REG - 3M Company - Annual Financial Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 3
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increased net sales by 0.7 percent and raw material cost deflation was favorable by
approximately 3.5 percent year-on-year. In addition, cost of sales as a percent of sales benefited from lower defined
benefit pension and postretirement costs (of which a portion impacts cost of sales). Fourth quarter 2015 restructuring
charges also provided a favorable year-on-year comparison.
Cost of sales, measured as a percent of net sales, was 50.9 percent in 2015, a decrease of 0.8 percentage points from 2014.
Cost of sales as a percent of sales decreased due to the combination of selling price increases and raw material cost
decreases, as selling prices increased net sales by 1.1 percent and raw material cost deflation was favorable by
approximately 3.5 percent year-on-year. In addition, higher defined benefit pension and postretirement costs (of which a
portion impacts cost of sales) and fourth quarter 2015 restructuring charges, increased cost of sales as a percent of
sales.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses (SG&A) decreased $71 million, or 1.2 percent, in 2016 when compared to 2015,
with 2016 results benefiting from year-on-year divestiture gains (as discussed in Note 2), foreign currency translation,
and productivity benefits related to the fourth quarter 2015 restructuring. In addition, SG&A benefited from lower defined
benefit pension and postretirement expense. Fourth quarter 2015 restructuring charges also provided a favorable
year-on-year comparison. SG&A, measured as a percent of sales, decreased 0.1 percentage points to 20.3 percent in 2016,
compared to 20.4 percent in 2015, and 20.3 percent of sales in 2014.
Selling, general and administrative expenses (SG&A) decreased $287 million, or 4.4 percent, in 2015 when compared to 2014.
The translation of foreign currencies into U.S. dollars reduced SG&A expense, as evidenced by our foreign currency
translation impact which reduced worldwide sales by 6.8 percent. This foreign currency translation benefit was partially
offset by higher defined benefit pension and postretirement expense and fourth quarter 2015 restructuring charges. SG&A,
measured as a percent of sales, increased 0.1 percentage points to 20.4 percent in 2015, compared to 20.3 percent of sales
in 2014.
Research, Development and Related Expenses:
Research, development and related expenses (R&D) decreased $28 million, or 1.6 percent, in 2016 compared to 2015, and
decreased $7 million, or 0.4 percent, in 2015 compared to 2014. 3M continued to support its key growth initiatives,
including more R&D aimed at disruptive innovation programs with the potential to create entirely new markets and disrupt
existing markets. In addition, 2016 benefited from lower defined benefit pension and postretirement expense, while 2015,
when compared to 2014, had higher defined benefit pension and postretirement expense. R&D, measured as a percent of sales,
was 5.8 percent in both 2016 and 2015, and 5.6 percent in 2014.
Operating Income:
3M uses operating income as one of its primary business segment performance measurement tools. Refer to the table below for
a reconciliation of operating income margins for 2016 versus 2015, and 2015 versus 2014.
Operating income margin:
Year ended
December 31,
(Percent of net sales) 2016 2015
Same period last year 22.9 % 22.4 %
Increase/(decrease) in operating income margin, due to:
Selling price and raw material impact 1.0 1.6
Pension and postretirement benefit costs 1.0 (0.5)
2015 restructuring charges 0.4 (0.4)
Productivity from restructuring 0.4 -
Strategic investments (0.3) (0.3)
Foreign exchange impacts (0.2) -
Acquisitions and divestitures 0.2 (0.2)
Organic volume and utilization (1.0) -
Legal and other (0.4) 0.3
Current period 24.0 % 22.9 %
Year 2016 versus Year 2015:
Operating income margins were 24.0 percent in 2016 compared to 22.9 percent in 2015, an increase of 1.1 percentage points.
3M benefited from the combination of higher selling prices and lower raw material costs, plus lower year-on-year defined
benefit pension and postretirement expense. The 2015 restructuring charges provided a favorable year-on-year comparison, in
addition to productivity benefits in 2016 related to the 2015 restructuring actions. Acquisitions and divestitures, which
are measured for the first twelve months post-transaction, had a favorable impact on operating margins. This included solid
performances from both the Capital Safety and Membrana acquisitions (third quarter 2015). Divestiture impacts are related
to the Polyfoam business (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. Items that reduced
operating income margins included 2016 strategic investments, as 3M took actions to better optimize its manufacturing
footprint and accelerated growth investments across its businesses. Foreign currency impacts (net of hedging) also reduced
operating income margins. Organic volume declines and related utilization impacts included the impact of lower asset
utilization, primarily in the Industrial, and Electronics and Energy businesses. The "legal and other" item in the
preceding table related to an unfavorable second quarter 2016 arbitration ruling on an insurance claim, commercial
litigation settlements related to Andover Healthcare and TransWeb, and accruals for respirator mask/asbestos liabilities
(all of which are discussed in Note 14).
