REG - 3M Company - Annual Financial Report - Part 1 <Origin Href="QuoteRef">MMM.N</Origin> - Part 2
13/02/2018 07:05
- Part 2: For the preceding part double click ID:nRSM6559Ea
third-party training, monitoring of networks and systems, patching,
maintenance, and backup of systems and data), the Company's information
technology networks and infrastructure may still be vulnerable to damage,
disruptions or shutdowns due to attacks by hackers, breaches, employee error
or malfeasance, power outages, computer viruses, telecommunication or utility
failures, systems failures, service or cloud provider breaches, natural
disasters or other catastrophic events. It is possible for such
vulnerabilities to remain undetected for an extended period, up to and
including several years. While we have experienced, and expect to continue to
experience, these types of threats to the Company's information technology
networks and infrastructure, none of them to date has had a material impact to
the Company. There may be other challenges and risks as the Company upgrades
and standardizes its ERP system on a worldwide basis. Any such events could
result in legal claims or proceedings, liability or penalties under privacy
laws, disruption in operations, and damage to the Company's reputation, which
could adversely affect the Company's business. Although the Company maintains
insurance coverage for various cybersecurity risks, there can be no guarantee
that all costs or losses incurred will be fully insured.
* The Company's defined benefit pension and postretirement plans are subject
to financial market risks that could adversely impact our results. The
performance of financial markets and discount rates impact the Company's
funding obligations under its defined benefit plans. Significant changes in
market interest rates, decreases in the fair value of plan assets and
investment losses on plan assets, and relevant legislative or regulatory
changes relating to defined benefit plan funding may increase the Company's
funding obligations and adversely impact its results of operations and cash
flows.
* The Company's future results may be affected by various legal and
regulatory proceedings and legal compliance risks, including those involving
product liability, antitrust, intellectual property, environmental, the U.S.
Foreign Corrupt Practices Act and other anti-bribery, anti-corruption, or
other matters. The outcome of these legal proceedings may differ from the
Company's expectations because the outcomes of litigation, including
regulatory matters, are often difficult to reliably predict. Various factors
or developments can lead the Company to change current estimates of
liabilities and related insurance receivables where applicable, or make such
estimates for matters previously not susceptible of reasonable estimates, such
as a significant judicial ruling or judgment, a significant settlement,
significant regulatory developments or changes in applicable law. A future
adverse ruling, settlement or unfavorable development could result in future
charges that could have a material adverse effect on the Company's results of
operations or cash flows in any particular period. For a more detailed
discussion of the legal proceedings involving the Company and the associated
accounting estimates, see the discussion in Note 15 "Commitments and
Contingencies" within the Notes to Consolidated Financial Statements.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
In the U.S., 3M's general offices, corporate research laboratories, and
certain division laboratories are located in St. Paul, Minnesota. The Company
operates 80 manufacturing facilities in 29 states. Internationally, the
Company operates 125 manufacturing and converting facilities in 37 countries.
3M owns the majority of its physical properties. 3M's physical facilities are
highly suitable for the purposes for which they were designed. Because 3M is a
global enterprise characterized by substantial intersegment cooperation,
properties are often used by multiple business segments.
Item 3. Legal Proceedings.
Discussion of legal matters is incorporated by reference from Part II, Item
8, Note 15, "Commitments and Contingencies," of this document, and should be
considered an integral part of Part I, Item 3, "Legal Proceedings."
Item 4. Mine Safety Disclosures.
Pursuant to Section 1503 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the "Act"), the Company is required to disclose, in connection
with the mines it operates, information concerning mine safety violations or
other regulatory matters in its periodic reports filed with the SEC. For the
year 2017, the information concerning mine safety violations or other
regulatory matters required by Section 1503(a) of the Act is included in
Exhibit 95 to this annual report.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Equity compensation plans' information is incorporated by reference from
Part III, Item 12, "Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters," of this document, and should be
considered an integral part of Item 5. At January 31, 2018, there were 78,331
shareholders of record. 3M's stock is listed on the New York Stock
Exchange, Inc. (NYSE), the Chicago Stock Exchange, Inc., and the SWX Swiss
Exchange. Cash dividends declared and paid totaled $1.175 and $1.11 per share
for each quarter in 2017 and 2016, respectively. Stock price comparisons
follow:
Stock price comparisons (NYSE composite transactions)
(Per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter Year
2017 High $ 193.50 $ 214.57 $ 214.65 $ 244.23 $ 244.23
2017 Low 173.55 188.62 197.17 210.03 173.55
2016 High $ 167.50 $ 175.14 $ 182.27 $ 180.06 $ 182.27
2016 Low 134.64 163.17 173.51 163.85 134.64
Issuer Purchases of Equity Securities
Repurchases of 3M common stock are made to support the Company's stock-based
employee compensation plans and for other corporate purposes. In
February 2016, 3M's Board of Directors authorized the repurchase of up to $10
billion of 3M's outstanding common stock, with no pre-established end date.
Issuer Purchases of Equity Securities
(registered pursuant to Section 12 of the Exchange Act)
Maximum
Approximate
Dollar Value of
Total Number of Shares that May
Shares Purchased Yet Be Purchased
Total Number of Average Price as Part of Publicly under the Plans
Shares Purchased Paid per Announced Plans or Programs
Period (1) Share or Programs (2) (Millions)
January 1-31, 2017 1,245,580 $ 177.61 1,245,347 $ 6,835
February 1-28, 2017 1,038,362 $ 182.41 1,037,719 $ 6,645
March 1-31, 2017 1,168,893 $ 190.75 1,168,893 $ 6,422
Total January 1-March 31, 2017 3,452,835 $ 183.50 3,451,959 $ 6,422
April 1-30, 2017 934,900 $ 191.64 933,463 $ 6,244
May 1-31, 2017 1,017,290 $ 197.80 1,017,000 $ 6,042
June 1-30, 2017 396,770 $ 208.83 396,770 $ 5,960
Total April 1-June 30, 2017 2,348,960 $ 197.21 2,347,233 $ 5,960
July 1-31, 2017 431,272 $ 205.00 431,272 $ 5,871
August 1-31, 2017 572,552 $ 204.69 572,552 $ 5,754
September 1-30, 2017 893,559 $ 209.62 893,559 $ 5,567
Total July 1-September 30, 2017 1,897,383 $ 207.08 1,897,383 $ 5,567
October 1-31, 2017 982,356 $ 220.27 980,804 $ 5,351
November 1-30, 2017 621,143 $ 231.38 621,143 $ 5,207
December 1-31, 2017 575,924 $ 237.86 575,924 $ 5,070
Total October 1-December 31, 2017 2,179,423 $ 228.08 2,177,871 $ 5,070
Total January 1-December 31, 2017 9,878,601 $ 201.13 9,874,446 $ 5,070
(1) The total number of shares purchased includes: (i) shares purchased
under the Board's authorizations described above, and (ii) shares purchased
in connection with the exercise of stock options.
(2) The total number of shares purchased as part of publicly announced
plans or programs includes shares purchased under the Board's authorizations
described above.
Item 6. Selected Financial Data.
(Dollars in millions, except per share amounts) 2017 2016 2015 2014 2013
Years ended December 31:
Net sales $ 31,657 $ 30,109 $ 30,274 $ 31,821 $ 30,871
Net income attributable to 3M 4,858 5,050 4,833 4,956 4,659
Per share of 3M common stock:
Net income attributable to 3M - basic 8.13 8.35 7.72 7.63 6.83
Net income attributable to 3M - diluted 7.93 8.16 7.58 7.49 6.72
Cash dividends declared per 3M common share 4.70 4.44 3.075 3.59 3.395
Cash dividends paid per 3M common share 4.70 4.44 4.10 3.42 2.54
At December 31:
Total assets $ 37,987 $ 32,906 $ 32,883 $ 31,374 $ 33,304
Long-term debt (excluding portion due within one year) and long-term capital 12,156 10,723 8,799 6,764 4,367
lease obligations
Cash dividends declared and paid totaled $1.175 and $1.11 per share for each
quarter in 2017 and 2016, respectively. 3M typically declares and pays
dividends in the same quarter. In December 2013 and 2014, 3M declared
dividends that were paid in the following first quarter.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is designed to provide a reader of 3M's financial
statements with a narrative from the perspective of management. 3M's MD&A
is presented in eight sections:
· Overview
· Results of Operations
· Performance by Business Segment
· Performance by Geographic Area
· Critical Accounting Estimates
· New Accounting Pronouncements
· Financial Condition and Liquidity
· Financial Instruments
Forward-looking statements in Item 7 may involve risks and uncertainties that
could cause results to differ materially from those projected (refer to the
section entitled "Cautionary Note Concerning Factors That May Affect Future
Results" in Item 1 and the risk factors provided in Item 1A for discussion of
these risks and uncertainties).
