REG - 3M Company - Annual Financial Report - Part 1 <Origin Href="QuoteRef">MMM.N</Origin> - Part 3
13/02/2018 07:06
- Part 3: For the preceding part double click ID:nRSM6559Eb
- (7.8) %
Consumer 2.4 % 6.0 % (6.2) % 0.1 % - 1.8 %
Sales totaled $30.1 billion, a decrease of 0.5 percent from 2015. Organic
local-currency sales declined 0.1 percent, with organic volume declines of 0.8
percent largely offset by selling price increases of 0.7 percent. Acquisitions
added 1.2 percent to sales, while divestitures reduced sales by 0.4 percent.
Foreign currency translation reduced sales by 1.2 percent year-on-year.
Total sales increased 1.2 percent in the United States, and declined 1.1
percent in EMEA, 2.1 percent in Asia Pacific, and 2.7 percent in Latin
America/Canada. Organic local-currency sales grew 3.7 percent in Latin
America/Canada, 0.5 percent in the United States, 0.4 percent in EMEA, and
declined 2.8 percent in Asia Pacific.
Financial condition:
3M generated $6.2 billion of operating cash flow in 2017, a decrease of $422
million when compared to 2016. This followed an increase of $242 million when
comparing 2016 to 2015. Refer to the section entitled "Financial Condition and
Liquidity" later in MD&A for a discussion of items impacting cash flows.
In February 2016, 3M's Board of Directors authorized the repurchase of up to
$10 billion of 3M's outstanding common stock. This program has no
pre-established end date. In 2017, the Company purchased $2.1 billion of its
own stock, compared to purchases of $3.8 billion in 2016 and $5.2 billion in
2015. The Company expects to purchase $2.0 billion to $5.0 billion of its own
stock in 2018. In January 2018, 3M's Board of Directors declared a
first-quarter 2018 dividend of $1.36 per share, an increase of 16 percent.
This marked the 60th consecutive year of dividend increases for 3M. The
Company has an AA- credit rating, with a stable outlook, from Standard &
Poor's and an A1 credit rating, with a stable outlook, from Moody's Investors
Service. The Company generates significant ongoing cash flow and has proven
access to capital markets funding throughout business cycles.
Raw materials:
In 2017, the Company continued to manage year-on-year raw material input
costs, benefiting from input management, reformulations, and multi-sourcing
activities. These efforts more than offset increasing costs in certain raw
material categories in oil-derivative chemical feedstock markets.
Oil-derivative cost increases also impact other feedstock categories,
including petroleum based materials, minerals, metals and wood pulp based
products. To date, the Company is receiving sufficient quantities of all raw
materials to meet its reasonably foreseeable production requirements. It is
difficult to predict future shortages of raw materials or the impact any such
shortages would have. 3M has avoided disruption to its manufacturing
operations through careful management of existing raw material inventories,
strategic relationships with key suppliers, and development and qualification
of additional supply sources. 3M manages spend category price risks through
negotiated supply contracts, price protection agreements and commodity price
swaps.
Pension and postretirement defined benefit/contribution plans:
On a worldwide basis, 3M's pension and postretirement plans were 87 percent
funded at year-end 2017. The primary U.S. qualified pension plan, which is
approximately 67 percent of the worldwide pension obligation, was 94 percent
funded and the international pension plans were 90 percent funded. The U.S.
non-qualified pension plan is not funded due to tax considerations and other
factors. Asset returns in 2017 for the primary U.S. qualified pension plan
were 12.4%, as 3M strategically invests in both growth assets and fixed income
matching assets to manage its funded status. For the primary U.S. qualified
pension plan, the expected long-term rate of return on an annualized basis for
2018 is 7.25%, consistent with 2017. The primary U.S. qualified pension plan
year-end 2017 discount rate was 3.68%, down 0.53 percentage points from the
year-end 2016 discount rate of 4.21%. The decrease in U.S. discount rates
resulted in an increased valuation of the projected benefit obligation (PBO).
The primary U.S. qualified pension plan's funded status increased 4 percentage
points in 2017 as strong plan assets returns and $800 million in contributions
increased asset values in excess of the higher PBO due to the significant
discount rate decline. Additional detail and discussion of international plan
asset returns and discount rates is provided in Note 12 (Pension and
Postretirement Benefit Plans).
3M expects to contribute approximately $300 million to $500 million of cash to
its global defined benefit pension and postretirement plans in 2018. The
Company does not have a required minimum cash pension contribution obligation
for its U.S. plans in 2018. 3M expects global defined benefit pension and
postretirement expense in 2018 (before settlements, curtailments, special
termination benefits and other) to increase by approximately $76 million
pre-tax when compared to 2017. Refer to "Critical Accounting Estimates" within
MD&A and Note 12 (Pension and Postretirement Benefit Plans) for additional
information concerning 3M's pension and post-retirement plans.
Divestitures and strategic investments:
In both the fourth quarter and full year of 2017, the Company continued to
accelerate investments in growth initiatives and footprint optimization. In
addition, the Company divested certain businesses as it continued to focus its
portfolio on opportunities that create greater value for its shareholders. As
shown below, these divestitures and strategic investments led to a net
year-on-year decrease of approximately $0.01 per diluted share and a benefit
of $0.10 per diluted share, respectively, for the three months and year ended
December 31, 2017:
Three months ended December 31, 2017 Year ended December 31, 2017
Divestiture impacts and strategic investments net benefit/(cost) (in millions, Pre-tax impact Impact per diluted share after-tax Pre-tax impact Impact per diluted share after-tax
except per share amounts)
Divestiture impacts:
2017 divestiture gains $ 96 $ 586
Less: prior year divestiture gains (71) (111)
Year-on-year lost operating loss/(income) from divested businesses 1 (1)
Year-on-year divestiture impacts, net of operating loss/(income) $ 26 $ 0.05 $ 474 $ 0.61
Strategic investments:
2017 portfolio and footprint optimization activities:
Restructuring actions and exit activities, net of adjustments $ (20) $ (143)
Asset charges and accelerated depreciation (40) (180)
Other costs (4) (30)
Less: prior year portfolio and footprint optimization activities 19 40
Year-on-year portfolio and footprint optimization (45) $ (0.05) (313) $ (0.39)
Incremental year-on-year growth initiatives (6) (100)
Total incremental strategic investments $ (51) $ (0.06) $ (413) $ (0.51)
Year-on-year divestiture impacts and strategic investments net benefit/(cost) $ (25) $ (0.01) $ 61 $ 0.10
The total pre-tax year-on-year divestiture impacts, net of strategic
investments from the table above, are further detailed below by business
group:
Three months ended Year ended
(Millions) December 31, 2017 December 31, 2017
Industrial $ (79) $ (193)
Safety and Graphics 93 553
Health Care 6 (43)
Electronics and Energy (40) (120)
Consumer 2 (86)
Corporate and Unallocated (7) (50)
Total pretax divestiture gains, net of strategic investments $ (25) $ 61
2017 announced and 2018 closed divestitures:
In December 2017, 3M announced it had reached an agreement to sell
substantially all of its Communications Markets Division, which consists of
optical fiber and copper passive connectivity solutions, structured cabling
solutions, and telecommunications system integration services. The business
has annual global sales of approximately $400 million. The Company expects a
pre-tax gain of approximately $500 million in 2018 as a result of this
divestiture. 3M expects to realize a gain of approximately $0.40 per diluted
share from this transaction, net of actions related to this divestiture. Refer
to Note 2 for additional discussion.
