REG - 3M Company - Annual Financial Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 3
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increased in total by $165 million. Of this increase,
$153 million was allocated to Corporate and Unallocated. Increases were also driven by fourth quarter 2015 restructuring
charges of $37 million, as indicated in the below table. Items which partially offset these increases within Corporate and
Unallocated included higher administrative and R&D cost absorption by the five business segments, resulting in less
under-absorbed expense being allocated to Corporate.
Corporate and Unallocated operating expenses decreased by $70 million in 2014 when compared to 2013. This decrease was
driven by lower pension and postretirement benefit expenses, which declined year-on-year by $162 million. Of this
reduction, $116 million was allocated to Corporate and Unallocated. This was partially offset by higher Corporate and
Unallocated expenses related to year-on-year increases in annual incentive plan expenses and legal accruals.
Restructuring Pre-Tax Charge by Business Segment:
(Millions) 2015
Industrial 42
Safety and Graphics 11
Health Care 9
Electronics and Energy 12
Consumer 3
Corporate and Unallocated 37
Total $ 114
Operating Business Segments:
Each of 3M's business segments incurred restructuring charges in the fourth quarter of 2015, as indicated in the preceding
table. In 2014, each business segment absorbed additional cost related to incremental investments related to business
transformation, enabled by 3M's global ERP implementation, which impacted each of the five business segments 2014 annual
operating income margins by approximately 0.2 percentage points when compared to 2013.
Information related to 3M's business segments is presented in the tables that follow. Organic local-currency sales include
both organic volume impacts plus selling price impacts. Acquisition impacts, if any, are measured separately for the first
twelve months of the acquisition. The divestiture impacts, if any, foreign currency translation impacts and total sales
change are also provided for each business segment. Any references to EMEA relate to Europe, Middle East and Africa on a
combined basis.
The following discusses total year results for 2015 compared to 2014, and also discusses 2014 compared to 2013, for each
business segment.
Industrial Business (34.1% of consolidated sales):
2015 2014 2013
Sales (millions) $ 10,328 $ 10,990 $ 10,657
Sales change analysis:
Organic local currency 0.7 % 4.9 % 4.6 %
Acquisitions 0.6 - 3.6
Translation (7.3) (1.8) (1.7)
Total sales change (6.0) % 3.1 % 6.5 %
Operating income (millions) $ 2,263 $ 2,389 $ 2,307
Percent change (5.3) % 3.6 % 2.8 %
Percent of sales 21.9 % 21.7 % 21.6 %
The Industrial segment serves a broad range of markets, such as automotive original equipment manufacturer (OEM) and
automotive aftermarket (auto body shops and retail), electronics, appliance, paper and printing, packaging, food and
beverage, and construction. Industrial products include tapes, a wide variety of coated, non-woven and bonded abrasives,
adhesives, advanced ceramics, sealants, specialty materials, 3M purification (filtration products), closure systems for
personal hygiene products, acoustic systems products, and components and products that are used in the manufacture, repair
and maintenance of automotive, marine, aircraft and specialty vehicles. 3M is also a leading global supplier of precision
grinding technology serving customers in the area of hard-to-grind precision applications in industrial, automotive,
aircraft and cutting tools. 3M develops and produces advanced technical ceramics for demanding applications in the
automotive, oil and gas, solar, industrial, electronics and defense industries.
Year 2015 results:
Sales in Industrial totaled $10.3 billion, down 6.0 percent in U.S. dollars. Organic local-currency sales increased 0.7
percent, acquisitions added 0.6 percent, and foreign currency translation reduced sales by 7.3 percent.
On an organic local-currency sales basis:
· Sales growth was led by 3M purification, automotive OEM, and aerospace and commercial transportation, while both
automotive aftermarket, and industrial adhesives and tapes sales increased slightly.
· Sales in advanced materials declined, primarily due to weakness in the oil and gas market. Sales in abrasive systems
also declined.
· Geographically, sales increased 4 percent in Latin America/Canada, 1 percent in Asia Pacific, and were flat in both
EMEA and the United States.
Acquisitions:
· Acquisition sales growth related to the late August 2015 acquisition of Polypore's Separations Media business.
· This business is a provider of microporous membranes and modules for filtration in the life sciences, industrial,
and specialty segments. This acquisition enhances 3M's core filtration platform and will help generate new growth
opportunities across the company.
Operating income:
· Operating income margins increased by 0.2 percentage points to 21.9 percent, helped by the combination of lower raw
material costs and selective selling price increases.
· Operating income margins were negatively impacted by 0.4 percentage points due to the $42 million restructuring
charge, plus an additional 0.3 percentage points penalty due to the Polypore Separations Media acquisition.
Year 2014 results:
Sales in Industrial totaled $11.0 billion, up 3.1 percent in U.S. dollars. Organic local-currency sales increased 4.9
percent, and foreign currency translation reduced sales by 1.8 percent.