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of
a wide variety of products and services. As described in Note 17, effective in
the first quarter of 2017, 3M improved the alignment of its businesses around
markets and customers. Segment information presented herein reflects the
impact of these changes for all periods presented. 3M manages its operations
in five operating business segments: Industrial; Safety and Graphics; Health
Care; Electronics and Energy; and Consumer. From a geographic perspective, any
references to EMEA refer to Europe, Middle East and Africa on a combined
basis.
Earnings per share (EPS) attributable to 3M common shareholders - diluted:
The following table provides the increase (decrease) in diluted earnings per
share for the fourth quarter and year 2017 compared to the same period last
year, in addition to 2016 compared to 2015.
Three months ended Year ended
(Earnings per diluted share) December 31, 2017 December 31, 2017 December 31, 2016
Same period last year $ 1.88 $ 8.16 $ 7.58
Increase/(decrease) in earnings per share - diluted, due to:
Organic growth/other productivity 0.33 0.86 0.16
Acquisitions and divestitures (0.02) 0.54 0.14
Incremental strategic investments (0.06) (0.51) 0.14
Legal - respirator mask actuarial reserve (0.07) (0.07) -
Foreign exchange impacts - (0.13) (0.14)
Shares of common stock outstanding - 0.08 0.24
Other net interest (0.09) (0.10) (0.05)
Income tax rate, excluding Tax Cuts and Jobs Act (TCJA) 0.13 0.34 0.09
Current period, excluding TCJA $ 2.10 $ 9.17 $ 8.16
TCJA enactment impact (1.25) (1.24) -
Current period $ 0.85 $ 7.93 $ 8.16
Year 2017 and fourth quarter EPS:
For the fourth quarter of 2017, net income attributable to 3M was $523
million, or $0.85 per diluted share, compared to $1.155 billion, or $1.88 per
diluted share, in the fourth quarter of 2016, a decrease of 54.8 percent on a
per diluted share. Excluding the $762 million impact related to the enactment
of the Tax Cuts and Jobs Act (TCJA), net income was $1.285 billion, or $2.10
per diluted share, an increase of 11.7 percent on a per diluted share basis
compared to the fourth quarter of 2016. For the full year 2017, net income
attributable to 3M was $4.858 billion, or $7.93 per diluted share, compared to
$5.050 billion, or $8.16 per diluted share, for the full year 2016, a decrease
of 2.8 percent on a per diluted share basis. Excluding the 2017 impact related
to TCJA, net income was $5.620 billion, or $9.17 per diluted share, an
increase of 12.4 percent on a per diluted share basis compared to 2016. The
Company refers to various measures excluding the 2017 net impact of enactment
of the Tax Cuts and Jobs Act. These non-GAAP measures are further described
and reconciled to the most directly comparable GAAP financial measures in the
section that follows.
Organic growth/productivity in 2017 includes benefits from higher organic
local-currency sales, raw material cost decreases from sourcing cost reduction
projects, and business transformation, which is having a positive impact on
3M's productivity efforts. These benefits were partially offset by higher
defined benefit pension expenses. During both the fourth quarter and full year
2017, organic growth and productivity were the primary drivers for the
year-on-year benefit.
Acquisitions and divestitures decreased earnings per diluted share by 2 cents
year-on-year for the fourth quarter of 2017, while increasing earnings per
diluted share by 54 cents year-on-year for the full year 2017. Acquisition
impacts, which are measured for the first twelve months post-transaction,
relate primarily to the acquisition of Scott Safety (fourth quarter 2017). The
net impact related to Scott Safety includes income from operations, more than
offset by the transaction and integration costs of the acquisition. Interest
expense related to financing costs of Scott Safety are also included. The net
impact related to Scott Safety was equivalent to a year-on-year decrease of 7
cents per diluted share. Full year 2017 had year-on-year operating income
impacts from the following divestitures: Polyfoam and the remaining portion of
the library system business (both in first quarter 2016), protective films
business and cathode battery technology out-license business (both in fourth
quarter 2016), prescription safety eyewear business (January 2017), identity
management business and tolling and automated license/number plate recognition
business (both in the second quarter of 2017), and electronic monitoring
business (fourth quarter 2017). The incremental year-on-year pre-tax gain on
divestiture impact, net of lost operating loss/(income) during the fourth
quarter of 2017 was $26 million, or approximately 5 cents per diluted share.
For the full year 2017, the year-on-year net pre-tax increase from
divestitures was approximately $474 million, which is equivalent to a
year-on-year increase of 61 cents per diluted share (primarily related to the
identity management business). Additional discussion on divestitures is
provided later within the "Divestitures and Strategic Investments" section.
Operating income results include year-on-year incremental strategic
investments that decreased pre-tax earnings by approximately $51 million and
$413 million in the fourth quarter and full year 2017, respectively. These
incremental strategic investments are comprised of 3M's investments in growth
initiatives and optimization of its portfolio and supply chain footprint.
Additional discussion on strategic investments is provided later within the
"Divestitures and Strategic Investments" section.
In the fourth quarter of 2017, as a result of the Company's regular review of
its respirator mask/asbestos liabilities, the Company increased its accruals.
This incremental increase resulted in a year-on-year decrease of 7 cents per
diluted share. Refer to Note 15 for more details.
Foreign currency impacts (net of hedging) decreased pre-tax earnings by
approximately $3 million and $111 million year-on-year in the fourth quarter
and full year 2017, respectively, excluding the impact of foreign currency
changes on tax rates. This had a minimal impact per diluted share in the
fourth quarter of 2017, and is equivalent to a year-on-year decrease of 13
cents per diluted share for the full year 2017.
Weighted-average diluted shares outstanding in the fourth quarter and full
year 2017 declined 0.1 percent and 1.0 percent year-on-year, respectively,
which benefited earnings per share. The Company purchased $504 million and
$2.1 billion of its own stock in the fourth quarter and full year 2017,
respectively.
Other net interest decreased earnings per share for both fourth quarter and
full year 2017, largely due to the loss on extinguishment of debt, higher U.S.
average balances, and higher interest rates. The early extinguishment of debt
resulted in a charge of $96 million, which contributed to a year-on-year
decrease of 11 cents per diluted share for both the fourth quarter and full
year 2017. Additionally, the portion of interest expense related to the
financing costs of acquiring Scott Safety, which was equivalent to a
year-on-year decrease of 2 cents per diluted share, is included in the
acquisitions and divestitures impact described above.
As discussed in the section below, the Company recorded a net tax expense of
$762 million related to the enactment of the TCJA, which was equivalent to a
decrease of $1.25 per diluted share in the fourth quarter of 2017. The
effective tax rate for the fourth quarter 2017 was 68.6 percent, an increase
of 40.4 percentage points versus 2016. Excluding the impact of TCJA, the
effective income tax rate was 23.0 percent in the fourth quarter 2017, a
decrease of 5.2 percentage points versus 2016. For the full year 2017, the
effective tax rate was 35.5 percent, an increase of 7.2 percentage points
versus 2016. Excluding the impact of TCJA, the effective income tax rate was
25.4 percent in the full year 2017, a decrease of 2.9 percentage points versus
2016. Excluding the impact of TCJA, the fourth quarter and full year 2017
change in tax rate was driven largely by increasing benefits from our supply
chain centers of expertise, favorable geographic mix and other items, as
referenced in Note 9.
