REG - 3M Company - Annual Financial Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 2
10/02/2017 17:45
- Part 2: For the preceding part double click ID:nRSJ6609Wa
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 our suppliers and customers,
· new business opportunities, product development, and future performance or results of current or anticipated
products,
· the scope, nature or impact of acquisition, strategic alliance and divestiture activities,
· 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 I, Item 1A, "Risk
Factors," of this document, and should be considered an integral part of Part II, Item 7, "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 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 II, Item 7,
"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. In
March 2016, Moody's downgraded 3M's rating from Aa3 to A1, revised 3M's outlook from negative to stable, and affirmed the
Company's short-term rating of P-1. This ratings action followed 3M's announcement of its new five-year plan for the period
2016 through 2020 in which the Company communicated its intent to further increase financial leverage. 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 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 81 manufacturing facilities in 29 states. The Company operates 122 manufacturing and
converting facilities in 36 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 2016, 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, 2017, there were 81,443 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 $1.11 per share for each quarter in 2016. 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 March 2015 of $1.025 per share. Stock price comparisons follow:
Stock price comparisons (NYSE composite transactions)
(Per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter Year
2016 High $ 167.50 $ 175.14 $ 182.27 $ 180.06 $ 182.27
2016 Low 134.64 163.17 173.51 163.85 134.64
2015 High $ 170.50 $ 167.70 $ 157.94 $ 160.09 $ 170.50
2015 Low 157.74 153.92 134.00 138.57 134.00
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, 2016 4,867,209 $ 141.70 4,867,019 $ 777
February 1-29, 2016 1,593,234 $ 153.47 1,590,500 $ 9,756
March 1-31, 2016 1,094,083 $ 162.58 1,091,293 $ 9,578
Total January 1-March 31, 2016 7,554,526 $ 147.21 7,548,812 $ 9,578
April 1-30, 2016 1,543,073 $ 167.78 1,538,003 $ 9,320
May 1-31, 2016 1,695,626 $ 167.90 1,695,200 $ 9,036
June 1-30, 2016 1,712,490 $ 169.72 1,712,490 $ 8,745
Total April 1-June 30, 2016 4,951,189 $ 168.49 4,945,693 $ 8,745
July 1-31, 2016 1,351,737 $ 178.63 1,351,044 $ 8,504
August 1-31, 2016 1,529,161 $ 179.33 1,528,801 $ 8,230
September 1-30, 2016 1,416,264 $ 177.68 1,416,264 $ 7,978
Total July 1-September 30, 2016 4,297,162 $ 178.57 4,296,109 $ 7,978
October 1-31, 2016 1,753,259 $ 169.12 1,753,259 $ 7,682
November 1-30, 2016 2,097,600 $ 171.03 2,097,600 $ 7,323
December 1-31, 2016 1,510,478 $ 176.68 1,510,478 $ 7,056
Total October 1-December 31, 2016 5,361,337 $ 171.99 5,361,337 $ 7,056
Total January 1-December 31, 2016 22,164,214 $ 164.04 22,151,951 $ 7,056
(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) 2016 2015 2014 2013 2012
Years ended December 31:
Net sales $ 30,109 $ 30,274 $ 31,821 $ 30,871 $ 29,904
Net income attributable to 3M 5,050 4,833 4,956 4,659 4,444
Per share of 3M common stock:
Net income attributable to 3M - basic 8.35 7.72 7.63 6.83 6.40
Net income attributable to 3M - diluted 8.16 7.58 7.49 6.72 6.32
Cash dividends declared per 3M common share 4.44 3.075 3.59 3.395 2.36
Cash dividends paid per 3M common share 4.44 4.10 3.42 2.54 2.36
At December 31:
Total assets $ 32,906 $ 32,883 $ 31,374 $ 33,304 $ 34,006
Long-term debt (excluding portion due within one year) and long-term capital lease obligations 10,723 8,799 6,764 4,367 4,970
Cash dividends declared and paid totaled $1.11 per share for each quarter in 2016. 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.
Total assets have been immaterially revised for prior periods as discussed in Note 1, Significant Accounting Policies,
Basis of Presentation.
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 first quarter of 2016, 3M made a product line reporting change involving two of its
business segments. Segment information presented herein reflects the impact of these changes for all periods presented. 3M
manages its operations in five operating business segments: Industrial; Safety and Graphics; Health Care; Electronics and
Energy; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a
combined basis. Any references to "Membrana" refer to the former Separations Media business acquired by 3M from Polypore in
2015.