On an organic local-currency sales basis:
· Sales growth was positive across all businesses, led by aerospace and commercial transportation, automotive OEM, 3M
purification, advanced materials, and abrasive systems.
· Geographically, organic local-currency sales increased 6 percent in the United States, 5 percent in Asia Pacific,
and 3 percent in both EMEA and Latin America/Canada.
Operating income:
· Operating income was $2.4 billion in 2014, an increase of 3.6 percent.
· Operating income margins increased by 0.1 percentage points to 21.7 percent.
· Operating income margins improved due to sales volume leverage, plus the combination of selling price increases and
raw material cost decreases, partially offset by incremental investments related to business transformation, enabled by
3M's global ERP implementation.
Safety and Graphics Business (18.2% of consolidated sales):
2015 2014 2013
Sales (millions) $ 5,515 $ 5,732 $ 5,584
Sales change analysis:
Organic local currency 2.4 % 5.4 % 4.1 %
Acquisitions 2.6 - 1.3
Divestitures (0.4) - -
Translation (8.4) (2.7) (2.1)
Total sales change (3.8) % 2.7 % 3.3 %
Operating income (millions) $ 1,305 $ 1,296 $ 1,227
Percent change 0.7 % 5.6 % 1.4 %
Percent of sales 23.7 % 22.6 % 22.0 %
The Safety and Graphics segment serves a broad range of markets that increase the safety, security and productivity of
people, facilities and systems. Major product offerings include personal protection products; traffic safety and security
products, including border and civil security solutions; commercial solutions, including commercial graphics sheeting and
systems, architectural design solutions for surfaces, and cleaning and protection products for commercial establishments;
roofing granules for asphalt shingles; plus fall protection equipment.
Year 2015 results:
Sales in Safety and Graphics totaled $5.5 billion, down 3.8 percent in U.S. dollars. Organic local-currency sales increased
2.4 percent, and foreign currency translation reduced sales by 8.4 percent. Acquisitions added 2.6 percent, while
divestitures reduced sales by 0.4 percent.
On an organic local-currency sales basis:
· Sales growth was led by roofing granules, commercial solutions, and personal safety, while sales were flat in
traffic safety and security.
· Sales increased 6 percent in Asia Pacific, 3 percent in the United States, and 2 percent in EMEA, while sales
declined 1 percent in Latin America/Canada.
Acquisitions and divestitures:
· Acquisition sales growth reflects the acquisition of Capital Safety in early August 2015. Capital Safety is a
leading global provider of fall protection equipment.
· In the fourth quarter of 2015, 3M divested its license plate converting business in France and substantially all of
its library systems business as discussed in Note 2.
Operating income:
· Operating income in 2015 totaled $1.3 billion, up 0.7 percent.
· Operating income margins were 23.7 percent of sales, compared to 22.6 percent in 2014.
· Operating income margin improvements were driven by higher selling prices and lower raw material costs, along with
productivity.
· Operating income margins penalty from acquisitions was partially offset by a benefit from divestitures, which
resulted in a net margin penalty of 0.2 percentage points.
Year 2014 results:
Sales in Safety and Graphics totaled $5.7 billion, up 2.7 percent in U.S. dollars. Organic local-currency sales increased
5.4 percent, and foreign currency translation reduced sales by 2.7 percent.
On an organic local-currency sales basis:
· Sales growth was led by personal safety. 3M also saw positive organic local-currency sales growth in commercial
solutions, and traffic safety and security.
· Sales in the roofing granules business declined year-on-year.
· Organic local-currency sales increased 6 percent in EMEA, and increased 5 percent in the United States, Asia
Pacific, and Latin America/Canada.
Operating income:
· Operating income in 2014 totaled $1.3 billion, up 5.6 percent.
· Operating income margins were 22.6 percent of sales, compared to 22.0 percent in 2013.
· Operating income margins benefited from organic volume leverage plus selling price increases, partially offset by
incremental investments related to business transformation, enabled by 3M's global ERP implementation, plus certain
portfolio management actions.
Health Care Business (17.9% of consolidated sales):
2015 2014 2013
Sales (millions) $ 5,420 $ 5,572 $ 5,334
Sales change analysis:
Organic local currency 3.7 % 5.8 % 5.0 %
Acquisitions 0.8 0.4 0.1
Translation (7.2) (1.7) (1.3)
Total sales change (2.7) % 4.5 % 3.8 %
Operating income (millions) $ 1,724 $ 1,724 $ 1,672
Percent change - % 3.1 % 1.9 %
Percent of sales 31.8 % 30.9 % 31.3 %
The Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, dental and orthodontic
practitioners, health information systems, and food manufacturing and testing. Products and services provided to these and
other markets include medical and surgical supplies, skin health and infection prevention products, inhalation and
transdermal drug delivery systems, oral care solutions (dental and orthodontic products), health information systems, and
food safety products. 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.