Income, earnings per share, and effective tax rate adjusted for impacts of the
Tax Cuts and Jobs Act (TCJA) - (non-GAAP measures):
During the fourth quarter of 2017, 3M recorded a net tax expense of $762
million related to the enactment of the Tax Cuts and Jobs Act (TCJA). The
expense is primarily related to the TCJA's transition tax on previously
unremitted earnings of non-U.S. subsidiaries and is net of remeasurement of
3M's deferred tax assets and liabilities considering the TCJA's newly enacted
tax rates and certain other impacts. This provisional amount is subject to
adjustment during the measurement period of up to one year following the
December 2017 enactment of the TCJA, as provided by recent SEC guidance. See
additional information in Note 9. In addition to reporting financial results
in accordance with U.S. GAAP, the Company also provides non-GAAP measures that
adjust for the net impact of enactment of the TCJA. This item represents a
significant charge that impacted the Company's financial results. Income,
earnings per share, and the effective tax rate are all measures for which 3M
provides the reported GAAP measure and an adjusted measure. The adjusted
measures are not in accordance with, nor are they a substitute for, GAAP
measures. The Company considers these non-GAAP measures in evaluating and
managing the Company's operations. The Company believes that discussion of
results adjusted for this item is meaningful to investors as it provides a
useful analysis of ongoing underlying operating trends. The determination of
this item may not be comparable to similarly titled measures used by other
companies.
Three months ended December 31, 2017
Q4 2016 Q4 2017
Adjusted income, earnings per share, & effective tax rate (non-GAAP Reported GAAP Measure Reported GAAP Measure Adjustment for TCJA Adjusted Non-GAAP Measure
measures) (Dollars in millions, except per share amounts)
Operating income $ 1,665 $ 1,821 $ - $ 1,821
Income before taxes $ 1,610 $ 1,672 $ - $ 1,672
Provision for income taxes $ 454 $ 1,147 $ (762) $ 385
Effective tax rate 28.2 % 68.6 % 23.0 %
Net income attributable to 3M $ 1,155 $ 523 $ 762 $ 1,285
Earnings per diluted share $ 1.88 $ 0.85 $ 1.25 $ 2.10
Earnings per diluted share percent change (54.8) % 11.7 %
Year ended December 31, 2017
Year End 2016 Year End 2017
Adjusted income, earnings per share, & effective tax rate (non-GAAP Reported GAAP Measure Reported GAAP Measure Adjustment for TCJA Adjusted Non-GAAP Measure
measures) (Dollars in millions, except per share amounts)
Operating income $ 7,223 $ 7,820 $ - $ 7,820
Income before taxes $ 7,053 $ 7,548 $ - $ 7,548
Provision for income taxes $ 1,995 $ 2,679 $ (762) $ 1,917
Effective tax rate 28.3 % 35.5 % 25.4 %
Net income attributable to 3M $ 5,050 $ 4,858 $ 762 $ 5,620
Earnings per diluted share $ 8.16 $ 7.93 $ 1.24 $ 9.17
Earnings per diluted share percent change (2.8) % 12.4 %
Year 2016 EPS:
For total year 2016, productivity and other increased earnings, helped by
lower defined benefit pension and postretirement expenses, higher selling
prices, lower raw material costs, and productivity benefits related to the
fourth quarter 2015 restructuring. These benefits were partially offset by the
impact of flat organic sales and lower asset utilization.
Acquisition and divestiture impacts, which are measured for the first twelve
months post-transaction, related to the acquisitions of Membrana and Capital
Safety (third quarter 2015) and Semfinder (September 2016), and the
divestitures of Polyfoam (first quarter 2016), the library systems business
(fourth quarter 2015/first quarter 2016), and the license plate converting
business in France (fourth quarter 2015). In addition, in the fourth quarter
of 2016, 3M sold the assets of its protective films business and its cathode
battery technology out-licensing business. On a combined basis, these
acquisition/divestiture year-on-year impacts resulted in a 14 cents per
diluted share benefit to earnings per share in 2016, driven by solid
performances from 2015 acquisitions and year-on-year divestiture gains. Refer
to Note 2 for further discussion of these acquisition/divestiture impacts.
Restructuring actions (included within incremental strategic investments in
the preceding table) resulted in an after-tax charge of 14 cents per diluted
share in 2015, which provided a year-on-year benefit in 2016.
Foreign exchange impacts (net of hedging) decreased pre-tax earnings by
approximately $127 million year-on-year in 2016, excluding the impact of
foreign currency changes on tax rates. This was equivalent to a year-on-year
decrease of 14 cents per diluted share for 2016.
Weighted-average diluted shares outstanding in 2016 declined 3 percent versus
2015, which benefited earnings per share. The benefits from share repurchases,
net of issuances, were partially offset by the adoption of ASU No. 2016-09,
which increased the calculated number of diluted shares in 2016.
Higher average debt balances led to an increase in interest expense
year-on-year in 2016.
The income tax rate was 28.3 percent in 2016, a decline of 0.8 percentage
points versus last year. The 2016 change in tax rate was driven by a number of
factors as referenced in Note 9, including the first quarter 2016 adoption of
Accounting Standards Update (ASU) No. 2016-09 (discussed in Note 1).
Fourth quarter 2017 sales and operating income by business segment:
The following tables contain sales and operating income results by business
segment for the fourth quarters of 2017 and 2016, followed by additional
discussion of business segment results.
Three months ended Three months ended 2017 vs 2016
December 31, 2017 December 31, 2016 % change
Net % of Oper. Net % of Oper. Net Oper.
(Dollars in millions) Sales Total Income Sales Total Income Sales Income
Business Segments
Industrial $ 2,718 34.0 % $ 527 $ 2,543 34.7 % $ 558 6.9 % (5.5) %
Safety and Graphics 1,545 19.3 406 1,343 18.3 271 15.0 50.0
Health Care 1,474 18.4 464 1,390 19.0 413 6.0 12.3
Electronics and Energy 1,321 16.6 334 1,175 16.0 325 12.5 2.6
Consumer 1,174 14.7 269 1,094 14.9 229 7.3 17.6
Corporate and Unallocated (4) - (127) 2 - (83) - -
Elimination of Dual Credit (238) (3.0) (52) (218) (2.9) (48) - -
Total Company $ 7,990 100.0 % $ 1,821 $ 7,329 100.0 % $ 1,665 9.0 % 9.4 %
Three months ended December 31, 2017
Organic
Worldwide local- Total
Sales Change Analysis currency sales
By Business Segment sales Acquisitions Divestitures Translation change
Industrial 3.9 % - % - % 3.0 % 6.9 %
Safety and Graphics 10.7 10.2 (9.1) 3.2 15.0
Health Care 3.1 0.1 - 2.8 6.0
Electronics and Energy 11.0 - (0.3) 1.8 12.5
Consumer 5.4 - - 1.9 7.3
Total Company 6.0 % 1.8 % (1.5) % 2.7 % 9.0 %
From a business segment perspective, 3M achieved both total sales growth and
organic local-currency sales growth (which includes organic volume and selling
price impacts) in all five business segments. Operating income margins were
22.8 percent, with four of five business segments above 22 percent.
· In Industrial, total sales increased 6.9 percent, or 3.9 percent
on an organic local currency basis, with organic sales growth in abrasives,
automotive and aerospace solutions, industrial adhesives and tapes, automotive
aftermarket, and separation and purification. Organic sales declined in
advanced materials. Operating income margins were 19.4 percent, down 2.5
percentage points, with the decline driven by incremental strategic
investments and a fourth quarter 2016 gain on sale of the temporary protective
films business.
· In Safety and Graphics, total sales increased 15.0 percent, or
10.7 percent on an organic local currency basis. Organic sales grew in all
businesses, led by personal safety, roofing granules, and transportation
safety. Operating income margins were 26.3 percent, up 6.1 percentage points,
with 2.4 percentage points of this increase driven by divestitures, partially
offset by acquisitions and incremental strategic investments.
· In Health Care, total sales increased 6.0 percent, or 3.1 percent
on an organic local currency sales basis. Organic sales grew in food safety,
health information systems, medical consumables, and oral care. Organic sales
declined in drug delivery systems. Operating income margins were 31.5 percent,
up 1.8 percentage points.