Year 2015 versus Year 2014:
Operating income margins were 22.9 percent in 2015 compared to 22.4 percent in 2014, an increase of 0.5 percentage points.
These results included a significant benefit from the combination of higher selling prices and lower raw material costs,
and a benefit from productivity and other items. These benefits were partially offset by higher defined benefit pension and
postretirement benefit costs, 2015 restructuring charges, higher strategic investments, and acquisition and divestiture
impacts. Strategic investments include incremental programs around disruptive R&D and business transformation. Acquisition
and divestiture impacts primarily relate to the Capital Safety and Membrana acquisitions, and the divestitures of
substantially all of the library systems business, along with the license plate converting business in France.
Interest Expense and Income:
(Millions) 2016 2015 2014
Interest expense $ 199 $ 149 $ 142
Interest income (29) (26) (33)
Total $ 170 $ 123 $ 109
Interest Expense: Interest expense increased in 2016 due to higher average debt balances and higher U.S. borrowing costs.
Interest expense increased slightly in 2015 compared to 2014, despite significantly higher debt levels, helped by lower
average interest rates.
Capitalized interest related to property, plant and equipment construction in progress is recorded as a reduction to
interest expense. The amounts shown in the table above for interest expense are net of capitalized interest amounts of $10
million, $13 million, and $15 million, in 2016, 2015 and 2014, respectively.
Interest Income: Interest income was higher in 2016 when compared to 2015 due to higher average interest rates. Interest
income in 2015 was lower when compared to 2014 due to lower average cash/marketable securities balances.
Provision for Income Taxes:
(Percent of pre-tax income) 2016 2015 2014
Effective tax rate 28.3 % 29.1 % 28.9 %
The effective tax rate for 2016 was 28.3 percent, compared to 29.1 percent in 2015, a decrease of 0.8 percentage points.
The effective tax rate for 2015 was 29.1 percent, compared to 28.9 percent in 2014, an increase of 0.2 percentage points.
The changes in the tax rates between years are impacted by many factors, as described further in Note 8, including the 2016
adoption of ASU No. 2016-09 (discussed in Note 1).
The Company currently expects that its effective tax rate for 2017 will be approximately 28 to 29 percent. The rate can
vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, changes in tax laws and
employee share-based payment accounting; as well as recurring factors, such as the geographic mix of income before taxes.
Refer to Note 8 for further discussion of income taxes.
Net Income Attributable to Noncontrolling Interest:
(Millions) 2016 2015 2014
Net income attributable to noncontrolling interest $ 8 $ 8 $ 42
Net income attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M
ownership interests in 3M consolidated entities. The changes in noncontrolling interest amounts have largely related to
Sumitomo 3M Limited (Japan), which was 3M's most significant consolidated entity with non-3M ownership interests. As
discussed in Note 6, on September 1, 2014, 3M purchased the remaining 25 percent ownership in Sumitomo 3M Limited, bringing
3M's ownership to 100 percent. Thus, effective September 1, 2014, net income attributable to noncontrolling interest was
significantly reduced. The primary remaining noncontrolling interest relates to 3M India Limited, of which 3M's effective
ownership is 75 percent.
Currency Effects:
3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by $127 million and
$390 million in 2016 and 2015, respectively. These estimates include the effect of translating profits from local
currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the
United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign
currency exchange rate risks. 3M estimates that year-on-year derivative and other transaction gains and losses decreased
pre-tax income by approximately $69 million in 2016 and increased pre-tax income by approximately $180 million in 2015.
Refer to Note 12 in the Consolidated Financial Statements for additional information concerning 3M's hedging activities.
PERFORMANCE BY BUSINESS SEGMENT
Disclosures relating to 3M's business segments are provided in Item 1, Business Segments. Financial information and other
disclosures are provided in the Notes to the Consolidated Financial Statements. As described in Note 16, effective in the
first quarter of 2016, 3M made a product line reporting change involving two of its business segments. Business segment
information presented herein reflects the impact of these changes for all periods presented. 3M manages its operations in
five business segments. The reportable segments are Industrial; Safety and Graphics; Electronics and Energy; Health Care;
and Consumer.