Year 2015 results:
Health Care sales totaled $5.4 billion, a decrease of 2.7 percent in U.S. dollars. Organic local-currency sales increased
3.7 percent, acquisitions added 0.8 percent, and foreign currency translation reduced sales by 7.2 percent.
On an organic local-currency sales basis:
· Sales growth was broad-based across much of the Health Care portfolio, including food safety, health information
systems, critical and chronic care, oral care solutions, and infection prevention.
· Sales declined in drug delivery systems.
· On a geographic basis, sales increased 8 percent in Asia Pacific, 6 percent in Latin America/Canada, 4 percent in
the United States, and 1 percent in EMEA.
· In developing markets, Health Care organic local-currency sales grew 8 percent.
Acquisitions:
· Acquisition sales growth related to the March 2015 purchase of Ivera Medical Corp. Ivera is a manufacturer of health
care products that disinfect and protect devices used for access into a patient's bloodstream. In addition, Treo Solutions
LLC, acquired in April 2014, provided a year-on-year benefit (discussed further in Year 2014 results below).
Operating income:
· Operating income was flat in dollars at $1.7 billion.
· Operating income margins were 31.8 percent in 2015, compared to 30.9 percent in 2014, helped by portfolio management
actions that are contributing to higher productivity and margins.
· Acquisition impacts reduced operating income margins by 0.2 percentage points.
In September 2015, 3M announced that it would explore strategic alternatives for its Health Information Systems Division
(HIS), which included spinning-off, selling, or retaining the business. In February 2016, following an in-depth exploration
of strategic alternatives, the Company announced that it made the decision to retain and further invest in HIS.
Year 2014 results:
Health Care sales totaled $5.6 billion, an increase of 4.5 percent in U.S. dollars. Organic local-currency sales increased
5.8 percent, acquisitions added 0.4 percent, and foreign currency translation reduced sales by 1.7 percent.
On an organic local-currency sales basis:
· Sales grew in all businesses, with the strongest growth in health information systems, drug delivery systems, food
safety, critical and chronic care, and infection prevention.
· On a geographic basis, organic local-currency sales increased 9 percent in Latin America/Canada, 8 percent in Asia
Pacific, 6 percent in the United States, and 3 percent in EMEA.
· In developing markets, Health Care organic local-currency sales grew 12 percent.
Acquisitions:
· Acquisition sales growth related to the April 2014 purchase of Treo Solutions LLC. Treo is a provider of data
analytics and business intelligence to healthcare payers and providers.
Operating income:
· Operating income increased 3.1 percent to $1.7 billion.
· Operating income margins were 30.9 percent in 2014, compared to 31.3 percent in 2013, with acquisition impacts
reducing operating income margins by 0.3 percentage points.
· The gain from sale of a non-strategic equity method investment benefited total year 2013 operating income margins by
0.3 percentage points.
Electronics and Energy Business (17.2% of consolidated sales):
2015 2014 2013
Sales (millions) $ 5,220 $ 5,604 $ 5,393
Sales change analysis:
Organic local currency (1.9) % 5.2 % - %
Divestitures (0.8) - -
Translation (4.1) (1.3) (1.2)
Total sales change (6.8) % 3.9 % (1.2) %
Operating income (millions) $ 1,102 $ 1,115 $ 954
Percent change (1.1) % 16.8 % (7.0) %
Percent of sales 21.1 % 19.9 % 17.7 %
The Electronics and Energy segment serves customers in electronics and energy markets, including solutions that improve the
dependability, cost-effectiveness, and performance of electronic devices; electrical products, including infrastructure
protection; telecommunications networks, and power generation and distribution. This segment's electronics solutions
include film solutions for the electronic display industry; packaging and interconnection devices; high performance fluids
and abrasives; high-temperature and display tapes; flexible circuits, which use electronic packaging and interconnection
technology; and touch systems products, which includes touch screens, touch monitors, and touch sensor components. This
segment's energy solutions include pressure sensitive tapes and resins; electrical insulation; infrastructure products that
provide both protection and detection solutions; a wide array of fiber-optic and copper-based telecommunications systems;
and renewable energy component solutions for the solar and wind power industries.
The display materials and systems business provides films that serve numerous market segments of the electronic display
industry. 3M provides distinct products for five market segments, including products for: 1) LCD computer monitors 2) LCD
televisions 3) handheld devices such as cellular phones and tablets 4) notebook PCs and 5) automotive displays. The display
materials and systems business includes a number of different products that are protected by various patents and groups of
patents. These patents provide varying levels of exclusivity to 3M for a number of such products. As some of 3M's
multi-layer optical film patents expired at the end of 2013 and will expire over several years thereafter, 3M will likely
see more competition in these products. 3M continues to innovate in the area of optical films and files patents on its new
technology and products. 3M's proprietary manufacturing technology and know-how also provide a competitive advantage to 3M
independent of its patents.