· In Electronics and Energy, total sales increased 12.5 percent, or
11.0 percent on an organic local currency basis. Electronics-related organic
sales increased 14 percent, with growth in both electronics materials
solutions and display materials and systems. Energy-related organic sales
increased 4 percent as growth in electrical markets was partially offset by
declines in telecommunications markets. Operating income margins were 25.2
percent, down 2.5 percentage points. The fourth quarter 2016 gain on sale of
intellectual property and fourth quarter 2017 incremental strategic
investments negatively impacted operating income margins by 3.3 percentage
points.
· In Consumer, total sales increased 7.3 percent, or 5.4 percent on
an organic local currency basis. Organic sales grew in consumer health care,
home improvement, and stationery and office, while sales in home care were
flat. Operating income margins were 22.9 percent, up 2.0 percentage points
Year 2017 sales and operating income by business segment:
The following tables contain sales and operating income results by business
segment for the years ended December 31, 2017 and 2016. Refer to the section
entitled "Performance by Business Segment" later in MD&A for additional
discussion concerning both 2017 versus 2016 results and 2016 versus 2015
results, including Corporate and Unallocated. Refer to Note 17 for additional
information on business segments, including Elimination of Dual Credit.
2017 vs 2016
2017 2016 % change
Net % of Oper. Net % of Oper. Net Oper.
(Dollars in millions) Sales Total Income Sales Total Income Sales Income
Business Segments
Industrial $ 10,911 34.5 % $ 2,289 $ 10,399 34.5 % $ 2,395 4.9 % (4.4) %
Safety and Graphics 6,148 19.4 2,067 5,881 19.5 1,423 4.5 45.3
Health Care 5,813 18.4 1,781 5,566 18.5 1,763 4.4 1.0
Electronics and Energy 5,159 16.3 1,254 4,643 15.4 1,041 11.1 20.4
Consumer 4,589 14.5 993 4,484 14.9 1,065 2.3 (6.8)
Corporate and Unallocated 1 - (352) 7 - (272) - -
Elimination of Dual Credit (964) (3.1) (212) (871) (2.8) (192) - -
Total Company $ 31,657 100.0 % $ 7,820 $ 30,109 100.0 % $ 7,223 5.1 % 8.3 %
Year ended December 31, 2017
Worldwide Sales Change Organic local- Total sales
By Business Segment currency sales Acquisitions Divestitures Translation change
Industrial 4.9 % - % (0.5) % 0.5 % 4.9 %
Safety and Graphics 6.1 2.2 (4.3) 0.5 4.5
Health Care 3.9 - - 0.5 4.4
Electronics and Energy 11.0 - (0.2) 0.3 11.1
Consumer 1.7 - - 0.6 2.3
Total Company 5.2 % 0.4 % (1.0) % 0.5 % 5.1 %
Fourth-quarter 2017 sales results by geographic area/business segment:
Percent change information compares the fourth quarter 2017 with the same
period last year, unless otherwise indicated. From a geographic perspective,
any references to EMEA refer to Europe, Middle East and Africa on a combined
basis.
Three months ended December 31, 2017
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 3,081 $ 2,474 $ 1,684 $ 756 $ (5) $ 7,990
% of worldwide sales 38.5 % 31.0 % 21.1 % 9.4 % - 100.0 %
Components of net sales change:
Volume - organic 3.1 % 12.0 % 5.4 % 1.2 % - 5.8 %
Price (0.3) (0.1) 1.4 1.3 - 0.2
Organic local-currency sales 2.8 11.9 6.8 2.5 - 6.0
Acquisitions 2.2 0.7 3.2 0.7 - 1.8
Divestitures (2.0) (0.7) (1.7) (1.5) - (1.5)
Translation - 2.5 8.8 2.3 - 2.7
Total sales change 3.0 % 14.4 % 17.1 % 4.0 % - 9.0 %
Total sales change:
Industrial 0.5 % 10.9 % 15.4 % 6.8 % - 6.9 %
Safety and Graphics 9.8 % 21.1 % 28.1 % (0.2) % - 15.0 %
Health Care 1.1 % 14.4 % 11.7 % 6.1 % - 6.0 %
Electronics and Energy 6.1 % 15.8 % 13.4 % 0.6 % - 12.5 %
Consumer 4.7 % 11.0 % 16.9 % 8.3 % - 7.3 %
Organic local-currency sales change:
Industrial 0.5 % 8.1 % 6.1 % 4.7 % - 3.9 %
Safety and Graphics 9.4 % 18.2 % 12.4 % 0.7 % - 10.7 %
Health Care 1.0 % 10.9 % 3.3 % 3.8 % - 3.1 %
Electronics and Energy 7.2 % 14.6 % 6.0 % (1.6) % - 11.0 %
Consumer 4.7 % 7.5 % 7.9 % 5.5 % - 5.4 %
Additional information beyond what is included in the preceding table is as
follows:
· In the Asia Pacific geographic area, where 3M's Electronics and
Energy business is concentrated, sales benefited from strengthened demand
across most electronics market segments in addition to strong growth in 3M's
Safety and Graphics business. In China/Hong Kong, total sales increased 21
percent and organic local-currency sales increased 18 percent. In Japan, total
sales increased 6 percent, as organic local-currency sales growth of 7 percent
was partially offset by foreign currency translation impacts.
· In the EMEA geographic area, Central/East Europe and Middle
East/Africa had total sales increase by 14 percent, with organic
local-currency sales increases of 12 percent. West Europe total sales grew 18
percent, driven by foreign currency translation impacts, in addition to
organic local-currency sales growth of 5 percent.
· In the Latin America/Canada geographic area, total sales
increased 7 percent in Mexico, driven by foreign currency translation impacts,
in addition to organic local-currency sales growth of 3 percent. In Canada,
total sales increased 13 percent, driven by organic local-currency sales
growth of 8 percent. In Brazil, total sales and organic local-currency sales
increased 3 percent.
Selling prices were up 0.2 percent year-on-year for the fourth quarter of
2017. In Asia Pacific, strong volume growth in electronics had a negative
impact on price. EMEA and Latin America/Canada had price growth, while U.S.
selling prices declined slightly.
Year 2017 sales results by geographic area/business segment:
Percent change information compares the full year 2017 with the same period
last year, unless otherwise indicated. Additional discussion of business
segment results is provided in the Performance by Business Segment section.
Year ended December 31, 2017
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 12,372 $ 9,809 $ 6,456 $ 3,033 $ (13) $ 31,657
% of worldwide sales 39.1 % 31.0 % 20.4 % 9.5 % - 100.0 %
Components of net sales change:
Volume - organic 2.8 % 11.5 % 2.5 % 2.5 % - 5.2 %
Price (0.3) (0.3) 0.7 1.1 - -
Organic local-currency sales 2.5 11.2 3.2 3.6 - 5.2
Acquisitions 0.5 0.2 0.7 0.2 - 0.4
Divestitures (1.5) (0.4) (0.8) (1.4) - (1.0)
Translation - (0.1) 1.7 2.2 - 0.5
Total sales change 1.5 % 10.9 % 4.8 % 4.6 % - 5.1 %
Total sales change:
Industrial 3.0 % 7.3 % 5.9 % 4.9 % - 4.9 %
Safety and Graphics 1.3 % 8.8 % 8.4 % 0.6 % - 4.5 %
Health Care 3.7 % 8.6 % 1.4 % 9.3 % - 4.4 %
Electronics and Energy 1.0 % 16.9 % 2.2 % 3.1 % - 11.1 %
Consumer 0.2 % 7.8 % 1.7 % 7.2 % - 2.3 %
Organic local-currency sales change:
Industrial 3.9 % 7.9 % 4.2 % 3.2 % - 4.9 %
Safety and Graphics 4.2 % 10.5 % 6.6 % 2.6 % - 6.1 %
Health Care 3.7 % 8.5 % 0.2 % 7.0 % - 3.9 %
Electronics and Energy 2.0 % 17.0 % - % 1.4 % - 11.0 %
Consumer 0.2 % 7.0 % (0.2) % 4.2 % - 1.7 %
Additional information beyond what is included in the preceding table is as
follows:
· In the Asia Pacific geographic area, where 3M's Electronics and
Energy business is concentrated, sales benefited from strengthened demand
across most electronics market segments, in addition to strong growth in 3M's
Safety and Graphics business. Total sales in China/Hong Kong grew 16 percent
and Japan grew 5 percent. On an organic local-currency sales basis, China/Hong
Kong grew 18 percent and Japan grew 8 percent.