Corporate and Unallocated:
In addition to these five business segments, 3M assigns certain costs to "Corporate and Unallocated," which is presented
separately in the preceding business segments table and in Note 16. Corporate and Unallocated includes a variety of
miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain
insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and
certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the Company determines not to allocate
directly to its business segments. Because this category includes a variety of miscellaneous items, it is subject to
fluctuation on a quarterly and annual basis.
Corporate and Unallocated operating expenses decreased by $75 million in 2016 when compared to 2015. 3M's defined benefit
pension and postretirement expense allocation to Corporate and Unallocated decreased by $223 million in 2016 when compared
to 2015. In addition, the portion of the 2015 restructuring actions charged to corporate ($37 million) provided a favorable
year-on-year comparison. These decreases were partially offset by an increase in legal expenses related to an unfavorable
second quarter 2016 arbitration ruling on an insurance claim, commercial litigation settlements related to Andover
Healthcare and TransWeb, and accruals for respirator mask/asbestos liabilities (all of which are discussed in Note 14).
Corporate and Unallocated operating expenses increased by $105 million in 2015 when compared to 2014. This increase was
driven by higher defined benefit pension and postretirement benefit expenses, which 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.
Operating Business Segments:
Each of 3M's business segments incurred restructuring charges in the fourth quarter of 2015, as indicated in the following
table.
Restructuring Pre-Tax Charge by Business Segment:
(Millions) Fourth Quarter 2015
Industrial 42
Safety and Graphics 11
Health Care 9
Electronics and Energy 12
Consumer 3
Corporate and Unallocated 37
Total $ 114
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 and divestiture impacts, if any, are measured
separately for the first twelve months post-transaction. 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. Any references to "Membrana" refer to the former Separations Media business acquired by 3M from Polypore in 2015.
The following discusses total year results for 2016 compared to 2015, and also discusses 2015 compared to 2014, for each
business segment.
Industrial Business (34.3% of consolidated sales):
2016 2015 2014
Sales (millions) $ 10,313 $ 10,295 $ 10,985
Sales change analysis:
Organic local currency - % 0.4 % 4.9 %
Acquisitions 1.6 0.6 -
Divestitures (0.3) - -
Translation (1.1) (7.3) (1.8)
Total sales change 0.2 % (6.3) % 3.1 %
Operating income (millions) $ 2,376 $ 2,256 $ 2,381
Percent change 5.3 % (5.3) % 3.5 %
Percent of sales 23.0 % 21.9 % 21.7 %
The Industrial segment serves a broad range of markets, such as automotive original equipment manufacturer (OEM) and
automotive aftermarket (auto body shops and retail), electronics, appliance, paper and printing, packaging, food and
beverage, and construction. Industrial products include tapes, a wide variety of coated, non-woven and bonded abrasives,
adhesives, advanced ceramics, sealants, specialty materials, separation and purification 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 2016 results:
Sales in Industrial totaled $10.3 billion, up 0.2 percent in U.S. dollars. Organic local-currency sales were flat,
acquisitions added 1.6 percent, divestitures reduced sales by 0.3 percent, and foreign currency translation reduced sales
by 1.1 percent. The flat organic local-currency sales impact reflected the continued economic challenges in the global
industrial sector. Industrial did rebound in the fourth quarter of 2016, when it reflected 4.6 percent organic
local-currency sales growth.
On an organic local-currency sales basis:
· Sales grew in automotive OEM, automotive aftermarket, and separation and purification.
· Sales declined in abrasives, industrial adhesives and tapes, and aerospace and commercial transportation.
· Sales also declined in advanced materials, primarily due to persistent weakness in the oil and gas end markets.
· Geographically, sales increased 5 percent in Latin America/Canada and 2 percent in EMEA, while Asia Pacific declined
1 percent and the United States declined 2 percent.
Acquisitions and divestitures (also discussed in Note 2):
· Acquisition sales growth primarily related to the August 2015 acquisition of Membrana, a leading provider of
microporous membranes and modules for filtration in the life sciences, industrial, and specialty segments.
· 3M completed its sale of the assets of 3M's pressurized polyurethane foam adhesives business (formerly known as
Polyfoam) in January 2016.