Year 2015 results:
Electronics and Energy sales totaled $5.2 billion, down 6.8 percent in U.S. dollars. Organic local-currency sales declined
1.9 percent, divestitures reduced sales by 0.8 percent, and foreign currency translation reduced sales by 4.1 percent.
On an organic local-currency sales basis:
· Sales decreased approximately 1 percent in 3M's electronics-related businesses, with growth in electronics materials
solutions more than offset by a decline in display materials and systems, as 3M experienced softer conditions in the
electronics markets.
· Sales decreased approximately 4 percent in 3M's energy-related businesses, as telecommunications, electrical
markets, and renewable energy all declined.
· On a geographic basis, sales increased 1 percent in Europe, were flat in the United States, and declined 3 percent
in both Latin America/Canada and Asia Pacific.
Divestitures:
· 3M completed the sale of its static control business in January 2015 (discussed in Note 2).
Operating income:
· Operating income decreased 1.1 percent to $1.1 billion in 2015.
· Operating income margins were 21.1 percent compared to 19.9 percent in 2014, helped by prior year portfolio
management actions that are contributing to higher productivity.
· Portfolio management actions in 2015 related to renewable energy, plus fourth quarter 2015 restructuring charges,
which combined reduced operating income margins by 0.8 percentage points.
Year 2014 results:
Electronics and Energy sales totaled $5.6 billion, up 3.9 percent in U.S. dollars. Organic local-currency sales increased
5.2 percent, and foreign currency translation reduced sales by 1.3 percent.
On an organic local-currency sales basis:
· Sales increased approximately 8 percent in 3M's electronics-related businesses, with growth led by display materials
and systems.
· In 3M's energy-related businesses, organic local-currency sales increased approximately 1 percent, with growth in
electrical markets and telecommunications, partially offset by reductions in renewable energy.
· On a geographic basis, organic local-currency sales increased 8 percent in Latin America/Canada, 7 percent in Asia
Pacific, and 1 percent in EMEA, while sales in the United States were flat.
Operating income:
· Operating income increased 16.8 percent to $1.1 billion in 2014.
· Operating income margins were 19.9 percent compared to 17.7 percent in 2013, helped by sales volume leverage.
· In addition, prior portfolio management actions enhanced 3M's relevance with customers and generated operational
efficiencies, which also contributed to the operating income margin improvement in 2014.
Consumer Business (14.6% of consolidated sales):
2015 2014 2013
Sales (millions) $ 4,422 $ 4,523 $ 4,435
Sales change analysis:
Organic local currency 3.4 % 3.9 % 3.0 %
Divestitures - (0.1) (0.1)
Translation (5.6) (1.8) (1.8)
Total sales change (2.2) % 2.0 % 1.1 %
Operating income (millions) $ 1,046 $ 995 $ 945
Percent change 5.2 % 5.3 % 0.2 %
Percent of sales 23.7 % 22.0 % 21.3 %
The Consumer segment serves markets that include consumer retail, office retail, office business to business, home
improvement, drug and pharmacy retail, and other markets. Products in this segment include office supply products,
stationery products, construction and home improvement products (do-it-yourself), home care products, protective material
products, certain consumer retail personal safety products, and consumer health care products.
Year 2015 results:
Consumer sales totaled $4.4 billion, down 2.2 percent in U.S. dollars. Organic local-currency sales increased 3.4 percent,
and foreign currency translation reduced sales by 5.6 percent.
On an organic local-currency sales basis:
· Sales growth was led by construction and home improvement, stationery and office supplies, and home care. 3M also
posted positive growth in its consumer health care business.
· On a geographic basis, organic local-currency sales increased 5 percent in the United States and 3 percent in Asia
Pacific, while sales in both EMEA and Latin America/Canada were flat.
· In developing markets, sales growth was 3 percent.
Operating income:
· Consumer operating income was $1.0 billion, up 5.2 percent from 2014.
· Operating income margins were 23.7 percent, up from 22.0 percent in 2014.
· The combination of strong organic growth and productivity continued to drive efficiencies across this business.
Year 2014 results:
Consumer sales totaled $4.5 billion, up 2.0 percent in U.S. dollars. Organic local-currency sales increased 3.9 percent,
divestitures reduced sales by 0.1 percent, and foreign currency translation reduced sales by 1.8 percent.
On an organic local-currency sales basis:
· Sales growth was led by construction and home improvement. 3M also posted positive growth in the consumer health
care and home care businesses. Sales in the stationery and office supplies business were flat.
· On a geographic basis, organic local-currency sales increased 6 percent in Asia Pacific, 4 percent in the United
States, 3 percent in Latin America/Canada, and 1 percent in EMEA.
· In developing markets, sales growth was 6 percent.
Operating income:
· Consumer operating income was $1.0 billion, up 5.3 percent from 2013.
· Operating income margins were 22.0 percent, up from 21.3 percent in 2013.
