Percent of net sales) 2015 2014
Same period last year 22.4 % 21.6 %
Increase/(decrease) in operating income margin, due to:
Selling price and raw material impacts 1.6 1.0
Organic volume growth - 0.3
Pension and postretirement benefit costs (0.5) 0.5
Acquisitions and divestitures (0.2) (0.1)
Strategic investments (0.3) (0.6)
Foreign exchange impacts - (0.3)
Restructuring charges (0.4) -
Productivity and other 0.3 -
Current period 22.9 % 22.4 %
Operating income margins were 22.9 percent in 2015 compared to 22.4 percent in 2014, an increase of 0.5 percentage points.
These results included a significant benefit from the combination of higher selling prices and lower raw material costs,
and a benefit from productivity and other items. These benefits were partially offset by higher pension and postretirement
benefit costs, 2015 restructuring charges, higher strategic investments, and acquisition and divestiture impacts. Strategic
investments include incremental programs around disruptive R&D and business transformation. Acquisition and divestiture
impacts primarily relate to the Capital Safety and Polypore Separations Media acquisitions, and the divestitures of
substantially all of the library systems business, along with the license plate converting business in France.
Operating income margins were 22.4 percent in 2014 compared to 21.6 percent in 2013, an increase of 0.8 percentage points.
These results included a significant benefit from the combination of higher selling prices and lower raw material costs. In
addition, lower year-on-year pension and postretirement benefit costs and profit leverage on organic volume growth provided
benefits. Items that reduced operating income margins included strategic investments, which included investments in
disruptive R&D, business transformation, the supply chain center of expertise in Europe, and portfolio management actions.
The Company invested $90 million in 2014 in portfolio management actions to position 3M for greater success. Foreign
currency effects and acquisition impacts (Treo) reduced operating income margins.
Interest Expense and Income:
(Millions) 2015 2014 2013
Interest expense $ 149 $ 142 $ 145
Interest income (26) (33) (41)
Total $ 123 $ 109 $ 104
Interest Expense: Interest expense increased slightly in 2015 compared to 2014, despite significantly higher debt levels,
helped by lower average interest rates. Interest expense decreased in 2014 compared to 2013, again despite higher debt
levels, primarily due to lower U.S. borrowing costs as debt maturities were replaced with lower cost financing from
commercial paper and lower interest rates on new debt issuances.
Capitalized interest related to property, plant and equipment construction in progress is recorded as a reduction to
interest expense. The amounts shown in the table above for interest expense are net of capitalized interest amounts of $13
million, $15 million, and $21 million, in 2015, 2014 and 2013, respectively.
Interest Income: Interest income in 2015 was lower when compared to 2014 due to lower average cash/marketable securities
balances. Interest income in 2014 was lower when compared to 2013 due to lower cash balances.
Provision for Income Taxes:
(Percent of pre-tax income) 2015 2014 2013
Effective tax rate 29.1 % 28.9 % 28.1 %
The effective tax rate for 2015 was 29.1 percent, compared to 28.9 percent in 2014, an increase of 0.2 percentage points.
The effective tax rate for 2014 was 28.9 percent, compared to 28.1 percent in 2013, an increase of 0.8 percentage points.
The changes in the rates between years are impacted by many factors, as described further in Note 8.
The Company currently expects that its effective tax rate for 2016 will be approximately 29.5 to 30.5 percent. The rate can
vary from quarter to quarter due to discrete items, such as the settlement of income tax audits and changes in tax laws, as
well as recurring factors, such as the geographic mix of income before taxes.
Refer to Note 8 for further discussion of income taxes.
Net Income Attributable to Noncontrolling Interest:
(Millions) 2015 2014 2013
Net income attributable to noncontrolling interest $ 8 $ 42 $ 62
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 changes in noncontrolling interest amounts have largely related to
Sumitomo 3M Limited (Japan), which was 3M's most significant consolidated entity with non-3M ownership interests. As
discussed in Note 6, on September 1, 2014, 3M purchased the remaining 25 percent ownership in Sumitomo 3M Limited, bringing
3M's ownership to 100 percent. Thus, effective September 1, 2014, net income attributable to noncontrolling interest was
significantly reduced. The primary remaining 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 $390
million and $100 million in 2015 and 2014, respectively. These estimates include 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 the negative impact of swapping Venezuelan bolivars into U.S. dollars. 3M estimates that
year-on-year derivative and other transaction gains and losses increased pre-tax income by approximately $180 million and
$10 million in 2015 and 2014, respectively. Refer to Note 12 in the Consolidated Financial Statements for additional
information concerning 3M's hedging activities.
PERFORMANCE BY BUSINESS SEGMENT
Disclosures relating to 3M's business segments are provided in Item 1, Business Segments. Financial information and other
disclosures are provided in the Notes to the Consolidated Financial Statements. As described in Note 16, effective in the
third quarter of 2015, within the Health Care business segment, the Company formed the Oral Care Solutions Division, which
combined the former 3M ESPE and 3M Unitek divisions. 3M manages its operations in five business segments. The reportable
segments are Industrial; Safety and Graphics; Electronics and Energy; Health Care; and Consumer.
Corporate and Unallocated:
In addition to these five business segments, 3M assigns certain costs to "Corporate and Unallocated," which is presented
separately in the preceding business segments table and in Note 16. 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 determines 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 expenses increased by $104 million in 2015 when compared to 2014. This increase was
driven by higher pension and postretirement benefit expenses, which
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