· In the EMEA geographic area, Central/East Europe and Middle
East/Africa total sales and organic local-currency grew 5 percent. West Europe
total sales grew 5 percent, with organic local-currency sales growth of 3
percent along with an increase related to foreign currency translation.
· In the Latin America/Canada geographic area, total sales
increased 4 percent in Mexico, as organic local-currency sales growth of 6
percent was partially offset by divestitures. In Canada, total sales increased
8 percent, with organic-local currency sales growth of 7 percent. In Brazil
total sales growth of 9 percent was driven by foreign currency translation,
while organic local-currency sales increased 2 percent.
Foreign currency translation increased year-on-year sales by 0.5 percent, with
the translation-related sales increase in Latin America/Canada and EMEA
partially offset by the decreases in Asia Pacific. Selling prices were flat
year-on-year for 2017. In Asia Pacific, strong volume growth in electronics
had a negative impact on price. Latin America/Canada and EMEA had price
growth, while the U.S. selling prices declined slightly.
Year 2016 sales results by geographic area/business segment:
Percent change information compares the full year 2016 with the full year
2015, unless otherwise indicated. Additional discussion of business segment
results is provided in the Performance by Business Segment section.
Year ended December 31, 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) %
Total sales change:
Industrial (1.6) % 0.9 % 2.8 % (2.2) % - 0.1 %
Safety and Graphics 6.9 % 1.6 % (2.7) % - % - 2.5 %
Health Care 3.0 % 8.2 % (2.4) % (1.2) % - 2.1 %
Electronics and Energy (1.9) % (11.4) % (2.6) % (9.2) % - (8.4) %
Consumer 2.4 % 7.2 % (8.2) % (5.9) % - 1.2 %
Organic local-currency sales change:
Industrial (2.1) % (0.7) % 1.8 % 4.8 % - (0.1) %
Safety and Graphics 2.9 % 1.4 % 0.2 % 4.2 % - 2.1 %
Health Care 2.6 % 8.0 % 1.2 % 6.9 % - 3.6 %
Electronics and Energy (1.9) % (11.4) % (1.0) % (2.3) %
- More to follow, for following part double click ID:nRSM6559Ec ion and Results of Operations." For additional information concerning factors that may cause
actual results to vary materially from those stated in the forward-looking statements, see our reports on Form 10-K, 10-Q
and 8-K filed with the SEC from time to time.
Item 1A. Risk Factors.
Provided below is a cautionary discussion of what we believe to be the most important risk factors applicable to the
Company. Discussion of these factors is incorporated by reference into and considered an integral part of Part II, Item 7,
"Management's Discussion and Analysis of Financial Conditions and Results of Operations."
* Results are impacted by the effects of, and changes in, worldwide economic, political, and capital markets conditions.
The Company operates in more than 70 countries and derives approximately 60 percent of its revenues from outside the United
States. The Company's business is subject to global competition and geopolitical risks and may be adversely affected by
factors in the United States and other countries that are beyond its control, such as slower economic growth, disruptions
in financial markets, economic downturns in the form of either contained or widespread recessionary conditions, inflation,
elevated unemployment levels, sluggish or uneven recovery, government deficit reduction and other austerity measures in
specific countries or regions, or in the various industries in which the Company operates; social, political or labor
conditions in specific countries or regions; natural and other disasters or climate change affecting the operations of the
Company or its customers and suppliers; or adverse changes in the availability and cost of capital, interest rates, tax
rates, tax laws, or exchange control, ability to expatriate earnings and other regulations in the jurisdictions in which
the Company operates.
* Change in the Company's credit ratings could increase cost of funding. The Company's credit ratings are important to 3M's
cost of capital. The major rating agencies routinely evaluate the Company's credit profile and assign debt ratings to 3M.
This evaluation is based on a number of factors, which include financial strength, business and financial risk, as well as
transparency with rating agencies and timeliness of financial reporting. 3M currently has an AA- credit rating with a
stable outlook from Standard & Poor's and has an A1 credit rating with a stable outlook from Moody's Investors Service. The
Company's credit ratings have served to lower 3M's borrowing costs and facilitate access to a variety of lenders. The
addition of further leverage to the Company's capital structure could impact 3M's credit ratings in the future. Failure to
maintain strong investment grade ratings would adversely affect the Company's cost of funding and could adversely affect
liquidity and access to capital markets.
* The Company's results are affected by competitive conditions and customer preferences. Demand for the Company's products,
which impacts revenue and profit margins, is affected by (i) the development and timing of the introduction of competitive
products; (ii) the Company's response to downward pricing to stay competitive; (iii) changes in customer order patterns,
such as changes in the levels of inventory maintained by customers and the timing of customer purchases which may be
affected by announced price changes, changes in the Company's incentive programs, or the customer's ability to achieve
incentive goals; and (iv) changes in customers' preferences for our products, including the success of products offered by
our competitors, and changes in customer designs for their products that can affect the demand for some of the Company's
products.
* Foreign currency exchange rates and fluctuations in those rates may affect the Company's ability to realize projected
growth rates in its sales and earnings. Because the Company's financial statements are denominated in U.S. dollars and
approximately 60 percent of the Company's revenues are derived from outside the United States, the Company's results of
operations and its ability to realize projected growth rates in sales and earnings could be adversely affected if the U.S.
dollar strengthens significantly against foreign currencies.
* The Company's growth objectives are largely dependent on the timing and market acceptance of its new product offerings,
including its ability to continually renew its pipeline of new products and to bring those products to market. This ability
may be adversely affected by difficulties or delays in product development, such as the inability to identify viable new
products, obtain adequate intellectual property protection, or gain market acceptance of new products. There are no
guarantees that new products will prove to be commercially successful.
* The Company's future results are subject to fluctuations in the costs and availability of purchased components,
compounds, raw materials and energy, including oil and natural gas and their derivatives, due to shortages, increased
demand, supply interruptions, currency exchange risks, natural disasters and other factors. The Company depends on various
components, compounds, raw materials, and energy (including oil and natural gas and their derivatives) supplied by others
for the manufacturing of its products. It is possible that any of its supplier relationships could be interrupted due to
natural and other disasters and other events, or be terminated in the future. Any sustained interruption in the Company's
receipt of adequate supplies could have a material adverse effect on the Company. In addition, while the Company has a
process to minimize volatility in component and material pricing, no assurance can be given that the Company will be able
to successfully manage price fluctuations or that future price fluctuations or shortages will not have a material adverse
effect on the Company.
* Acquisitions, strategic alliances, divestitures, and other unusual events resulting from portfolio management actions and
other evolving business strategies, and possible organizational restructuring could affect future results. The Company
monitors its business portfolio and organizational structure and has made and may continue to make acquisitions, strategic
alliances, divestitures and changes to its organizational structure. With respect to acquisitions, future results will be
affected by the Company's ability to integrate acquired businesses quickly and obtain the anticipated synergies.
* The Company's future results may be affected if the Company generates fewer productivity improvements than estimated. The
Company utilizes various tools, such as Lean Six Sigma, and engages in ongoing global business transformation. Business
transformation is defined as changes in processes and internal/external service delivery across 3M to move to more
efficient business models to improve operational efficiency and productivity, while allowing 3M to serve customers with
greater speed and efficiency. This is enabled by the ongoing multi-year phased implementation of an enterprise resource
planning (ERP) system on a worldwide basis. There can be no assurance that all of the projected productivity improvements
will be realized.
* The Company employs information technology systems to support its business, including ongoing phased implementation of an
ERP system as part of business transformation on a worldwide basis over the next several years. Security breaches and other
disruptions to the Company's information technology infrastructure could interfere with the Company's operations,
compromise information belonging to the Company or its customers, suppliers, and employees, exposing the Company to
liability which could adversely impact the Company's business and reputation. In the ordinary course of business, the
Company relies on information technology networks and systems, some of which are managed by third parties, to process,
transmit and store electronic information, and to manage or support a variety of business processes and activities.