· The combination of strong organic growth, productivity, and portfolio prioritization continued to drive efficiencies
across this business.
PERFORMANCE BY GEOGRAPHIC AREA
While 3M manages its businesses globally and believes its business segment results are the most relevant measure of
performance, the Company also utilizes geographic area data as a secondary performance measure. Export sales are generally
reported within the geographic area where the final sales to 3M customers are made. A portion of the products or components
sold by 3M's operations to its customers are exported by these customers to different geographic areas. As customers move
their operations from one geographic area to another, 3M's results will follow. Thus, net sales in a particular geographic
area are not indicative of end-user consumption in that geographic area. Financial information related to 3M operations in
various geographic areas is provided in Note 17.
A summary of key information and discussion related to 3M's geographic areas follow:
2015
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 12,049 $ 9,041 $ 6,228 $ 2,982 $ (26) $ 30,274
% of worldwide sales 39.8 % 29.9 % 20.5 % 9.8 % - 100.0 %
Components of net sales change:
Volume - organic 1.7 % 0.9 % (1.0) % (3.1) % - 0.2 %
Price 0.4 - 1.8 4.6 - 1.1
Organic local-currency sales 2.1 0.9 0.8 1.5 - 1.3
Acquisitions 1.2 0.4 0.7 0.7 - 0.8
Divestitures (0.4) (0.1) (0.1) (0.2) - (0.2)
Translation - (5.2) (14.9) (16.9) - (6.8)
Total sales change 2.9 % (4.0) % (13.5) % (14.9) % - (4.9) %
Operating income (millions) $ 2,647 $ 2,580 $ 1,017 $ 706 $ (4) $ 6,946
Percent change 4.2 % 3.8 % (17.5) % (18.5) % - (2.6) %
For total year 2015, as shown in the preceding table, sales declined 4.9 percent, with organic volume increases of 0.2
percent and selling price increases of 1.1 percent. Acquisitions added 0.8 percent, while divestitures reduced sales by 0.2
percent. Foreign currency translation reduced sales by 6.8 percent. Organic local-currency sales increased, 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 2015,
international operations represented 60.2 percent of 3M's sales.
2014
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 11,714 $ 9,418 $ 7,198 $ 3,504 $ (13) $ 31,821
% of worldwide sales 36.8 % 29.6 % 22.6 % 11.0 % - 100.0 %
Components of net sales change:
Volume - organic 4.4 % 6.2 % 2.1 % 0.2 % - 3.9 %
Price 0.5 0.1 1.1 4.3 - 1.0
Organic local-currency sales 4.9 6.3 3.2 4.5 - 4.9
Acquisitions 0.2 - - - - 0.1
Divestitures (0.1) - - - - -
Translation - (2.2) (1.6) (7.5) - (1.9)
Total sales change 5.0 % 4.1 % 1.6 % (3.0) % - 3.1 %
Operating income (millions) $ 2,540 $ 2,487 $ 1,234 $ 867 $ 7 $ 7,135
Percent change 14.9 % 4.2 % 5.7 % (4.5) % - 7.0 %
For total year 2014, as shown in the preceding table, sales rose 3.1 percent, with organic volume increases of 3.9 percent
and selling price increases of 1.0 percent. Acquisitions added 0.1 percent, while foreign currency translation reduced
sales by 1.9 percent. Organic local-currency sales increased 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 2014, international operations represented 63.2 percent
of 3M's sales.
Geographic Area Supplemental Information
Property, Plant and
Equipment - net
Employees as of December 31, Capital Spending as of December 31,
(Millions, except Employees) 2015 2014 2013 2015 2014 2013 2015 2014
United States 35,973 35,581 34,719 $ 936 $ 909 $ 941 $ 4,838 $ 4,619
Asia Pacific 17,642 17,854 18,417 172 184 284 1,647 1,798
Europe, Middle East and Africa 20,563 20,506 20,504 249 288 290 1,531 1,502
Latin America and Canada 15,268 15,859 15,027 104 112 150 499 570
Total Company 89,446 89,800 88,667 $ 1,461 $ 1,493 $ 1,665 $ 8,515 $ 8,489
Employment:
Employment decreased by 354 positions in 2015 and increased by 1,133 positions in 2014. The primary factor that decreased
employment in 2015 related to fourth-quarter 2015 restructuring actions that impacted approximately 1,700 positions
worldwide. The 2015 acquisitions of Ivera Medical Corp., Polypore International Inc.'s Separations Media business and
Capital Safety Group S.A.R.L. increased 2015 headcount by approximately 2,000 positions. The primary factors that increased
employment in 2014 was additions in developing economies to support growth, plus additions related to the Treo Solutions
LLC acquisition in 2014.