Earnings per share (EPS) attributable to 3M common shareholders - diluted:
The following table provides the increase (decrease) in diluted earnings per share for 2016 compared to 2015, and 2015
compared to 2014.
Year ended
December 31,
(Earnings per diluted share) 2016 2015
Same period last year $ 7.58 $ 7.49
Increase/(decrease) in earnings per share - diluted, due to:
Operational benefits 0.16 0.42
2015 restructuring charges 0.14 (0.14)
Acquisitions and divestitures 0.14 (0.02)
Foreign exchange impacts (0.14) (0.43)
Net interest expense (0.05) (0.02)
Income tax rate 0.09 -
Shares of common stock outstanding 0.24 0.28
Current period $ 8.16 $ 7.58
Year 2016 versus Year 2015 EPS:
For total year 2016, net income attributable to 3M was $5.050 billion, or $8.16 per diluted share, compared to $4.833
billion, or $7.58 per diluted share, in 2015, an increase of 7.7 percent on a per diluted share basis. Operational benefits
increased earnings, helped by lower defined benefit pension and postretirement expenses. Operational benefits also included
the combination of higher selling prices and lower raw material costs, in addition to productivity benefits related to the
fourth quarter 2015 restructuring. These operational benefits were partially offset by the impact of flat organic sales and
lower asset utilization. Restructuring actions resulted in an after-tax charge of 14 cents per diluted share in 2015, which
provided a year-on-year benefit in 2016.
Acquisition and divestiture impacts, which are measured for the first twelve months post-transaction, related to the
acquisitions of Membrana and Capital Safety (third quarter 2015) and Semfinder (September 2016), and the divestitures of
Polyfoam (first quarter 2016), the library systems business (fourth quarter 2015/first quarter 2016), and the license plate
converting business in France (fourth quarter 2015). In addition, in the fourth quarter of 2016, 3M sold the assets of its
protective films business and its cathode battery technology out-licensing business. On a combined basis, these
acquisition/divestiture year-on-year impacts resulted in a 14 cents per diluted share benefit to earnings per share in
2016, driven by solid performances from 2015 acquisitions and year-on-year divestiture gains. Refer to Note 2 for further
discussion of these acquisition/divestiture impacts.
Foreign currency impacts (net of hedging) decreased pre-tax earnings by approximately $127 million year-on-year in 2016,
excluding the impact of foreign currency changes on tax rates. This is equivalent to a year-on-year decrease of 14 cents
per diluted share for 2016.
Over the past few years, 3M has taken actions to better optimize its capital structure and reduce its cost of capital by
adding debt. These actions have led to an increase in interest expense year-on-year in 2016, largely due to higher average
debt balances.
The income tax rate was 28.3 percent in 2016, a decline of 0.8 percentage points versus last year. The 2016 change in tax
rate was driven by a number of factors as referenced in Note 8, including the first quarter 2016 adoption of Accounting
Standards Update (ASU) No. 2016-09 (discussed in Note 1).
Weighted-average diluted shares outstanding in 2016 declined 3 percent versus last year, which benefited earnings per
share. The benefits from share repurchases, net of issuances, were partially offset by the adoption of ASU No. 2016-09,
which increased the calculated number of diluted shares in 2016.
Refer to the section entitled "Results of Operations" for further discussion.
Year 2015 versus Year 2014 EPS:
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 in Note 4) resulted in an after-tax charge of 14
cents per diluted share. Acquisition and divestiture impacts primarily relate to the Capital Safety and Membrana
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.
Fourth-quarter 2016 sales and operating income results:
Fourth-quarter 2016 net income attributable to 3M was $1.155 billion, or $1.88 per diluted share, compared to $1.038
billion, or $1.66 per diluted share, in the fourth quarter of 2015. Fourth-quarter 2016 sales totaled $7.3 billion, an
increase of 0.4 percent from the fourth quarter of 2015. Organic-local currency sales increased 1.6 percent, with organic
volume increases of 1.5 percent and higher selling prices contributing 0.1 percent. Divestitures reduced sales by 0.4
percent, which related to the fourth quarter 2015 sale of both the license plate converting business in France, along with
substantially all of the library systems business. In addition, in the fourth quarter of 2016, 3M sold the assets of its
protective films business and its cathode battery technology out-licensing business. Foreign currency translation reduced
sales by 0.8 percent year-on-year.
From a business segment perspective, 3M achieved organic local-currency sales growth (which includes organic volume and
selling price impacts) in Industrial, Safety and Graphics, and Health Care, with declines in Electronics and Energy, and
Consumer.