In February 2018, 3M closed on the sale of certain personal safety product
offerings primarily focused on noise, environmental, and heat stress
monitoring. This business has annual sales of approximately $15 million. The
transaction is expected to result in a pre-tax gain of less than $20 million
that will be reported within the Company's Safety and Graphics business. Refer
to Note 2 for additional discussion.
RESULTS OF OPERATIONS
Net Sales:
Refer to the preceding "Overview" section and the "Performance by Business
Segment" section later in MD&A for additional discussion of sales change.
Operating Expenses:
2017 versus 2016 versus
(Percent of net sales) 2017 2016 2015 2016 2015
Cost of sales 50.6 % 49.9 % 50.9 % 0.7 % (1.0) %
Selling, general and administrative expenses 20.8 20.7 20.6 0.1 0.1
Research, development and related expenses 5.8 5.8 5.8 - -
Gain on sale of businesses (1.9) (0.4) (0.2) (1.5) (0.2)
Operating income margin 24.7 % 24.0 % 22.9 % 0.7 % 1.1 %
Operating income margins increased in 2017 versus 2016, driven by gains from
sale of businesses, partially offset by cost of sales increases. A number of
factors impact the various income statement line items, such as raw material
cost management, strategic investments, divestitures, foreign currency, cost
management, and pension and postretirement effects. Expanded discussion of
each of the income statement line items follows in the various sections below.
Pension and postretirement expense is recorded in cost of sales; selling,
general and administrative expenses (SG&A); and research, development and
related expenses (R&D). In total, 3M's defined benefit pension and
postretirement expense increased $82 million in 2017, compared to a decrease
of $305 million in 2016. Refer to Note 12 (Pension and Postretirement Plans)
for components of net periodic benefit cost and the assumptions used to
determine net cost.
The Company is investing in business transformation. Business transformation
is defined as changes in processes and internal/external service delivery
across 3M to move to more efficient business models to improve operational
efficiency and productivity, while allowing 3M to serve customers with greater
speed and efficiency. This is enabled by the ongoing multi-year phased
implementation of an enterprise resource planning (ERP) system on a worldwide
basis.
In 2017, as referenced above in the "Divestitures and strategic investments"
section, 3M incurred $413 million in incremental strategic actions, primarily
reported within the cost of sales and SG&A income statement line items.
Of these strategic investments, 3M incurred $96 million (net of adjustments)
in restructuring actions and $47 million in exit activities during 2017. In
addition, in the fourth quarter of 2015, 3M incurred $114 million in
restructuring charges. Refer to Note 4 for additional information on the
impact to operating expenses.
Cost of Sales:
Cost of sales includes manufacturing, engineering and freight costs.
Cost of sales as a percent of sales increased during 2017 due to incremental
strategic investments in productivity, portfolio actions and footprint
optimization, foreign currency effects (net of hedge impacts) and higher
defined benefit pension expense. This was partially offset by a year-on-year
reduction in raw material input costs as a result of sourcing cost reduction
projects. Selling prices were flat year-on-year for the full year 2017.
Cost of sales as a percent of sales decreased in 2016 due to the combination
of selling price increases and raw material cost decreases, as selling prices
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. Fourth quarter 2015 restructuring charges also provided
a favorable year-on-year comparison.
Selling, General and Administrative Expenses:
SG&A increased $350 million year-on year, or 5.6 percent, during 2017 due
to incremental strategic investments and higher defined benefit pension
expense. SG&A decreased $7 million, or 0.1 percent, in 2016 when compared
to 2015, with 2016 results benefiting from foreign currency translation, and
productivity benefits related to the fourth quarter 2015 restructuring. In
addition, SG&A in 2016 benefited from lower defined benefit pension and
postretirement expense. Fourth quarter 2015 restructuring charges also
provided a favorable year-on-year comparison.
Research, Development and Related Expenses:
R&D increased $115 million year-on-year and decreased $28 million
year-on-year in 2017 and 2016, respectively. 3M continued to invest in its key
initiatives, including R&D aimed at disruptive innovation programs with
the potential to create entirely new markets and disrupt existing markets.
R&D, measured as a percent of sales, was 5.8 percent in 2017, 2016, and
2015.
Gain on Sale of Businesses:
In 2017, 3M sold the assets of its safety prescription eyewear business,
completed the related sale or transfer of control, as applicable, of its
identity management business, sold its tolling and automated license/number
plate recognition and electronic monitoring businesses, and sold the assets of
its electrical marking/labeling business. On a combined basis, these
divestitures resulted in a gain on the sale of businesses of $586 million. 3M
also divested certain businesses in 2016 and 2015, resulting in gains of $111
million and $47 million, respectively. Refer to Note 2 for additional detail
on these divestitures.
Operating Income Margin:
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 2017 and 2016.