Capital Spending/Net Property, Plant and Equipment:
Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and
increasing manufacturing efficiency. 3M's capital spending by geography has been led by the United States (64% of spending
in 2015), followed by Europe, Middle East and Africa, Asia Pacific, and Latin America/Canada. 3M is continuing to increase
its manufacturing and sourcing capability, particularly in developing economies, in order to more closely align its product
capability with its sales in major geographic areas. 3M will continue to make investments in critical developing markets,
such as Brazil, China, Mexico, Panama, Poland, Southeast Asia, and Turkey. Capital spending is discussed in more detail
later in MD&A in the section entitled "Cash Flows from Investing Activities."
CRITICAL ACCOUNTING ESTIMATES
Information regarding significant accounting policies is included in Note 1. As stated in Note 1, the preparation of
financial statements requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its
estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates.
The Company believes its most critical accounting estimates relate to legal proceedings, the Company's pension and
postretirement obligations, asset impairments and income taxes. Senior management has discussed the development, selection
and disclosure of its critical accounting estimates with the Audit Committee of 3M's Board of Directors.
Legal Proceedings:
The categories of claims for which the Company has a probable and estimable liability, the amount of its liability
accruals, and the estimates of its related insurance receivables are critical accounting estimates related to legal
proceedings. Please refer to the section entitled "Process for Disclosure and Recording of Liabilities and Insurance
Receivables Related to Legal Proceedings" (contained in "Legal Proceedings" in Note 14) for additional information about
such estimates.
Pension and Postretirement Obligations:
3M has various company-sponsored retirement plans covering substantially all U.S. employees and many employees outside the
United States. The primary U.S. defined-benefit pension plan was closed to new participants effective January 1, 2009. The
Company accounts for its defined benefit pension and postretirement health care and life insurance benefit plans in
accordance with Accounting Standard Codification (ASC) 715, Compensation - Retirement Benefits, in measuring plan assets
and benefit obligations and in determining the amount of net periodic benefit cost. ASC 715 requires employers to recognize
the underfunded or overfunded status of a defined benefit pension or postretirement plan as an asset or liability in its
statement of financial position and recognize changes in the funded status in the year in which the changes occur through
accumulated other comprehensive income, which is a component of stockholders' equity. While the company believes the
valuation methods used to determine the fair value of plan assets are appropriate and consistent with other market
participants, the use of different methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value at the reporting date. See Note 11 for additional discussion
of actuarial assumptions used in determining pension and postretirement health care liabilities and expenses.
Pension benefits associated with these plans are generally based primarily on each participant's years of service,
compensation, and age at retirement or termination. The benefit obligation represents the present value of the benefits
that employees are entitled to in the future for services already rendered as of the measurement date. The Company measures
the present value of these future benefits by projecting benefit payment cash flows for each future period and discounting
these cash flows back to the December 31 measurement date, using the yields of a portfolio of high quality, fixed-income
debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.
Historically, the single aggregated discount rate used for each plan's benefit obligation was also used for the calculation
of all net periodic benefit costs, including the measurement of the service and interest costs. Beginning in 2016, 3M
changed the method used to estimate the service and interest cost components of the net periodic pension and other
postretirement benefit costs. The new method measures service cost and interest cost separately using the spot yield curve
approach applied to each corresponding obligation. Service costs are determined based on duration-specific spot rates
applied to the service cost cash flows. The interest cost calculation is determined by applying duration-specific spot
rates to the year-by-year projected benefit payments. The spot yield curve approach does not affect the measurement of the
total benefit obligations as the change in service and interest costs offset in the actuarial gains and losses recorded in
other comprehensive income. The Company changed to the new method to provide a more precise measure of service and interest
costs by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates. The
Company accounted for this change as a change in estimate prospectively beginning in the first quarter of 2016. As a result
of the change to the spot yield curve approach, 2016 defined benefit pension and postretirement net periodic benefit cost
is expected to decrease by $180 million. Including this $180 million, 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.
Using this methodology, the Company determined discount rates for its plans as follow:
U.S. Qualified Pension International Pension (weighted average) U.S. Postretirement Medical
December 31, 2014 Liability and 2015 Net Periodic Benefit Cost:
Single discount rate 4.10 % 3.11 % 4.07 %
December 31, 2015 Liability:
Benefit obligation 4.47 % 3.12 % 4.32 %
2016 Net Periodic Benefit Cost Components:
Service cost 4.72 % 2.84 % 4.60 %
Interest cost 3.77 % 2.72 % 3.44 %
Another significant element in determining the Company's pension expense in accordance with ASC 715 is the expected return
on plan assets, which is based on historical results for similar allocations among asset classes. For the primary U.S.
qualified pension plan, the expected long-term rate of return on an annualized basis for 2016 is 7.50%, 0.25% lower than
2015. Refer to Note 11 for information on how the 2015 rate was determined. Return on assets assumptions for international
pension and other post-retirement benefit plans are calculated on a plan-by-plan basis using plan asset allocations and
expected long-term rate of return assumptions. The weighted average expected return for the international pension plan is
5.77% for 2016, compared to 5.90% for 2015.