On an organic local-currency sales basis:
· Sales increased 4.6 percent in Industrial, with sales growth led by automotive OEM, advanced materials,
separation and purification, and automotive aftermarket. Sales declined in aerospace and commercial transportation.
· Sales increased 2.2 percent in Safety and Graphics, with sales increases in roofing granules, personal safety,
and commercial solutions. Sales declined in traffic safety and security.
· Sales increased 1.3 percent in Health Care, with sales increases in food safety, critical and chronic care, drug
delivery systems, and infection prevention. Sales declined slightly in oral care, as this business continued to be impacted
by soft end-market conditions and channel inventory adjustments. Health information systems also declined due to a slower
rate of software installations in a tougher market over the past year, along with a challenging comparison against last
year's fourth quarter.
· Sales decreased 0.6 percent in Electronics and Energy. Electronics-related sales were flat, with growth in
electronics materials solutions more than offset by a decline in display materials and systems. This was an improvement
over recent quarters as end-market conditions and channel inventories became more stable. Energy-related sales declined 2
percent as growth in telecommunications markets was offset by declines in electrical markets, and renewable energy. In
December 2015, 3M exited its backsheet business in renewable energy, which reduced energy-related organic sales by 3.5
percent year-on-year.
· Sales decreased 0.7 percent in the Consumer business segment. Despite channel inventory adjustments, 3M posted
organic growth in the home improvement, consumer health care, and home care businesses. The stationery and office supplies
business, which was most impacted by channel inventory adjustments, declined year-on-year.
From a geographic area perspective, fourth-quarter 2016 organic local-currency sales increased in Latin America/Canada,
Asia Pacific, and the United States. Organic local-currency sales declined in EMEA.
On an organic local-currency sales basis:
· Sales in Latin America/Canada increased 4.1 percent. 3M saw growth in four of its five business segments, led by
Health Care. Sales in Mexico increased 10 percent, Canada was up 3 percent and Brazil increased 1 percent.
· Sales in Asia Pacific increased 2.4 percent, led by Health Care and Consumer. This growth was partially offset by a
decline in Electronics and Energy. Within Asia Pacific, sales increased 6 percent in China/Hong Kong, and increased 3
percent in Japan. Excluding our electronics-related businesses, China/Hong Kong was up 11 percent and Japan grew 2
percent.
· Organic local-currency sales in the United States increased 1.2 percent, led by Industrial, Health Care, and Safety
and Graphics.
· Organic local-currency sales in EMEA declined 2.4 percent. West Europe declined 1 percent, as growth in Safety and
Graphics, and Industrial, was more than offset by declines in other business groups. Central East Europe and Middle East
Africa declined 6 percent, impacted by ongoing challenges in Saudi Arabia and Turkey, which 3M expects to persist in the
near term.
Operating income in the fourth quarter of 2016 was 22.7 percent of sales, compared to 20.5 percent of sales in the fourth
quarter of 2015, an increase of 2.2 percentage points. The year-on-year comparison related to 2015 restructuring charges
increased operating income margins by 1.6 percentage points. In addition, lower pension/postretirement benefit costs, raw
material cost decreases, year-on-year divestiture gains, and productivity benefits improved operating income margins. These
benefits were partially offset by strategic investments and legal costs, with these items discussed on an annual basis in
the "Operating income margin" section.
Year 2016 sales and operating income results:
Sales totaled $30.1 billion, a decrease of 0.5 percent from 2015. Organic local-currency sales declined 0.1 percent, with
organic volumes declines of 0.8 percent largely offset by selling price increases of 0.7 percent. Acquisitions added 1.2
percent to sales, while divestitures reduced sales by 0.4 percent. Foreign currency translation reduced sales by 1.2
percent year-on-year.
From a business segment perspective, organic local-currency sales increased 3.5 percent in Health Care, 2.2 percent in
Safety and Graphics, 1.9 percent in Consumer, and were flat in Industrial, while sales declined 7.5 percent in Electronics
and Energy. From a geographic area perspective, 2016 organic local-currency sales grew 3.7 percent in Latin America/Canada,
0.5 percent in the United States, 0.4 percent in EMEA, and declined 2.8 percent in Asia Pacific. Refer to the sections
entitled "Performance by Business Segment" and "Performance by Geographic Area" for additional detail.
Operating income in 2016 was 24.0 percent of sales, compared to 22.9 percent of sales in 2015, an increase of 1.1
percentage points. Restructuring actions resulted in a pre-tax charge of $114 million in 2015, which provided a
year-on-year benefit in 2016. These results also included a benefit from the combination of selling price increases and raw
material cost decreases, plus lower pension/postretirement benefit costs. Refer to the section entitled "Results of
Operations" for further discussion.