Three months ended Year ended
(Percent of net sales) December 31, 2017 December 31, 2017 December 31, 2016
Same period last year 22.7 % 24.0 % 22.9 %
Increase/(decrease) in operating income margin, due to:
Organic volume/other productivity 1.5 1.1 (1.0)
Acquisitions and divestitures (0.3) 1.4 0.2
Incremental strategic investments (0.7) (1.4) 0.1
Selling price and raw material impact 0.4 0.4 1.0
Foreign exchange impacts (0.6) (0.5) (0.2)
Pension and postretirement benefit costs (0.2) (0.3) 1.0
Current period 22.8 % 24.7 % 24.0 %
Year 2017 and fourth quarter operating income:
Operating income margins increased 0.1 percentage points in the fourth quarter
of 2017 and increased 0.7 percentage points for the full year 2017 when
compared to the same periods last year. 3M benefited from higher organic
local-currency sales growth and productivity, partially offset by actuarial
adjustments to the Company's respirator mask/asbestos liability accrual.
Acquisitions and divestitures consist of the transactions and integration
costs, net of income, that relate to the acquisition of Scott Safety, in
addition to the year-on-year divestiture gains (refer to Note 2) and
non-repeating operating losses from divested businesses, which combined,
reduced operating margins in the fourth quarter of 2017 and benefited
operating income margins for the full year 2017. Items that reduced operating
margins were incremental strategic investments in growth, productivity and
portfolio actions, in addition to charges related to 3M's optimization of its
portfolio and supply chain footprint. For full year 2017, the benefit from
year-on-year divestiture gains and non-repeating net operating losses from
divested businesses (primarily related to the sale of Identity Management) was
partially offset by the impact of the Scott Safety acquisition noted earlier.
3M also benefited from raw material sourcing cost reduction projects. Lastly,
operating margins were reduced by foreign currency effects (net of hedge
impacts) and higher year-on-year defined benefit pension expense.
Year 2016 operating income:
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. Acquisitions and
divestitures had a favorable impact on operating margins. This included solid
performances from both the Capital Safety and Membrana acquisitions.
Divestiture impacts relate to the Polyfoam business, the library systems
business, and the license plate converting business in France. 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, productivity,
and other decreased operating margins as a result of lower asset utilization,
primarily in the Industrial, and Electronics and Energy businesses. Also, 3M
had an unfavorable arbitration ruling on an insurance claim, commercial
litigation settlements related to Andover Healthcare and TransWeb, and
accruals for respirator mask/asbestos liabilities. These declines within
organic volume, productivity, and other were partially offset by 2015
restructuring charges, which provided a favorable year-on-year comparison, and
productivity benefits in 2016 related to the 2015 restructuring actions.
Other Expense (Income), Net:
See Note 5 for a detailed breakout of this line item.
Interest expense increased during 2017 and 2016 due to higher average debt
balances and higher U.S. borrowing costs. In addition, in October 2017, via
cash tender offers, 3M repurchased $305 million aggregate principal amount of
its outstanding notes. The Company recorded an early debt extinguishment
charge of $96 million in the fourth quarter of 2017, which was included within
interest expense. Capitalized interest related to property, plant and
equipment construction in progress is recorded as a reduction to interest
expense. Capitalized interest was $12 million, $10 million, and $13 million,
in 2017, 2016 and 2015, respectively.
Interest income increased year-on-year in both 2017 and 2016 due to higher
average interest rates.
Provision for Income Taxes:
(Percent of pre-tax income) 2017 2016 2015
Effective tax rate 35.5 % 28.3 % 29.1 %
The effective tax rate for 2017 was 35.5 percent, compared to 28.3 percent in
2016, an increase of 7.2 percentage points. 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 changes in the tax rates between years were impacted by
many factors, including the enactment of the Tax Cuts and Jobs Act (TCJA) in
December 2017 as further described in the Overview, "Income, earnings per
share, and effective tax rate adjusted for impacts of the Tax Cuts and Jobs
Act (TCJA) -(non-GAAP measures)" section and in Note 9. During the fourth
quarter of 2017, 3M recorded a net tax expense of $762 million related to the
enactment of the 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.
The TCJA establishes new tax laws that will also affect 2018 and future
periods, including, but not limited to: 1) reduction of the U.S. federal
corporate tax rate from 35 percent to 21 percent, 2) the creation of the base
erosion anti-abuse tax (BEAT), 3) the creation of a new provision designed to
tax global intangible low-taxed income (GILTI), 4) a general elimination of
U.S. federal income taxes on dividends from foreign subsidiaries, 5)
limitations on the use of foreign tax credits to reduce the U.S. income tax
liability, 6) limitations on the deductibility of certain executive
compensation, and 7) the repeal of the domestic production activity deduction.
Considering the impacts of the TCJA and other factors, the Company currently
estimates its effective tax rate for 2018 will be approximately 20 to 22
percent. The tax rate can vary from quarter to quarter due to discrete items,
such as the settlement of income tax audits, changes in tax laws, measurement
period adjustment effects on the provisional items and remaining analyses to
complete noted in Note 9 related to the 2017 impact of the TCJA, employee
share-based payment accounting; as well as recurring factors, such as the
geographic mix of income before taxes.
Refer to Note 9 for further discussion of income taxes.
Net Income Attributable to Noncontrolling Interest:
(Millions) 2017 2016 2015
Net income attributable to noncontrolling interest $ 11 $ 8 $ 8
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 amount primarily 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 $111 million and $127 million in 2017 and 2016,
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 $152 million and $69 million in 2017 and 2016, respectively.
Refer to Note 13 in the Consolidated Financial Statements for additional
information concerning 3M's hedging activities.
PERFORMANCE BY BUSINESS SEGMENT
For a detailed discussion of the markets served and types of products offered
by 3M's business segments, see Item 1, Business Segments. Financial
information and other disclosures are provided in the Notes to the
Consolidated Financial Statements. Effective in the first quarter of 2017, as
part of 3M's continuing effort to improve the alignment of its businesses
around markets and customers, the Company made the following changes:
Integration of former Renewable Energy Division
· 3M's former Renewable Energy Division (RED) has been integrated
into existing divisions within the Electronics and Energy business segment and
Safety and Graphics business segment. 3M is committed to leadership in
sustainability and to enabling the advancement of energy solutions into the
future. Integrating RED's offerings into larger divisions already serving
these segments will provide increased scale and build on strength by
leveraging 3M's existing brands, go-to-market capabilities, and relationships
to support growth objectives.