For the year ended December 31, 2015, the Company recognized total consolidated defined benefit pre-tax pension and
postretirement expense (after settlements, curtailments, special termination benefits and other) of $556 million, up from
$391 million in 2014. Defined benefit pension and postretirement expense (before settlements, curtailments, special
termination benefits and other) is anticipated to decrease to approximately $236 million in 2016, a decrease of $320
million compared to 2015.
The table below summarizes the impact on 2016 pension expense for the U.S. and international pension plans of a 0.25
percentage point increase/decrease in the expected long-term rate of return on plan assets and discount rate assumptions
used to measure plan liabilities and 2016 net periodic benefit cost. The table assumes all other factors are held constant,
including the slope of the discount rate yield curves.
Increase (Decrease) in Net Periodic Benefit Cost
Discount Rate Expected Return on Assets
(Millions) -0.25% +0.25% -0.25% +0.25%
U.S. pension plans $ 30 $ (29) $ 35 $ (35)
International pension plans 22 (20) 14 (14)
Asset Impairments:
As of December 31, 2015, net property, plant and equipment totaled $8.5 billion and net identifiable intangible assets
totaled $2.6 billion. Management makes estimates and assumptions in preparing the consolidated financial statements for
which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed
in the business, including assets of acquired businesses. These estimates and assumptions are closely monitored by
management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or an
impairment recorded based on a change in the expected use of the asset or performance of the related asset group.
3M goodwill totaled approximately $9.2 billion as of December 31, 2015. 3M's annual goodwill impairment testing is
performed in the fourth quarter of each year. Impairment testing for goodwill is done at a reporting unit level, with all
goodwill assigned to a reporting unit. Reporting units are one level below the business segment level, but can be combined
when reporting units within the same segment have similar economic characteristics. At 3M, reporting units generally
correspond to a division. 3M did not combine any of its reporting units for impairment testing.
An impairment loss generally would be recognized when the carrying amount of the reporting unit's net assets exceeds the
estimated fair value of the reporting unit. The estimated fair value of a reporting unit is determined using earnings for
the reporting unit multiplied by a price/earnings ratio for comparable industry groups, or by using a discounted cash flow
analysis. 3M typically uses the price/earnings ratio approach for stable and growing businesses that have a long history
and track record of generating positive operating income and cash flows. 3M uses the discounted cash flow approach for
start-up, loss position and declining businesses, in addition to businesses where the price/earnings ratio valuation method
indicates additional review is warranted. 3M also uses discounted cash flow as an additional tool for businesses that may
be growing at a slower rate than planned due to economic or other conditions.
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. For any product moves
that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on
goodwill of the associated reporting units. During the third quarter of 2015, the Company completed its assessment of any
potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.
The discussion that follows relates to the separate fourth quarter 2015 annual impairment test and is in the context of the
reporting unit structure that existed at that time.
As of October 1, 2015, 3M had 26 primary reporting units, with ten reporting units accounting for approximately 87 percent
of the goodwill. These ten reporting units were comprised of the following divisions: 3M purification (which includes the
Polypore Separations Media acquisition), Advanced Materials, Communication Markets, Display Materials and Systems, Health
Information Systems, Industrial Adhesives and Tapes, Infection Prevention, Oral Care Solutions, Personal Safety (which
includes the Capital Safety acquisition), and Traffic Safety and Security. The estimated fair values for these reporting
units were in excess of carrying value by approximately 50 percent or more, except for one reporting unit with
approximately $300 million of goodwill, where the fair value exceeded the carrying value by approximately 30 percent. 3M's
market value at both September 30, 2015, and December 31, 2015, was significantly in excess of its equity of approximately
$12 billion at both December 31, 2015 and September 30, 2015.
In 2015, 3M primarily used an industry price-earnings ratio approach, but also used a discounted cash flows approach for
certain reporting units, to determine fair values. Where applicable, 3M used a weighted-average discounted cash flow
analysis for certain divisions, using projected cash flows that were weighted based on different sales growth and terminal
value assumptions, among other factors. The weighting was based on management's estimates of the likelihood of each
scenario occurring.
3M is an integrated materials enterprise, thus many of 3M's businesses could not easily be sold on a stand-alone basis.
3M's focus on research and development has resulted in a portion of 3M's value being comprised of internally developed
businesses that have no goodwill associated with them. Based on the annual test in the fourth quarter of 2015, no goodwill
impairment was indicated for any of the reporting units.
Factors which could result in future impairment charges include, among others, changes in worldwide economic conditions,
changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk
factors are discussed in Item 1A, "Risk Factors," of this document. In addition, changes in the weighted average cost of
capital could also impact impairment testing results. As indicated above, during the third quarter of 2015, the Company
completed its assessment of any potential goodwill impairment for reporting units impacted by changes between reporting
units and determined that no impairment existed. Long-lived assets with a definite life are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be
recoverable. If future non-cash asset impairment charges are taken, 3M would expect that only a portion of the long-lived
assets or goodwill would be impaired. 3M will continue to monitor its reporting units and asset groups in 2016 for any
triggering events or other indicators of impairment.