Year 2015 sales and operating income results:
Sales totaled $30.3 billion, a decrease of 4.9 percent from 2014. 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.
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 0.4 percent in Industrial, while sales declined 1.5 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. 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 and 2015 restructuring charges. Refer to the
section entitled "Results of Operations" for further discussion.
Sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the years ended December 31, 2016
and 2015. 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.
2016 vs 2015
2016 2015 % change
Net % of Oper. Net % of Oper. Net Oper.
(Dollars in millions) Sales Total Income Sales Total Income Sales Income
Business Segments
Industrial $ 10,313 34.3 % $ 2,376 $ 10,295 34.0 % $ 2,256 0.2 % 5.3 %
Safety and Graphics 5,660 18.8 % 1,390 5,515 18.2 % 1,305 2.6 % 6.6 %
Health Care 5,527 18.4 % 1,754 5,420 17.9 % 1,724 2.0 % 1.8 %
Electronics and Energy 4,826 16.0 % 1,075 5,253 17.4 % 1,109 (8.1) % (3.1) %
Consumer 4,482 14.9 % 1,064 4,422 14.6 % 1,046 1.3 % 1.7 %
Corporate and Unallocated 9 - % (280) 1 - % (355) - -
Elimination of Dual Credit (708) (2.4) % (156) (632) (2.1) % (139) - -
Total Company $ 30,109 100.0 % $ 7,223 $ 30,274 100.0 % $ 6,946 (0.5) % 4.0 %
Year ended December 31, 2016
Organic
Worldwide local- Total
Sales Change Analysis currency sales
By Business Segment sales Acquisitions Divestitures Translation change
Industrial - % 1.6 % (0.3) % (1.1) % 0.2 %
Safety and Graphics 2.2 % 4.0 % (1.9) % (1.7) % 2.6 %
Health Care 3.5 % 0.2 % - % (1.7) % 2.0 %
Electronics and Energy (7.5) % - % - % (0.6) % (8.1) %
Consumer 1.9 % - % - % (0.6) % 1.3 %
Total Company (0.1) % 1.2 % (0.4) % (1.2) % (0.5) %
Sales in 2016 decreased 0.5 percent, impacted by foreign currency translation, which reduced sales by 1.2 percent. Organic
local-currency sales growth (which includes organic volume and selling price impacts) declined 0.1 percent, acquisitions
added 1.2 percent, and divestitures reduced sales by 0.4 percent. Sales in U.S. dollars increased in Safety and Graphics by
2.6 percent, Health Care by 2.0 percent, Consumer by 1.3 percent, and Industrial by 0.2 percent, while sales in Electronics
and Energy declined 8.1 percent. All of 3M's five business segments posted operating income margins of more than 22 percent
in 2016. Worldwide operating income margins for 2016 were 24.0 percent, compared to 22.9 percent for 2015.
Sales in 2015 decreased 4.9 percent, substantially impacted by foreign currency translation, which reduced sales by 6.8
percent. Organic local-currency sales growth (which includes organic volume and selling price impacts) was 1.3 percent,
acquisitions added 0.8 percent, and divestitures reduced sales by 0.2 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, and in both Industrial, and Electronics and
Energy, sales declined by 6.3 percent. All of 3M's five business segments posted operating income margins of more than 21
percent in 2015. Worldwide operating income margins for 2015 were 22.9 percent, compared to 22.4 percent for 2014.
Financial condition:
3M generated $6.7 billion of operating cash flow in 2016, an increase of $242 million when compared to 2015. This followed
a decrease of $206 million when comparing 2015 to 2014. 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 2016, the Company purchased $3.75 billion of its own stock,
compared to purchases of more than $5 billion of its own stock each year in 2015 and 2014. The Company expects to purchase
$2.5 billion to $4.5 billion of its own stock in 2017. 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 marked the 59th consecutive year of dividend increases
for 3M. 3M's debt to total capital ratio (total capital defined as debt plus equity) was 53 percent at December 31, 2016,
48 percent at December 31, 2015, and 35 percent at December 31, 2014. The Company has an AA- credit rating, with a stable
outlook, from Standard & Poor's and an A1 credit rating, with a stable outlook, from Moody's Investors Service. The Company
generates significant ongoing cash flow and has proven access to capital markets funding throughout business cycles.
Raw materials:
In 2016, the Company experienced declining costs for most raw material categories and transportation fuel, due largely to
price decreases in crude oil and the derivative chemical feedstock markets. 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 spend category price risks through negotiated supply
contracts, price protection agreements and commodity price swaps.