Additionally, the Company collects and stores certain data, including proprietary business information, and may have access
to confidential or personal information in certain of our businesses that is subject to privacy and security laws,
regulations and customer-imposed controls. Despite our cybersecurity measures (including employee and third-party training,
monitoring of networks and systems, patching, maintenance, and backup of systems and data), the Company's information
technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attacks by
hackers, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures,
systems failures, service or cloud provider breaches, natural disasters or other catastrophic events. It is possible for
such vulnerabilities to remain undetected for an extended period, up to and including several years. While we have
experienced, and expect to continue to experience, these types of threats to the Company's information technology networks
and infrastructure, none of them to date has had a material impact to the Company. There may be other challenges and risks
as the Company upgrades and standardizes its ERP system on a worldwide basis. Any such events could result in legal claims
or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to the Company's
reputation, which could adversely affect the Company's business. Although the Company maintains insurance coverage for
various cybersecurity risks, there can be no guarantee that all costs or losses incurred will be fully insured.
* The Company's defined benefit pension and postretirement plans are subject to financial market risks that could adversely
impact our results. The performance of financial markets and discount rates impact the Company's funding obligations under
its defined benefit plans. Significant changes in market interest rates, decreases in the fair value of plan assets and
investment losses on plan assets, and relevant legislative or regulatory changes relating to defined benefit plan funding
may increase the Company's funding obligations and adversely impact its results of operations and cash flows.
* The Company's future results may be affected by various legal and regulatory proceedings and legal compliance risks,
including those involving product liability, antitrust, intellectual property, environmental, the U.S. Foreign Corrupt
Practices Act and other anti-bribery, anti-corruption, or other matters. The outcome of these legal proceedings may differ
from the Company's expectations because the outcomes of litigation, including regulatory matters, are often difficult to
reliably predict. Various factors or developments can lead the Company to change current estimates of liabilities and
related insurance receivables where applicable, or make such estimates for matters previously not susceptible of reasonable
estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments
or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in future charges
that could have a material adverse effect on the Company's results of operations or cash flows in any particular period.
For a more detailed discussion of the legal proceedings involving the Company and the associated accounting estimates, see
the discussion in Note 15 "Commitments and Contingencies" within the Notes to Consolidated Financial Statements.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
In the U.S., 3M's general offices, corporate research laboratories, and certain division laboratories are located in St.
Paul, Minnesota. The Company operates 80 manufacturing facilities in 29 states. Internationally, the Company operates 125
manufacturing and converting facilities in 37 countries.
3M owns the majority of its physical properties. 3M's physical facilities are highly suitable for the purposes for which
they were designed. Because 3M is a global enterprise characterized by substantial intersegment cooperation, properties are
often used by multiple business segments.
Item 3. Legal Proceedings.
Discussion of legal matters is incorporated by reference from Part II, Item 8, Note 15, "Commitments and Contingencies," of
this document, and should be considered an integral part of Part I, Item 3, "Legal Proceedings."
Item 4. Mine Safety Disclosures.
Pursuant to Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"), the Company is
required to disclose, in connection with the mines it operates, information concerning mine safety violations or other
regulatory matters in its periodic reports filed with the SEC. For the year 2017, the information concerning mine safety
violations or other regulatory matters required by Section 1503(a) of the Act is included in Exhibit 95 to this annual
report.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Equity compensation plans' information is incorporated by reference from Part III, Item 12, "Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters," of this document, and should be considered an integral
part of Item 5. At January 31, 2018, there were 78,331 shareholders of record. 3M's stock is listed on the New York Stock
Exchange, Inc. (NYSE), the Chicago Stock Exchange, Inc., and the SWX Swiss Exchange. Cash dividends declared and paid
totaled $1.175 and $1.11 per share for each quarter in 2017 and 2016, respectively. Stock price comparisons follow:
Stock price comparisons (NYSE composite transactions)
(Per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter Year
2017 High $ 193.50 $ 214.57 $ 214.65 $ 244.23 $ 244.23
2017 Low 173.55 188.62 197.17 210.03 173.55
2016 High $ 167.50 $ 175.14 $ 182.27 $ 180.06 $ 182.27
2016 Low 134.64 163.17 173.51 163.85 134.64
Issuer Purchases of Equity Securities
Repurchases of 3M common stock are made to support the Company's stock-based employee compensation plans and for other
corporate purposes. In February 2016, 3M's Board of Directors authorized the repurchase of up to $10 billion of 3M's
outstanding common stock, with no pre-established end date.
Issuer Purchases of Equity Securities
(registered pursuant to Section 12 of the Exchange Act)
Maximum
Approximate
Dollar Value of
Total Number of Shares that May
Shares Purchased Yet Be Purchased
Total Number of Average Price as Part of Publicly under the Plans
Shares Purchased Paid per Announced Plans or Programs
Period (1) Share or Programs (2) (Millions)
January 1-31, 2017 1,245,580 $ 177.61 1,245,347 $ 6,835
February 1-28, 2017 1,038,362 $ 182.41 1,037,719 $ 6,645
March 1-31, 2017 1,168,893 $ 190.75 1,168,893 $ 6,422
Total January 1-March 31, 2017 3,452,835 $ 183.50 3,451,959 $ 6,422
April 1-30, 2017 934,900 $ 191.64 933,463 $ 6,244
May 1-31, 2017 1,017,290 $ 197.80 1,017,000 $ 6,042
June 1-30, 2017 396,770 $ 208.83 396,770 $ 5,960
Total April 1-June 30, 2017 2,348,960 $ 197.21 2,347,233 $ 5,960
July 1-31, 2017 431,272 $ 205.00 431,272 $ 5,871
August 1-31, 2017 572,552 $ 204.69 572,552 $ 5,754
September 1-30, 2017 893,559 $ 209.62 893,559 $ 5,567
Total July 1-September 30, 2017 1,897,383 $ 207.08 1,897,383 $ 5,567
October 1-31, 2017 982,356 $ 220.27 980,804 $ 5,351
November 1-30, 2017 621,143 $ 231.38 621,143 $ 5,207
December 1-31, 2017 575,924 $ 237.86 575,924 $ 5,070
Total October 1-December 31, 2017 2,179,423 $ 228.08 2,177,871 $ 5,070
Total January 1-December 31, 2017 9,878,601 $ 201.13 9,874,446 $ 5,070
(1) The total number of shares purchased includes: (i) shares purchased under the Board's authorizations described above,
and (ii) shares purchased in connection with the exercise of stock options.
(2) The total number of shares purchased as part of publicly announced plans or programs includes shares purchased under
the Board's authorizations described above.
Item 6. Selected Financial Data.
(Dollars in millions, except per share amounts) 2017 2016 2015 2014 2013
Years ended December 31:
Net sales $ 31,657 $ 30,109 $ 30,274 $ 31,821 $ 30,871
Net income attributable to 3M 4,858 5,050 4,833 4,956 4,659
Per share of 3M common stock:
Net income attributable to 3M - basic 8.13 8.35 7.72 7.63 6.83
Net income attributable to 3M - diluted 7.93 8.16 7.58 7.49 6.72
Cash dividends declared per 3M common share 4.70 4.44 3.075 3.59 3.395
Cash dividends paid per 3M common share 4.70 4.44 4.10 3.42 2.54
At December 31:
Total assets $ 37,987 $ 32,906 $ 32,883 $ 31,374 $ 33,304
Long-term debt (excluding portion due within one year) and long-term capital lease obligations 12,156 10,723 8,799 6,764 4,367
Cash dividends declared and paid totaled $1.175 and $1.11 per share for each quarter in 2017 and 2016, respectively. 3M
typically declares and pays dividends in the same quarter. In December 2013 and 2014, 3M declared dividends that were paid
in the following first quarter.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a
reader of 3M's financial statements with a narrative from the perspective of management. 3M's MD&A is presented in eight
sections:
· Overview
· Results of Operations
· Performance by Business Segment
· Performance by Geographic Area
· Critical Accounting Estimates
· New Accounting Pronouncements
· Financial Condition and Liquidity
· Financial Instruments
Forward-looking statements in Item 7 may involve risks and uncertainties that could cause results to differ materially from
those projected (refer to the section entitled "Cautionary Note Concerning Factors That May Affect Future Results" in Item
1 and the risk factors provided in Item 1A for discussion of these risks and uncertainties).