Income Taxes:
The extent of 3M's operations involves dealing with uncertainties and judgments in the application of complex tax
regulations in a multitude of jurisdictions. The final taxes paid are dependent upon many factors, including negotiations
with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international
tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues in
the United States and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes
will be due. The Company follows guidance provided by ASC 740, Income Taxes, regarding uncertainty in income taxes, to
record these liabilities (refer to Note 8 for additional information). The Company adjusts these reserves in light of
changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution
may result in a payment that is materially different from the Company's current estimate of the tax liabilities. If the
Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would
result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities
would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer
necessary.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.
FINANCIAL CONDITION AND LIQUIDITY
3M continues its transition to a better-optimized capital structure and is adding leverage at a measured pace. The strength
and stability of 3M's business model and strong free cash flow capability, together with proven capital markets access,
enable the Company to implement this strategy. Investing in 3M's businesses to drive organic growth remains the first
priority, thus 3M will continue to deploy capital towards research and development, capital expenditures, and
commercialization capability. Investment in organic growth will be supplemented by complementary acquisitions. 3M will also
continue to return cash to shareholders through dividends and share repurchases. Sources for cash availability in the
United States, such as ongoing cash flow from operations and access to capital markets, have historically been sufficient
to fund dividend payments to shareholders and share repurchases, as well as funding U.S. acquisitions and other items as
needed. For those international earnings considered to be reinvested indefinitely, the Company currently has no plans or
intentions to repatriate these funds for U.S. operations. However, if these international funds are needed for operations
in the U.S., 3M would be required to accrue and pay U.S. taxes to repatriate them. See Note 8 for further information on
earnings considered to be reinvested indefinitely.
3M's primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances. The Company
believes it will have continuous access to the commercial paper market. 3M's commercial paper program permits the Company
to have a maximum of $3 billion outstanding with a maximum maturity of 397 days from date of issuance.
Net Debt:
The Company defines net debt as total debt less the total of cash, cash equivalents and marketable securities. 3M considers
net debt and its components to be an important indicator of liquidity and a guiding measure of capital structure strategy.
Net debt is not defined under U.S. generally accepted accounting principles and may not be computed the same as similarly
titled measures used by other companies. The following table provides net debt as of December 31, 2015 and 2014.
At December 31
(Millions) 2015 2014
Total Debt $ 10,797 $ 6,811
Less: Cash and cash equivalents and marketable securities 1,925 3,351
Net Debt $ 8,872 $ 3,460
In 2015, net debt rose by $5.4 billion to a net debt balance of $8.9 billion (as of December 31, 2015), as 3M progressed on
its capital structure strategy. Debt levels were higher in both the U.S. and internationally, while international cash and
marketable securities balances were reduced. Specific actions related to cash, cash equivalents, and marketable securities,
in addition to debt, are discussed further below.
Cash, Cash Equivalents and Marketable Securities:
At December 31, 2015, 3M had $1.9 billion of cash, cash equivalents and marketable securities, of which approximately $1.7
billion was held by the Company's foreign subsidiaries and $200 million was held by the United States. Of the $1.7 billion
held internationally, U.S. dollar-based cash, cash equivalents and marketable securities totaled $355 million, or 21
percent, which was invested in money market funds, asset-backed securities, agency securities, corporate medium-term note
securities and other high quality fixed income securities. At December 31, 2014, cash, cash equivalents and marketable
securities held by the Company's foreign subsidiaries and in the United States totaled approximately $3.3 billion and less
than $100 million, respectively.
The Company's total balance of cash, cash equivalents and marketable securities was $1.4 billion lower at December 31, 2015
when compared to December 31, 2014. 3M was able to manage the business with lower cash levels due to significant ongoing
cash flow generation and proven access to capital markets funding throughout business cycles.
Total Debt:
The Company's total debt was $4.0 billion higher at December 31, 2015 when compared to December 31, 2014. The strength of
3M's capital structure and significant ongoing cash flows provide 3M proven access to capital markets. Additionally, the
Company's maturity profile is staggered to help ensure refinancing needs in any given year are reasonable in proportion to
the total portfolio. 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's ongoing transition to a better-optimized
capital structure, financed with additional low-cost debt, could impact 3M's credit rating in the future.
Effective May 16, 2014, the Company updated its "well-known seasoned issuer" shelf registration statement, which registers
an indeterminate amount of debt or equity securities for future sales. This replaced 3M's previous shelf registration dated
August 5, 2011. In June 2014, in connection with the May 16, 2014 shelf registration, 3M re-commenced its
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