· In October 2016, 3M sold the assets of its temporary protective films business. This business is a provider of
adhesive-backed temporary protective films used in a broad range of industries.
Operating income:
· Operating income margins increased by 1.1 percentage points to 23.0 percent, helped by the gain on sale of Polyfoam
and its temporary protective films business, productivity benefits from fourth quarter 2015 restructuring actions, and
lower raw material costs.
· The Membrana acquisition had a minimal impact on operating income margins.
Year 2015 results:
Sales in Industrial totaled $10.3 billion, down 6.3 percent in U.S. dollars. Organic local-currency sales increased 0.4
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 separation and purification, automotive OEM, and aerospace and commercial transportation,
while automotive aftermarket increased slightly. Sales in industrial adhesives and tapes were flat.
· 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 August 2015 acquisition of Membrana.
· 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 Membrana acquisition.
Safety and Graphics Business (18.8% of consolidated sales):
2016 2015 2014
Sales (millions) $ 5,660 $ 5,515 $ 5,732
Sales change analysis:
Organic local currency 2.2 % 2.4 % 5.4 %
Acquisitions 4.0 2.6 -
Divestitures (1.9) (0.4) -
Translation (1.7) (8.4) (2.7)
Total sales change 2.6 % (3.8) % 2.7 %
Operating income (millions) $ 1,390 $ 1,305 $ 1,296
Percent change 6.6 % 0.7 % 5.6 %
Percent of sales 24.6 % 23.7 % 22.6 %
The Safety and Graphics segment serves a broad range of markets that increase the safety, security and productivity of
people, facilities and systems. Major product offerings include personal protection products, such as respiratory, hearing,
eye and fall protection equipment; traffic safety and security products, including border and civil security solutions;
commercial solutions, including commercial graphics sheeting and systems, architectural design solutions for surfaces, and
cleaning and protection products for commercial establishments; and roofing granules for asphalt shingles.
Year 2016 results:
Sales in Safety and Graphics totaled $5.7 billion, an increase of 2.6 percent in U.S. dollars. Organic local-currency sales
increased 2.2 percent, and foreign currency translation reduced sales by 1.7 percent. Acquisitions added 4.0 percent, while
divestitures reduced sales by 1.9 percent.
On an organic local-currency sales basis:
· Sales growth was led by roofing granules, which had a consistently strong year.
· Commercial solutions and personal safety also showed positive growth.
· Sales declined in traffic safety and security.
· Sales increased 4 percent in Latin America/Canada, 3 percent in the United States and 2 percent in Asia Pacific,
while sales in EMEA were flat.
Acquisitions and divestitures (also discussed in Note 2):
· Acquisition sales growth reflects the acquisition of Capital Safety in August 2015. Capital Safety is a leading
global provider of fall protection equipment.
· In the fourth quarter of 2015, 3M divested its license plate converting business in France and substantially all of
its library systems business. In the first quarter of 2016, 3M divested the remainder of the library systems business.
Operating income:
· Operating income totaled $1.4 billion, up 6.6 percent.
· Operating income margins were 24.6 percent of sales, compared to 23.7 percent in 2015, benefiting from higher
selling prices and lower raw material costs, plus productivity benefits related to fourth quarter 2015 restructuring
actions.
· Operating income margins were negatively impacted by margin dilution related to the Capital Safety acquisition, and
divestiture impacts on margins.
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 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.
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.
Health Care Business (18.4% of consolidated sales):
2016 2015 2014
Sales (millions) $ 5,527 $ 5,420 $ 5,572
Sales change analysis:
Organic local currency 3.5 % 3.7 % 5.8 %
Acquisitions 0.2 0.8 0.4
Translation (1.7) (7.2) (1.7)
Total sales change 2.0 % (2.7) % 4.5 %
Operating income (millions) $ 1,754 $ 1,724 $ 1,724
Percent change 1.8 % - % 3.1 %
Percent of sales 31.7 % 31.8 % 30.9 %
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.
Year 2016 results:
Health Care sales totaled $5.5 billion, an increase of 2.0 percent in U.S. dollars. Organic local-currency sales increased
3.5 percent, acquisitions added 0.2 percent, and foreign currency translation reduced sales by 1.7 percent.
On an organic local-currency sales basis:
· Sales growth was broad-based across the entire Health Care portfolio, led by food safety, critical and chronic care,
and drug delivery systems.