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. As
described in Note 17, effective in the first quarter of 2017, 3M improved the alignment of its businesses around markets
and customers. Segment information presented herein reflects the impact of these changes for all periods presented. 3M
manages its operations in five operating business segments: Industrial; Safety and Graphics; Health Care; Electronics and
Energy; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a
combined basis.
Earnings per share (EPS) attributable to 3M common shareholders - diluted:
The following table provides the increase (decrease) in diluted earnings per share for the fourth quarter and year 2017
compared to the same period last year, in addition to 2016 compared to 2015.
Three months ended Year ended
(Earnings per diluted share) December 31, 2017 December 31, 2017 December 31, 2016
Same period last year $ 1.88 $ 8.16 $ 7.58
Increase/(decrease) in earnings per share - diluted, due to:
Organic growth/other productivity 0.33 0.86 0.16
Acquisitions and divestitures (0.02) 0.54 0.14
Incremental strategic investments (0.06) (0.51) 0.14
Legal - respirator mask actuarial reserve (0.07) (0.07) -
Foreign exchange impacts - (0.13) (0.14)
Shares of common stock outstanding - 0.08 0.24
Other net interest (0.09) (0.10) (0.05)
Income tax rate, excluding Tax Cuts and Jobs Act (TCJA) 0.13 0.34 0.09
Current period, excluding TCJA $ 2.10 $ 9.17 $ 8.16
TCJA enactment impact (1.25) (1.24) -
Current period $ 0.85 $ 7.93 $ 8.16
Year 2017 and fourth quarter EPS:
For the fourth quarter of 2017, net income attributable to 3M was $523 million, or $0.85 per diluted share, compared to
$1.155 billion, or $1.88 per diluted share, in the fourth quarter of 2016, a decrease of 54.8 percent on a per diluted
share. Excluding the $762 million impact related to the enactment of the Tax Cuts and Jobs Act (TCJA), net income was
$1.285 billion, or $2.10 per diluted share, an increase of 11.7 percent on a per diluted share basis compared to the fourth
quarter of 2016. For the full year 2017, net income attributable to 3M was $4.858 billion, or $7.93 per diluted share,
compared to $5.050 billion, or $8.16 per diluted share, for the full year 2016, a decrease of 2.8 percent on a per diluted
share basis. Excluding the 2017 impact related to TCJA, net income was $5.620 billion, or $9.17 per diluted share, an
increase of 12.4 percent on a per diluted share basis compared to 2016. The Company refers to various measures excluding
the 2017 net impact of enactment of the Tax Cuts and Jobs Act. These non-GAAP measures are further described and reconciled
to the most directly comparable GAAP financial measures in the section that follows.
Organic growth/productivity in 2017 includes benefits from higher organic local-currency sales, raw material cost decreases
from sourcing cost reduction projects, and business transformation, which is having a positive impact on 3M's productivity
efforts. These benefits were partially offset by higher defined benefit pension expenses. During both the fourth quarter
and full year 2017, organic growth and productivity were the primary drivers for the year-on-year benefit.
Acquisitions and divestitures decreased earnings per diluted share by 2 cents year-on-year for the fourth quarter of 2017,
while increasing earnings per diluted share by 54 cents year-on-year for the full year 2017. Acquisition impacts, which are
measured for the first twelve months post-transaction, relate primarily to the acquisition of Scott Safety (fourth quarter
2017). The net impact related to Scott Safety includes income from operations, more than offset by the transaction and
integration costs of the acquisition. Interest expense related to financing costs of Scott Safety are also included. The
net impact related to Scott Safety was equivalent to a year-on-year decrease of 7 cents per diluted share. Full year 2017
had year-on-year operating income impacts from the following divestitures: Polyfoam and the remaining portion of the
library system business (both in first quarter 2016), protective films business and cathode battery technology out-license
business (both in fourth quarter 2016), prescription safety eyewear business (January 2017), identity management business
and tolling and automated license/number plate recognition business (both in the second quarter of 2017), and electronic
monitoring business (fourth quarter 2017). The incremental year-on-year pre-tax gain on divestiture impact, net of lost
operating loss/(income) during the fourth quarter of 2017 was $26 million, or approximately 5 cents per diluted share. For
the full year 2017, the year-on-year net pre-tax increase from divestitures was approximately $474 million, which is
equivalent to a year-on-year increase of 61 cents per diluted share (primarily related to the identity management
business). Additional discussion on divestitures is provided later within the "Divestitures and Strategic Investments"
section.
Operating income results include year-on-year incremental strategic investments that decreased pre-tax earnings by
approximately $51 million and $413 million in the fourth quarter and full year 2017, respectively. These incremental
strategic investments are comprised of 3M's investments in growth initiatives and optimization of its portfolio and supply
chain footprint. Additional discussion on strategic investments is provided later within the "Divestitures and Strategic
Investments" section.
In the fourth quarter of 2017, as a result of the Company's regular review of its respirator mask/asbestos liabilities, the
Company increased its accruals. This incremental increase resulted in a year-on-year decrease of 7 cents per diluted share.
Refer to Note 15 for more details.
Foreign currency impacts (net of hedging) decreased pre-tax earnings by approximately $3 million and $111 million
year-on-year in the fourth quarter and full year 2017, respectively, excluding the impact of foreign currency changes on
tax rates. This had a minimal impact per diluted share in the fourth quarter of 2017, and is equivalent to a year-on-year
decrease of 13 cents per diluted share for the full year 2017.
Weighted-average diluted shares outstanding in the fourth quarter and full year 2017 declined 0.1 percent and 1.0 percent
year-on-year, respectively, which benefited earnings per share. The Company purchased $504 million and $2.1 billion of its
own stock in the fourth quarter and full year 2017, respectively.
Other net interest decreased earnings per share for both fourth quarter and full year 2017, largely due to the loss on
extinguishment of debt, higher U.S. average balances, and higher interest rates. The early extinguishment of debt resulted
in a charge of $96 million, which contributed to a year-on-year decrease of 11 cents per diluted share for both the fourth
quarter and full year 2017. Additionally, the portion of interest expense related to the financing costs of acquiring Scott
Safety, which was equivalent to a year-on-year decrease of 2 cents per diluted share, is included in the acquisitions and
divestitures impact described above.
As discussed in the section below, the Company recorded a net tax expense of $762 million related to the enactment of the
TCJA, which was equivalent to a decrease of $1.25 per diluted share in the fourth quarter of 2017. The effective tax rate
for the fourth quarter 2017 was 68.6 percent, an increase of 40.4 percentage points versus 2016. Excluding the impact of
TCJA, the effective income tax rate was 23.0 percent in the fourth quarter 2017, a decrease of 5.2 percentage points versus
2016. For the full year 2017, the effective tax rate was 35.5 percent, an increase of 7.2 percentage points versus 2016.
Excluding the impact of TCJA, the effective income tax rate was 25.4 percent in the full year 2017, a decrease of 2.9
percentage points versus 2016. Excluding the impact of TCJA, the fourth quarter and full year 2017 change in tax rate was
driven largely by increasing benefits from our supply chain centers of expertise, favorable geographic mix and other items,
as referenced in Note 9.
Income, earnings per share, and effective tax rate adjusted for impacts of the Tax Cuts and Jobs Act (TCJA) - (non-GAAP
measures):
During the fourth quarter of 2017, 3M recorded a net tax expense of $762 million related to the enactment of the Tax Cuts
and Jobs Act (TCJA). The expense is primarily related to the TCJA's transition tax on previously unremitted earnings of
non-U.S. subsidiaries and is net of remeasurement of 3M's deferred tax assets and liabilities considering the TCJA's newly
enacted tax rates and certain other impacts. This provisional amount is subject to adjustment during the measurement period
of up to one year following the December 2017 enactment of the TCJA, as provided by recent SEC guidance. See additional
information in Note 9. In addition to reporting financial results in accordance with U.S. GAAP, the Company also provides
non-GAAP measures that adjust for the net impact of enactment of the TCJA. This item represents a significant charge that
impacted the Company's financial results. Income, earnings per share, and the effective tax rate are all measures for which
3M provides the reported GAAP measure and an adjusted measure. The adjusted measures are not in accordance with, nor are
they a substitute for, GAAP measures. The Company considers these non-GAAP measures in evaluating and managing the
Company's operations. The Company believes that discussion of results adjusted for this item is meaningful to investors as
it provides a useful analysis of ongoing underlying operating trends. The determination of this item may not be comparable
to similarly titled measures used by other companies.