Creation of Automotive and Aerospace Solutions Division
· 3M created the Automotive and Aerospace Solutions Division, which
combined the former Automotive Division and Aerospace and Commercial
Transportation Division, which were both within the Industrial business
segment. Combining the strengths along with the deep industry knowledge of
each business will enable this new division to utilize shared technology
platforms and processes to deliver a broader set of innovative solutions,
along with world-class quality and service to 3M's customers. This combination
will help accelerate the Company's profitable growth and market relevance
across the automotive, aerospace and commercial transportation industries.
Consolidation of U.S. customer account activity - impacting dual credit
reporting
· The Company consolidated its customer account activity in the
U.S. into more centralized sales districts. This improved alignment reduces
the complexity for customers when interacting with multiple businesses within
3M, creating a better customer experience. 3M business segment reporting
measures include dual credit to business segments for certain U.S. sales and
related operating income. This dual credit is based on which business segment
provides customer account activity with respect to a particular product sold
in the U.S. The alignment of U.S. customer accounts to fewer, more focused
sales districts changed the attribution of dual credit across 3M's 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; Health
Care; Electronics and Energy; 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 17. Corporate and Unallocated includes a
variety of miscellaneous items, such as corporate investment gains and losses,
certain derivative gains and losses, certain insurance-related gains and
losses, certain litigation and environmental expenses, corporate restructuring
charges and certain under- or over-absorbed costs (e.g. pension, stock-based
compensation) that the Company determines not to allocate directly to its
business segments. Because this category includes a variety of miscellaneous
items, it is subject to fluctuation on a quarterly and annual basis.
Corporate and Unallocated operating expenses increased by $80 million in 2017
when compared to 2016. In both the first and second quarters of 2017, a
portion of the severance actions were reflected in Corporate and Unallocated.
In the fourth quarter, an incremental $58 million was reflected within
Corporate and Unallocated related to the Company's actuarial adjustments to
its respirator mask/asbestos liability accrual. In addition, 3M's defined
benefit pension and postretirement expense allocation to Corporate and
Unallocated increased by approximately $30 million in 2017.
Corporate and Unallocated operating expenses decreased by $77 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.
Operating Business Segments:
Each of 3M's business segments were impacted by the following pre-tax amounts:
Incremental divestiture gains, net of strategic investments charges, by
business segment:
(Millions) 2017
Industrial (193)
Safety and Graphics 553
Health Care (43)
Electronics and Energy (120)
Consumer (86)
Corporate and Unallocated (50)
Total $ 61
Restructuring 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.
The following discusses total year results for 2017 compared to 2016 and 2016
compared to 2015, for each business segment. Refer to the preceding year 2017
and 2016 sales results by geographic area/business segment sections for
additional sales change information.
Industrial Business (34.5% of consolidated sales):
2017 2016 2015
Sales (millions) $ 10,911 $ 10,399 $ 10,388
Sales change analysis:
Organic local-currency 4.9 % (0.1) %
Acquisitions - 1.6
Divestitures (0.5) (0.3)
Translation 0.5 (1.1)
Total sales change 4.9 % 0.1 %
Operating income (millions) $ 2,289 $ 2,395 $ 2,277
Percent change (4.4) % 5.2 %
Percent of sales 21.0 % 23.0 % 21.9 %
Year 2017 results:
Sales in Industrial totaled $10.9 billion, up 4.9 percent in U.S. dollars.
Organic local-currency sales increased 4.9 percent, divestitures reduced sales
by 0.5 percent, and foreign currency translation increased sales by 0.5
percent.
On an organic local-currency sales basis:
· Sales grew in all businesses, led by advanced materials,
automotive and aerospace solutions, industrial adhesives and tapes, and
abrasives.
Acquisitions and divestitures:
· There were no acquisitions or divestitures that closed during
2017. The year-on-year divestiture sales change was due to the impact of 2016
activity.
Operating income:
· Operating income margins decreased 2.0 percentage points, as
divestiture impacts related to the first quarter 2016 sale of the Polyfoam
business resulted in a net year-on-year operating income margin reduction of
0.7 percentage points. In addition, incremental strategic investments
decreased margins by 1.0 percentage points.
Year 2016 results:
Sales totaled $10.4 billion, up 0.1 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
economic challenges in the global industrial sector. Industrial rebounded in
the fourth quarter of 2016, when it reflected 4.5 percent organic
local-currency sales growth.
On an organic local-currency sales basis:
· Sales grew in automotive and aerospace solutions, automotive
aftermarket, and separation and purification.
· Sales declined in abrasives and industrial adhesives and tapes.
· Sales also declined in advanced materials, primarily due to
persistent weakness in the oil and gas end markets.
Acquisitions and divestitures:
· In October 2016, 3M sold the assets of its temporary protective
films business.
· In January 2016, 3M completed its sale of 3M's pressurized
polyurethane foam adhesives business (formerly known as Polyfoam).
· Acquisition sales growth in 2016 related to the acquisition of
Membrana (closed in August 2015), a leading provider of microporous membranes
and modules for filtration in the life sciences, industrial, and specialty
segments.
Operating income:
· Operating income margins increased 1.1 percentage points, 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 materials costs.
Safety and Graphics Business (19.4% of consolidated sales):
2017 2016 2015
Sales (millions) $ 6,148 $ 5,881 $ 5,736
Sales change analysis:
Organic local-currency 6.1 % 2.1 %
Acquisitions 2.2 3.9
Divestitures (4.3) (1.8)
Translation 0.5 (1.7)
Total sales change 4.5 % 2.5 %
Operating income (millions) $ 2,067 $ 1,423 $ 1,332
Percent change 45.3 % 6.8 %
Percent of sales 33.6 % 24.2 % 23.2 %
Year 2017 results:
Sales in Safety and Graphics totaled $6.1 billion, up 4.5 percent in U.S.
dollars. Organic local-currency sales increased 6.1 percent, acquisitions
increased sales by 2.2 percent, divestitures reduced sales by 4.3 percent, and
foreign currency translation increased sales by 0.5 percent.
On an organic local-currency sales basis:
· Sales growth was led by personal safety and roofing granules.