· On a geographic basis, sales increased 8 percent in Asia Pacific, 7 percent in Latin America/Canada, 2 percent in
the United States, and 1 percent in EMEA.
· In developing markets, Health Care organic local-currency sales grew 7 percent.
· 3M continues to increase investments across the businesses to drive efficient growth into the future.
Acquisitions:
· Acquisition sales growth related to the March 2015 purchase of Ivera Medical Corp, a manufacturer of health care
products that disinfect and protect devices used for access into a patient's bloodstream.
Operating income:
· Operating income increased 1.8 percent to $1.8 billion.
· Operating income margins were 31.7 percent, compared to 31.8 percent in 2015.
· Acquisitions had a minimal impact on operating income margins.
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 sales growth benefit. Treo is a
provider of data analytics and business intelligence to healthcare payers and providers.
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 contributed to higher productivity and margins.
· Acquisition impacts reduced operating income margins by 0.2 percentage points.
Electronics and Energy Business (16.0% of consolidated sales):
2016 2015 2014
Sales (millions) $ 4,826 $ 5,253 $ 5,608
Sales change analysis:
Organic local currency (7.5) % (1.5) % 5.2 %
Divestitures - (0.8) -
Translation (0.6) (4.0) (1.3)
Total sales change (8.1) % (6.3) % 3.9 %
Operating income (millions) $ 1,075 $ 1,109 $ 1,122
Percent change (3.1) % (1.2) % 16.8 %
Percent of sales 22.3 % 21.1 % 20.0 %
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 optical film solutions for the electronic display industry; high-performance fluids and abrasives; high-temperature
and display tapes; flexible circuits, which use electronic packaging and interconnection technology; and touch systems
products. This segment's energy solutions include pressure sensitive tapes and resins; electrical insulation;
infrastructure products that provide both protection and detection solutions; a wide array of fiber-optic and copper-based
telecommunications systems; and renewable energy component solutions for the solar and wind power industries.
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 is seeing
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 2016 results:
Electronics and Energy sales totaled $4.8 billion, down 8.1 percent in U.S. dollars. Organic local-currency sales declined
7.5 percent, and foreign currency translation reduced sales by 0.6 percent.
On an organic local-currency sales basis:
· Sales decreased 10 percent in 3M's electronics-related businesses, with declines in both electronics materials
solutions and display materials and systems. 3M continues to be impacted by weak end market demand across most consumer
electronic applications.
· Sales decreased approximately 4 percent in 3M's energy-related businesses, with an increase in telecommunications
more than offset by declines in electrical markets and renewable energy. 3M exited its renewable energy backsheet business
in December 2015, which contributed to the reduction in energy-related sales.
· On a geographic basis, sales declined 1 percent in both Latin America/Canada and EMEA, and declined 2 percent in the
United States. Sales declined 11 percent in Asia Pacific, where 3M's electronics business is concentrated.
Divestitures:
· In December 2016, as discussed in Note 2, 3M sold the assets of its cathode battery technology out-licensing
business.
Operating income:
· Operating income decreased 3.1 percent to $1.1 billion.
· Operating income margins were 22.3 percent compared to 21.1 percent in 2015, as divestiture gains and productivity
benefits from past portfolio and restructuring actions benefited results.
· Expenses related to portfolio management actions in 2016, in addition to lower organic volume, reduced operating
income margins.
Year 2015 results:
Electronics and Energy sales totaled $5.3 billion, down 6.3 percent in U.S. dollars. Organic local-currency sales declined
1.5 percent, divestitures reduced sales by 0.8 percent, and foreign currency translation reduced sales by 4.0 percent.
On an organic local-currency sales basis:
· Sales were flat in 3M's electronics-related businesses, with growth in electronics materials solutions 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 2 percent
in Asia Pacific and 3 percent in Latin America/Canada.
Divestitures:
· 3M completed the sale of its static control business in January 2015.
Operating income:
· Operating income decreased 1.2 percent to $1.1 billion in 2015.
· Operating income margins were 21.1 percent compared to 20.0 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.
Consumer Business (14.9% of consolidated sales):
2016 2015 2014
Sales (millions) $ 4,482 $ 4,422 $ 4,523
Sales change analysis:
Organic local currency 1.9 % 3.4 % 3.9 %
Divestitures - - (0.1)
Translation (0.6) (5.6) (1.8)
Total sales change 1.3 % (2.2) % 2.0 %
Operating income (millions) $ 1,064 $ 1,046 $ 995
Percent change 1.7 % 5.2 % 5.3 %
Percent of sales 23.7 % 23.7 % 22.0 %
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, home improvement products (do-it-yourself), home care products, protective material products, certain
consumer retail personal safety products, and consumer health care products.