Pension and postretirement defined benefit/contribution plans:
On a worldwide basis, 3M's pension and postretirement plans were 84 percent funded at year-end 2016. The primary U.S.
qualified pension plan, which is approximately 68 percent of the worldwide pension obligation, was 90 percent funded and
the international pension plans were 85 percent funded. The U.S. non-qualified pension plan is not funded due to tax
considerations and other factors. Asset returns in 2016 for the primary U.S. qualified pension plan were 5.8%, 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 2017 is 7.25%, down 0.25%
from 2016. The primary U.S. qualified pension plan year-end 2016 discount rate was 4.21%, down 0.26 percentage points from
the year-end 2015 discount rate of 4.47%. The decrease in U.S. discount rates resulted in an increased valuation of the
projected benefit obligation (PBO). The plan's funded status decreased slightly in 2016 as the growth in the PBO increased
at a greater rate than the plan assets returned in 2016. 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 $300 million to $500 million of cash to its global defined benefit pension and
postretirement plans in 2017. The Company does not have a required minimum cash pension contribution obligation for its
U.S. plans in 2017. 3M expects global defined benefit pension and postretirement expense in 2017 (before settlements,
curtailments, special termination benefits and other) to increase by approximately $74 million pre-tax when compared to
2016. 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 is matched at rates of
45%, 60% or 100%, respectively. The reduction in the company's match reduced 2016 defined contribution pension expense by
approximately $30 million.
Year 2017 announced divestitures:
In December 2016, 3M (Safety and Graphics Business) announced that it agreed to sell its identity management business. The
transaction is expected to close during the first half of 2017. In January 2017, 3M (Safety and Graphics Business) sold the
assets of its safety prescription eyewear business. The Company expects a pre-tax gain of approximately $500 million in
2017 as a result of these two divestitures. Refer to Note 2 for additional discussion.
RESULTS OF OPERATIONS
Net Sales:
2016 2015
U.S. Intl. Worldwide U.S. Intl. Worldwide
Net sales (millions) $ 12,188 $ 17,921 $ 30,109 $ 12,049 $ 18,225 $ 30,274
% of worldwide sales 40.5 % 59.5 % 39.8 % 60.2 %
Components of net sales change:
Volume - organic 0.7 % (1.6) % (0.8) % 1.7 % (0.5) % 0.2 %
Price (0.2) 1.2 0.7 0.4 1.4 1.1
Organic local-currency sales 0.5 (0.4) (0.1) 2.1 0.9 1.3
Acquisitions 1.3 1.1 1.2 1.2 0.5 0.8
Divestitures (0.6) (0.4) (0.4) (0.4) (0.1) (0.2)
Translation - (2.0) (1.2) - (10.7) (6.8)
Total sales change 1.2 % (1.7) % (0.5) % 2.9 % (9.4) % (4.9) %
In 2016, organic local-currency sales declined 0.1 percent, with increases of 3.7 percent in Latin America/Canada, 0.5
percent in the United States, and 0.4 percent in EMEA, while Asia Pacific declined 2.8 percent. Organic local-currency
sales growth was 0.2 percent across developing markets, and declined 0.3 percent in developed markets. Worldwide organic
local-currency sales grew 3.5 percent in Health Care, 2.2 percent in Safety and Graphics, and 1.9 percent in Consumer,
while sales were flat in Industrial, and declined 7.5 percent in Electronics and Energy. Acquisitions added 1.2 percent to
worldwide growth, while divestitures reduced worldwide growth by 0.4 percent. Foreign currency translation reduced
worldwide sales growth by 1.2 percent.
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 0.4 percent in Industrial, while
sales declined 1.5 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 by 0.7 percent in 2016, and 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.
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:
2016 versus 2015 versus
(Percent of net sales) 2016 2015 2014 2015 2014
Cost of sales 49.9 % 50.9 % 51.7 % (1.0) % (0.8) %
Selling, general and administrative expenses 20.3 20.4 20.3 (0.1) 0.1
Research, development and related expenses 5.8 5.8 5.6 - 0.2
Operating income 24.0 % 22.9 % 22.4 % 1.1 % 0.5 %
Defined benefit pension and postretirement expense decreased $305 million in 2016 compared to 2015, compared to an increase
of $165 million in 2015 compared to 2014. Year 2015 includes the impact of a first-quarter 2015 Japan pension curtailment
gain of $17 million. Defined benefit 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 49.9 percent in 2016, a decrease of 1.0 percentage point from 2015.
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
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