· Transportation safety showed positive growth, while the
commercial solutions business was flat.
Acquisitions and divestitures:
· In January 2017, 3M sold its safety prescription eyewear
business.
· In the second quarter of 2017, 3M finalized the sale of its
identity management business and tolling and automated license/number plate
recognition business.
· In October 2017, 3M completed the acquisition of Scott Safety.
· Also in October 2017, 3M completed the sale of its electronic
monitoring business.
· In February 2018, 3M closed on the sale of certain personal
safety products primarily focused on noise, environmental, and heat stress
monitoring.
Operating income:
· Operating income margins increased 9.4 percentage points, largely
driven by year-on-year divestiture gains that were partially offset by
acquisition charges and incremental strategic investments, which combined
resulted in a net operating income margin benefit of 8.6 percentage points.
Year 2016 results:
Sales totaled $5.9 billion, up 2.5 percent in U.S. dollars. Organic
local-currency sales increased 2.1 percent, and foreign currency translation
reduced sales by 1.7 percent. Acquisitions added 3.9 percent, while
divestitures reduced sales by 1.8 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 transportation safety (formerly traffic safety
and security).
Acquisitions and divestitures:
· Acquisition sales growth reflected 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 margins increased 1.0 percentage point,
benefiting from higher selling prices and lower raw material costs, plus
productivity benefits related to fourth quarter 2015 restructuring actions
that were partially offset by by margin dilution related to the Capital Safety
acquisition, and divestiture impacts on margins.
Health Care Business (18.4% of consolidated sales):
2017 2016 2015
Sales (millions) $ 5,813 $ 5,566 $ 5,449
Sales change analysis:
Organic local-currency 3.9 % 3.6 %
Acquisitions - 0.2
Translation 0.5 (1.7)
Total sales change 4.4 % 2.1 %
Operating income (millions) $ 1,781 $ 1,763 $ 1,730
Percent change 1.0 % 1.9 %
Percent of sales 30.6 % 31.7 % 31.7 %
Year 2017 results:
Sales in Health Care totaled $5.8 billion, up 4.4 percent in U.S. dollars.
Organic local-currency sales increased 3.9 percent and foreign currency
translation increased sales by 0.5 percent.
On an organic local-currency sales basis:
· Sales increased in all businesses, led by drug delivery systems,
food safety, and medical consumables (which is comprised of the critical and
chronic care and infection prevention businesses).
Acquisitions:
· In September 2017, 3M acquired Elution Technologies, LLC, a
manufacturer of food safety test kits.
Operating income:
· Operating income margins decreased 1.1 percent year-on-year, as
incremental strategic investments, primarily related to accelerating future
growth opportunities, reduced margins by 0.7 percentage points.
Year 2016 results:
Sales totaled $5.6 billion, an increase of 2.1 percent in U.S. dollars.
Organic local-currency sales increased 3.6 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.
· In developing markets, Health Care organic local-currency sales
grew 7 percent.
· 3M continued to increase investments across the businesses to
drive efficient growth.
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 1.9 percent to $1.8 billion, while
margins held steady at 31.7 percent.
· Acquisitions had a minimal impact on operating income margins.
Electronics and Energy Business (16.3% of consolidated sales):
2017 2016 2015
Sales (millions) $ 5,159 $ 4,643 $ 5,069
Sales change analysis:
Organic local-currency 11.0 % (7.8) %
Divestitures (0.2) -
Translation 0.3 (0.6)
Total sales change 11.1 % (8.4) %
Operating income (millions) $ 1,254 $ 1,041 $ 1,083
Percent change 20.4 % (3.9) %
Percent of sales 24.3 % 22.4 % 21.4 %
Year 2017 results:
Sales in Electronics and Energy totaled $5.2 billion, up 11.1 percent in U.S.
dollars. Organic local-currency sales increased 11.0 percent, divestitures
reduced sales by 0.2 percent, and foreign currency translation increased sales
by 0.3 percent.
Total sales within the electronics-related businesses were up 16 percent while
energy-related businesses were up 2 percent.
On an organic local-currency sales basis:
· Sales increased 16 percent in 3M's electronics-related
businesses, with increases in both display materials and systems and
electronics materials solutions, as the businesses drove increased penetration
on OEM platforms in addition to strengthened end-market demand in consumer
electronics.
· Sales increased 1 percent in 3M's energy-related businesses, as
sales growth in electrical markets was partially offset by declines in
telecommunications.
Divestitures:
· In the fourth quarter of 2017, 3M sold the assets of its
electrical marking/labeling business.
· In December 2016, 3M sold the assets of its cathode battery
technology out-licensing business.
· In December 2017, 3M announced the sale of substantially all of
its Communication Markets division, which is expected to close in 2018.
Operating income:
· Operating income margins increased 1.9 percentage points, as
benefits from higher organic volume were partially offset by 2017 footprint
and portfolio actions and year-on-year divestiture impacts. These actions
resulted in a year-on-year operating income margin reduction of 2.3 percentage
points.
Year 2016 results:
Sales totaled $4.6 billion, down 8.4 percent in U.S. dollars. Organic
local-currency sales declined 7.8 percent, and foreign currency translation
reduced sales by 0.6 percent.
Total sales within the electronics-related and energy-related businesses
decreased 10 percent and 4 percent, respectively.
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 was impacted by weak end-market demand across most
consumer electronic applications.
· Sales decreased approximately 3 percent in 3M's energy-related
businesses, with an increase in telecommunications more than offset by a
decline in electrical markets. 3M exited its backsheet business in December
2015, which contributed to the reduction in energy-related sales.
Divestitures:
· In December 2016, 3M sold the assets of its cathode battery
technology out-licensing business.
Operating income:
· Operating income decreased 3.9 percent to $1.0 billion.
· Operating income margins were 22.4 percent compared to 21.4
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.
Consumer Business (14.5% of consolidated sales):
2017 2016 2015
Sales (millions) $ 4,589 $ 4,484 $ 4,429
Sales change analysis:
Organic local-currency 1.7 % 1.8 %
Translation 0.6 (0.6)
Total sales change 2.3 % 1.2 %
Operating income (millions) $ 993 $ 1,065 $ 1,048
Percent change (6.8) % 1.6 %
Percent of sales 21.6 % 23.7 % 23.7 %
Year 2017 results:
Sales in Consumer totaled $4.6 billion, up 2.3 percent in U.S. dollars.