Year 2016 results:
Consumer sales totaled $4.5 billion, up 1.3 percent in U.S. dollars. Organic local-currency sales increased 1.9 percent,
and foreign currency translation reduced sales by 0.6 percent.
On an organic local-currency sales basis:
· Sales growth was led by home improvement, in addition to consumer health care.
· On a geographic basis, sales increased 6 percent in Asia Pacific, and 3 percent in the United States, were flat in
Latin America/Canada, and declined 6 percent in EMEA.
Operating income:
· Operating income was $1.1 billion, up 1.7 percent from 2015.
· Operating income margins were 23.7 percent in both 2016 and 2015, benefiting from ongoing productivity efforts.
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 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.
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:
2016
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 12,188 $ 8,847 $ 6,163 $ 2,901 $ 10 $ 30,109
% of worldwide sales 40.5 % 29.4 % 20.5 % 9.6 % - 100.0 %
Components of net sales change:
Volume - organic 0.7 % (2.5) % (0.6) % (2.4) % - (0.8) %
Price (0.2) (0.3) 1.0 6.1 - 0.7
Organic local-currency sales 0.5 (2.8) 0.4 3.7 - (0.1)
Acquisitions 1.3 0.7 1.7 1.3 - 1.2
Divestitures (0.6) (0.2) (0.7) (0.3) - (0.4)
Translation - 0.2 (2.5) (7.4) - (1.2)
Total sales change 1.2 % (2.1) % (1.1) % (2.7) % - (0.5) %
Operating income (millions) $ 2,948 $ 2,560 $ 1,046 $ 705 $ (36) $ 7,223
Percent change 11.4 % (0.8) % 2.8 % (0.2) % - 4.0 %
For total year 2016, as shown in the preceding table, worldwide sales declined 0.5 percent, with organic volume decreases
of 0.8 percent and selling price increases of 0.7 percent. Acquisitions added 1.2 percent, while divestitures reduced sales
by 0.4 percent. Foreign currency translation reduced sales by 1.2 percent. Organic local-currency sales increased 3.7
percent in Latin America/Canada, 0.5 percent in the United States, 0.4 percent in EMEA, and decreased 2.8 percent in Asia
Pacific. For 2016, international operations represented 59.5 percent of 3M's sales.
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.
Geographic Area Supplemental Information
Property, Plant and
Equipment - net
Employees as of December 31, Capital Spending as of December 31,
(Millions, except Employees) 2016 2015 2014 2016 2015 2014 2016 2015
United States 35,748 35,973 35,581 $ 834 $ 936 $ 909 $ 4,914 $ 4,838
Asia Pacific 18,124 17,642 17,854 228 172 184 1,573 1,647
Europe, Middle East and Africa 20,203 20,563 20,506 294 249 288 1,512 1,531
Latin America and Canada 17,509 15,268 15,859 64 104 112 517 499
Total Company 91,584 89,446 89,800 $ 1,420 $ 1,461 $ 1,493 $ 8,516 $ 8,515
Employment:
Employment increased by 2,138 positions in 2016 and decreased by 354 positions in 2015. 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., Membrana, and Capital Safety Group S.A.R.L. increased 2015
headcount by approximately 2,000 positions.
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 (59% of spending
in 2016), 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 defined benefit 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.
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, 2016 Liability:
Benefit obligation 4.21 % 2.54 % 4.08 %
2017 Net Periodic Benefit Cost Components:
Service cost 4.44 % 2.32 % 4.37 %
Interest cost 3.62 % 2.25 % 3.41 %
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 2017 is 7.25%, 0.25% lower than
2016. Refer to Note 11 for information on how the 2016 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
5.16% for 2017, compared to 5.77% for 2016.
For the year ended December 31, 2016, the Company recognized total consolidated defined benefit pre-tax pension and
postretirement expense (after settlements, curtailments, special termination benefits and other) of $251 million, down from
$556 million in 2015. Defined benefit pension and postretirement expense (before settlements, curtailments, special
termination benefits and other) is anticipated to increase to approximately $325 million in 2017, an increase of $74
million compared to 2016.
The table below summarizes the impact on 2017 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 $ 31
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