Three months ended December 31, 2017
Q4 2016 Q4 2017
Adjusted income, earnings per share, & effective tax rate (non-GAAP measures) (Dollars in millions, except per share amounts) Reported GAAP Measure Reported GAAP Measure Adjustment for TCJA Adjusted Non-GAAP Measure
Operating income $ 1,665 $ 1,821 $ - $ 1,821
Income before taxes $ 1,610 $ 1,672 $ - $ 1,672
Provision for income taxes $ 454 $ 1,147 $ (762) $ 385
Effective tax rate 28.2 % 68.6 % 23.0 %
Net income attributable to 3M $ 1,155 $ 523 $ 762 $ 1,285
Earnings per diluted share $ 1.88 $ 0.85 $ 1.25 $ 2.10
Earnings per diluted share percent change (54.8) % 11.7 %
Year ended December 31, 2017
Year End 2016 Year End 2017
Adjusted income, earnings per share, & effective tax rate (non-GAAP measures) (Dollars in millions, except per share amounts) Reported GAAP Measure Reported GAAP Measure Adjustment for TCJA Adjusted Non-GAAP Measure
Operating income $ 7,223 $ 7,820 $ - $ 7,820
Income before taxes $ 7,053 $ 7,548 $ - $ 7,548
Provision for income taxes $ 1,995 $ 2,679 $ (762) $ 1,917
Effective tax rate 28.3 % 35.5 % 25.4 %
Net income attributable to 3M $ 5,050 $ 4,858 $ 762 $ 5,620
Earnings per diluted share $ 8.16 $ 7.93 $ 1.24 $ 9.17
Earnings per diluted share percent change (2.8) % 12.4 %
Year 2016 EPS:
For total year 2016, productivity and other increased earnings, helped by lower defined benefit pension and postretirement
expenses, higher selling prices, lower raw material costs, and productivity benefits related to the fourth quarter 2015
restructuring. These benefits were partially offset by the impact of flat organic sales and lower asset utilization.
Acquisition and divestiture impacts, which are measured for the first twelve months post-transaction, related to the
acquisitions of Membrana and Capital Safety (third quarter 2015) and Semfinder (September 2016), and the divestitures of
Polyfoam (first quarter 2016), the library systems business (fourth quarter 2015/first quarter 2016), and the license plate
converting business in France (fourth quarter 2015). In addition, in the fourth quarter of 2016, 3M sold the assets of its
protective films business and its cathode battery technology out-licensing business. On a combined basis, these
acquisition/divestiture year-on-year impacts resulted in a 14 cents per diluted share benefit to earnings per share in
2016, driven by solid performances from 2015 acquisitions and year-on-year divestiture gains. Refer to Note 2 for further
discussion of these acquisition/divestiture impacts.
Restructuring actions (included within incremental strategic investments in the preceding table) resulted in an after-tax
charge of 14 cents per diluted share in 2015, which provided a year-on-year benefit in 2016.
Foreign exchange impacts (net of hedging) decreased pre-tax earnings by approximately $127 million year-on-year in 2016,
excluding the impact of foreign currency changes on tax rates. This was equivalent to a year-on-year decrease of 14 cents
per diluted share for 2016.
Weighted-average diluted shares outstanding in 2016 declined 3 percent versus 2015, which benefited earnings per share. The
benefits from share repurchases, net of issuances, were partially offset by the adoption of ASU No. 2016-09, which
increased the calculated number of diluted shares in 2016.
Higher average debt balances led to an increase in interest expense year-on-year in 2016.
The income tax rate was 28.3 percent in 2016, a decline of 0.8 percentage points versus last year. The 2016 change in tax
rate was driven by a number of factors as referenced in Note 9, including the first quarter 2016 adoption of Accounting
Standards Update (ASU) No. 2016-09 (discussed in Note 1).
Fourth quarter 2017 sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the fourth quarters of 2017 and
2016, followed by additional discussion of business segment results.
Three months ended Three months ended 2017 vs 2016
December 31, 2017 December 31, 2016 % change
Net % of Oper. Net % of Oper. Net Oper.
(Dollars in millions) Sales Total Income Sales Total Income Sales Income
Business Segments
Industrial $ 2,718 34.0 % $ 527 $ 2,543 34.7 % $ 558 6.9 % (5.5) %
Safety and Graphics 1,545 19.3 406 1,343 18.3 271 15.0 50.0
Health Care 1,474 18.4 464 1,390 19.0 413 6.0 12.3
Electronics and Energy 1,321 16.6 334 1,175 16.0 325 12.5 2.6
Consumer 1,174 14.7 269 1,094 14.9 229 7.3 17.6
Corporate and Unallocated (4) - (127) 2 - (83) - -
Elimination of Dual Credit (238) (3.0) (52) (218) (2.9) (48) - -
Total Company $ 7,990 100.0 % $ 1,821 $ 7,329 100.0 % $ 1,665 9.0 % 9.4 %
Three months ended December 31, 2017
Organic
Worldwide local- Total
Sales Change Analysis currency sales
By Business Segment sales Acquisitions Divestitures Translation change
Industrial 3.9 % - % - % 3.0 % 6.9 %
Safety and Graphics 10.7 10.2 (9.1) 3.2 15.0
Health Care 3.1 0.1 - 2.8 6.0
Electronics and Energy 11.0 - (0.3) 1.8 12.5
Consumer 5.4 - - 1.9 7.3
Total Company 6.0 % 1.8 % (1.5) % 2.7 % 9.0 %
From a business segment perspective, 3M achieved both total sales growth and organic local-currency sales growth (which
includes organic volume and selling price impacts) in all five business segments. Operating income margins were 22.8
percent, with four of five business segments above 22 percent.
· In Industrial, total sales increased 6.9 percent, or 3.9 percent on an organic local currency basis, with organic
sales growth in abrasives, automotive and aerospace solutions, industrial adhesives and tapes, automotive aftermarket, and
separation and purification. Organic sales declined in advanced materials. Operating income margins were 19.4 percent, down
2.5 percentage points, with the decline driven by incremental strategic investments and a fourth quarter 2016 gain on sale
of the temporary protective films business.
· In Safety and Graphics, total sales increased 15.0 percent, or 10.7 percent on an organic local currency basis.
Organic sales grew in all businesses, led by personal safety, roofing granules, and transportation safety. Operating income
margins were 26.3 percent, up 6.1 percentage points, with 2.4 percentage points of this increase driven by divestitures,
partially offset by acquisitions and incremental strategic investments.
· In Health Care, total sales increased 6.0 percent, or 3.1 percent on an organic local currency sales basis. Organic
sales grew in food safety, health information systems, medical consumables, and oral care. Organic sales declined in drug
delivery systems. Operating income margins were 31.5 percent, up 1.8 percentage points.
· In Electronics and Energy, total sales increased 12.5 percent, or 11.0 percent on an organic local currency basis.
Electronics-related organic sales increased 14 percent, with growth in both electronics materials solutions and display
materials and systems. Energy-related organic sales increased 4 percent as growth in electrical markets was partially
offset by declines in telecommunications markets. Operating income margins were 25.2 percent, down 2.5 percentage points.
The fourth quarter 2016 gain on sale of intellectual property and fourth quarter 2017 incremental strategic investments
negatively impacted operating income margins by 3.3 percentage points.
· In Consumer, total sales increased 7.3 percent, or 5.4 percent on an organic local currency basis. Organic sales
grew in consumer health care, home improvement, and stationery and office, while sales in home care were flat. Operating
income margins were 22.9 percent, up 2.0 percentage points
Year 2017 sales and operating income by business segment:
The following tables contain
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