Organic local-currency sales increased 1.7 percent, while foreign currency
translation increased sales by 0.6 percent.
On an organic local-currency sales basis:
· Sales grew in consumer health care, home improvement, and home
care.
· The stationery and office supplies business declined due to
channel inventory adjustments, primarily in the U.S. office retail and
wholesale market.
Operating income:
· Operating income margins declined 2.1 percentage points
year-on-year, in part due to incremental strategic investments, which reduced
margins by 1.9 percentage points.
Year 2016 results:
Consumer sales totaled $4.5 billion, up 1.2 percent in U.S. dollars. Organic
local-currency sales increased 1.8 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.
Operating income:
· Operating income was $1.1 billion, up 1.6 percent from 2015.
· Operating income margins were 23.7 percent, benefiting from
ongoing productivity efforts.
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 18.
Refer to the "Overview" section for a summary of net sales by geographic area
and business segment.
Geographic Area Supplemental Information
Property, Plant and
Equipment - net
Employees as of December 31, Capital Spending as of December 31,
(Millions, except Employees) 2017 2016 2015 2017 2016 2015 2017 2016
United States 36,958 35,748 35,973 $ 852 $ 834 $ 936 $ 4,891 $ 4,914
Asia Pacific 18,283 18,124 17,642 209 228 172 1,672 1,573
Europe, Middle East and Africa 20,869 20,203 20,563 256 294 249 1,798 1,512
Latin America and Canada 15,426 17,509 15,268 56 64 104 505 517
Total Company 91,536 91,584 89,446 $ 1,373 $ 1,420 $ 1,461 $ 8,866 $ 8,516
Employment:
Employment decreased by 48 positions in 2017 and increased by 2,138 positions
in 2016.
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. In 2017, 62% of 3M's capital spending was within the United
States, followed by Europe, Middle East and Africa; Asia Pacific; and Latin
America/Canada. 3M is increasing its investment in manufacturing and sourcing
capability in order to more closely align its product capability with its
sales in major geographic areas in order to best serve its customers
throughout the world with proprietary, automated, efficient, safe and
sustainable processes. 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 of
the consolidated financial statements. 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 15) 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 12 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, 2017 Liability:
Benefit obligation 3.68 % 2.41 % 3.60 %
2018 Net Periodic Benefit Cost Components:
Service cost 3.78 % 2.28 % 3.77 %
Interest cost 3.35 % 2.14 % 3.20 %
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
- More to follow, for following part double click ID:nRSM6559Ed 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) % - (7.8) %
Consumer 2.4 % 6.0 % (6.2) % 0.1 % - 1.8 %
Sales totaled $30.1 billion, a decrease of 0.5 percent from 2015. Organic local-currency sales declined 0.1 percent, with
organic volume declines of 0.8 percent largely offset by selling price increases of 0.7 percent. Acquisitions added 1.2
percent to sales, while divestitures reduced sales by 0.4 percent. Foreign currency translation reduced sales by 1.2
percent year-on-year.
Total sales increased 1.2 percent in the United States, and declined 1.1 percent in EMEA, 2.1 percent in Asia Pacific, and
2.7 percent in Latin America/Canada. Organic local-currency sales grew 3.7 percent in Latin America/Canada, 0.5 percent in
the United States, 0.4 percent in EMEA, and declined 2.8 percent in Asia Pacific.
Financial condition:
3M generated $6.2 billion of operating cash flow in 2017, a decrease of $422 million when compared to 2016. This followed
an increase of $242 million when comparing 2016 to 2015. Refer to the section entitled "Financial Condition and Liquidity"
later in MD&A for a discussion of items impacting cash flows. In February 2016, 3M's Board of Directors authorized the
repurchase of up to $10 billion of 3M's outstanding common stock. This program has no pre-established end date. In 2017,
the Company purchased $2.1 billion of its own stock, compared to purchases of $3.8 billion in 2016 and $5.2 billion in
2015. The Company expects to purchase $2.0 billion to $5.0 billion of its own stock in 2018. In January 2018, 3M's Board of
Directors declared a first-quarter 2018 dividend of $1.36 per share, an increase of 16 percent. This marked the 60th
consecutive year of dividend increases for 3M. The Company has an AA- credit rating, with a stable outlook, from Standard &
Poor's and an A1 credit rating, with a stable outlook, from Moody's Investors Service. The Company generates significant
ongoing cash flow and has proven access to capital markets funding throughout business cycles.
Raw materials:
In 2017, the Company continued to manage year-on-year raw material input costs, benefiting from input management,
reformulations, and multi-sourcing activities. These efforts more than offset increasing costs in certain raw material
categories in oil-derivative chemical feedstock markets. Oil-derivative cost increases also impact other feedstock
categories, including petroleum based materials, minerals, metals and wood pulp based products. To date, the Company is
receiving sufficient quantities of all raw materials to meet its reasonably foreseeable production requirements. It is
difficult to predict future shortages of raw materials or the impact any such shortages would have. 3M has avoided
disruption to its manufacturing operations through careful management of existing raw material inventories, strategic
relationships with key suppliers, and development and qualification of additional supply sources. 3M manages spend category
price risks through negotiated supply contracts, price protection agreements and commodity price swaps.
Pension and postretirement defined benefit/contribution plans:
On a worldwide basis, 3M's pension and postretirement plans were 87 percent funded at year-end 2017. The primary U.S.
qualified pension plan, which is approximately 67 percent of the worldwide pension obligation, was 94 percent funded and
the international pension plans were 90 percent funded. The U.S. non-qualified pension plan is not funded due to tax
considerations and other factors. Asset returns in 2017 for the primary U.S. qualified pension plan were 12.4%, as 3M
strategically invests in both growth assets and fixed income matching assets to manage its funded status. For the primary
U.S. qualified pension plan, the expected long-term rate of return on an annualized basis for 2018 is 7.25%, consistent
with 2017. The primary U.S. qualified pension plan year-end 2017 discount rate was 3.68%, down 0.53 percentage points from
the year-end 2016 discount rate of 4.21%. The decrease in U.S. discount rates resulted in an increased valuation of the
projected benefit obligation (PBO). The primary U.S. qualified pension plan's funded status increased 4 percentage points
in 2017 as strong plan assets returns and $800 million in contributions increased asset values in excess of the higher PBO
due to the significant discount rate decline. Additional detail and discussion of international plan asset returns and
discount rates is provided in Note 12 (Pension and Postretirement Benefit Plans).
3M expects to contribute approximately $300 million to $500 million of cash to its global defined benefit pension and
postretirement plans in 2018. The Company does not have a required minimum cash pension contribution obligation for its
U.S. plans in 2018. 3M expects global defined benefit pension and postretirement expense in 2018 (before settlements,
curtailments, special termination benefits and other) to increase by approximately $76 million pre-tax when compared to
2017. Refer to "Critical Accounting Estimates" within MD&A and Note 12 (Pension and Postretirement Benefit Plans) for
additional information concerning 3M's pension and post-retirement plans.
Divestitures and strategic investments:
In both the fourth quarter and full year of 2017, the Company continued to accelerate investments in growth initiatives and
footprint optimization. In addition, the Company divested certain businesses as it continued to focus its portfolio on
opportunities that create greater value for its shareholders. As shown below, these divestitures and strategic investments
led to a net year-on-year decrease of approximately $0.01 per diluted share and a benefit of $0.10 per diluted share,
respectively, for the three months and year ended December 31, 2017:
Three months ended December 31, 2017 Year ended December 31, 2017
Divestiture impacts and strategic investments net benefit/(cost) (in millions, except per share amounts) Pre-tax impact Impact per diluted share after-tax Pre-tax impact Impact per diluted share after-tax
Divestiture impacts:
2017 divestiture gains $ 96 $ 586
Less: prior year divestiture gains (71) (111)
Year-on-year lost operating loss/(income) from divested businesses 1 (1)
Year-on-year divestiture impacts, net of operating loss/(income) $ 26 $ 0.05 $ 474 $ 0.61
Strategic investments:
2017 portfolio and footprint optimization activities:
Restructuring actions and exit activities, net of adjustments $ (20) $ (143)
Asset charges and accelerated depreciation (40) (180)
Other costs (4) (30)
Less: prior year portfolio and footprint optimization activities 19 40
Year-on-year portfolio and footprint optimization (45) $ (0.05) (313) $ (0.39)
Incremental year-on-year growth initiatives (6) (100)
Total incremental strategic investments $ (51) $ (0.06) $ (413) $ (0.51)
Year-on-year divestiture impacts and strategic investments net benefit/(cost) $ (25) $ (0.01) $ 61 $ 0.10
The total pre-tax year-on-year divestiture impacts, net of strategic investments from the table above, are further detailed
below by business group:
Three months ended Year ended
(Millions) December 31, 2017 December 31, 2017
Industrial $ (79) $ (193)
Safety and Graphics 93 553
Health Care 6 (43)
Electronics and Energy (40) (120)
Consumer 2 (86)
Corporate and Unallocated (7) (50)
Total pretax divestiture gains, net of strategic investments $ (25) $ 61
2017 announced and 2018 closed divestitures:
In December 2017, 3M announced it had reached an agreement to sell substantially all of its Communications Markets
Division, which consists of optical fiber and copper passive connectivity solutions, structured cabling solutions, and
telecommunications system integration services. The business has annual global sales of approximately $400 million. The
Company expects a pre-tax gain of approximately $500 million in 2018 as a result of this divestiture. 3M expects to realize
a gain of approximately $0.40 per diluted share from this transaction, net of actions related to this divestiture. Refer to
Note 2 for additional discussion.
In February 2018, 3M closed on the sale of certain personal safety product offerings primarily focused on noise,
environmental, and heat stress monitoring. This business has annual sales of approximately $15 million. The transaction is
expected to result in a pre-tax gain of less than $20 million that will be reported within the Company's Safety and
Graphics business. Refer to Note 2 for additional discussion.
RESULTS OF OPERATIONS
Net Sales:
Refer to the preceding "Overview" section and the "Performance by Business Segment" section later in MD&A for additional
discussion of sales change.
Operating Expenses:
2017 versus 2016 versus
(Percent of net sales) 2017 2016 2015 2016 2015
Cost of sales 50.6 % 49.9 % 50.9 % 0.7 % (1.0) %
Selling, general and administrative expenses 20.8 20.7 20.6 0.1 0.1
Research, development and related expenses 5.8 5.8 5.8 - -
Gain on sale of businesses (1.9) (0.4) (0.2) (1.5) (0.2)
Operating income margin 24.7 % 24.0 % 22.9 % 0.7 % 1.1 %
Operating income margins increased in 2017 versus 2016, driven by gains from sale of businesses, partially offset by cost
of sales increases. A number of factors impact the various income statement line items, such as raw material cost
management, strategic investments, divestitures, foreign currency, cost management, and pension and postretirement effects.
Expanded discussion of each of the income statement line items follows in the various sections below. Pension and
postretirement expense is recorded in cost of sales; selling, general and administrative expenses (SG&A); and research,
development and related expenses (R&D). In total, 3M's defined benefit pension and postretirement expense increased $82
million in 2017, compared to a decrease of $305 million in 2016. Refer to Note 12 (Pension and Postretirement Plans) for
components of net periodic benefit cost and the assumptions used to determine net cost.
The Company is investing in business transformation. Business transformation is defined as changes in processes and
internal/external service delivery across 3M to move to more efficient business models to improve operational efficiency
and productivity, while allowing 3M to serve customers with greater speed and efficiency. This is enabled by the ongoing
multi-year phased implementation of an enterprise resource planning (ERP) system on a worldwide basis.
In 2017, as referenced above in the "Divestitures and strategic investments" section, 3M incurred $413 million in
incremental strategic actions, primarily reported within the cost of sales and SG&A income statement line items.
Of these strategic investments, 3M incurred $96 million (net of adjustments) in restructuring actions and $47 million in
exit activities during 2017. In addition, in the fourth quarter of 2015, 3M incurred $114 million in restructuring charges.
Refer to Note 4 for additional information on the impact to operating expenses.
Cost of Sales:
Cost of sales includes manufacturing, engineering and freight costs.
Cost of sales as a percent of sales increased during 2017 due to incremental strategic investments in productivity,
portfolio actions and footprint optimization, foreign currency effects (net of hedge impacts) and higher defined benefit
pension expense. This was partially offset by a year-on-year reduction in raw material input costs as a result of sourcing
cost reduction projects. Selling prices were flat year-on-year for the full year 2017.
Cost of sales as a percent of sales decreased in 2016 due to the combination of selling price increases and raw material
cost decreases, as selling prices 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. Fourth quarter 2015 restructuring charges also provided a favorable year-on-year
comparison.
Selling, General and Administrative Expenses:
SG&A increased $350 million year-on year, or 5.6 percent, during 2017 due to incremental strategic investments and higher
defined benefit pension expense. SG&A decreased $7 million, or 0.1 percent, in 2016 when compared to 2015, with 2016
results benefiting from foreign currency translation, and productivity benefits related to the fourth quarter 2015
restructuring. In addition, SG&A in 2016 benefited from lower defined benefit pension and postretirement expense. Fourth
quarter 2015 restructuring charges also provided a favorable year-on-year comparison.
Research, Development and Related Expenses:
R&D increased $115 million year-on-year and decreased $28 million year-on-year in 2017 and 2016, respectively. 3M continued
to invest in its key initiatives, including R&D aimed at disruptive innovation programs with the potential to create
entirely new markets and disrupt existing markets. R&D, measured as a percent of sales, was 5.8 percent in 2017, 2016, and
2015.
Gain on Sale of Businesses:
In 2017, 3M sold the assets of its safety prescription eyewear business, completed the related sale or transfer of control,
as applicable, of its identity management business, sold its tolling and automated license/number plate recognition and
electronic monitoring businesses, and sold the assets of its electrical marking/labeling business. On a combined basis,
these divestitures resulted in a gain on the sale of businesses of $586 million. 3M also divested certain businesses in
2016 and 2015, resulting in gains of $111 million and $47 million, respectively. Refer to Note 2 for additional detail on
these divestitures.
Operating Income Margin:
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 2017 and 2016.
Three months ended Year ended
(Percent of net sales) December 31, 2017 December 31, 2017 December 31, 2016
Same period last year 22.7 % 24.0 % 22.9 %
Increase/(decrease) in operating income margin, due to:
Organic volume/other productivity 1.5 1.1 (1.0)
Acquisitions and divestitures (0.3) 1.4 0.2
Incremental strategic investments (0.7) (1.4) 0.1
Selling price and raw material impact 0.4 0.4 1.0
Foreign exchange impacts (0.6) (0.5) (0.2)
Pension and postretirement benefit costs (0.2) (0.3) 1.0
Current period 22.8 % 24.7 % 24.0 %
Year 2017 and fourth quarter operating income:
Operating income margins increased 0.1 percentage points in the fourth quarter of 2017 and increased 0.7 percentage points
for the full year 2017 when compared to the same periods last year. 3M benefited from higher organic local-currency sales
growth and productivity, partially offset by actuarial adjustments to the Company's respirator mask/asbestos liability
accrual. Acquisitions and divestitures consist of the transactions and integration costs, net of income, that relate to the
acquisition of Scott Safety, in addition to the year-on-year divestiture gains (refer to Note 2) and non-repeating
operating losses from divested businesses, which combined, reduced operating margins in the fourth quarter of 2017 and
benefited operating income margins for the full year 2017. Items that reduced operating margins were incremental strategic
investments in growth, productivity and portfolio actions, in addition to charges related to 3M's optimization of its
portfolio and supply chain footprint. For full year 2017, the benefit from year-on-year divestiture gains and non-repeating
net operating losses from divested businesses (primarily related to the sale of Identity Management) was partially offset
by the impact of the Scott Safety acquisition noted earlier. 3M also benefited from raw material sourcing cost reduction
projects. Lastly, operating margins were reduced by foreign currency effects (net of hedge impacts) and higher year-on-year
defined benefit pension expense.
Year 2016 operating income:
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. Acquisitions and divestitures had a favorable impact on operating margins. This
included solid performances from both the Capital Safety and Membrana acquisitions. Divestiture impacts relate to the
Polyfoam business, the library systems business, and the license plate converting business in France. 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, productivity, and other decreased operating
margins as a result of lower asset utilization, primarily in the Industrial, and Electronics and Energy businesses. Also,
3M had an unfavorable arbitration ruling on an insurance claim, commercial litigation settlements related to Andover
Healthcare and TransWeb, and accruals for respirator mask/asbestos liabilities. These declines within organic volume,
productivity, and other were partially offset by 2015 restructuring charges, which provided a favorable year-on-year
comparison, and productivity benefits in 2016 related to the 2015 restructuring actions.
Other Expense (Income), Net:
See Note 5 for a detailed breakout of this line item.
Interest expense increased during 2017 and 2016 due to higher average debt balances and higher U.S. borrowing costs. In
addition, in October 2017, via cash tender offers, 3M repurchased $305 million aggregate principal amount of its
outstanding notes. The Company recorded an early debt extinguishment charge of $96 million in the fourth quarter of 2017,
which was included within interest expense. Capitalized interest related to property, plant and equipment construction in
progress is recorded as a reduction to interest expense. Capitalized interest was $12 million, $10 million, and $13
million, in 2017, 2016 and 2015, respectively.
Interest income increased year-on-year in both 2017 and 2016 due to higher average interest rates.
Provision for Income Taxes:
(Percent of pre-tax income) 2017 2016 2015
Effective tax rate 35.5 % 28.3 % 29.1 %
The effective tax rate for 2017 was 35.5 percent, compared to 28.3 percent in 2016, an increase of 7.2 percentage points.
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 changes in the tax rates between years were impacted by many factors, including the enactment of the Tax Cuts and Jobs
Act (TCJA) in December 2017 as further described in the Overview, "Income, earnings per share, and effective tax rate
adjusted for impacts of the Tax Cuts and Jobs Act (TCJA) -(non-GAAP measures)" section and in Note 9. During the fourth
quarter of 2017, 3M recorded a net tax expense of $762 million related to the enactment of the 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.
The TCJA establishes new tax laws that will also affect 2018 and future periods, including, but not limited to: 1)
reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent, 2) the creation of the base erosion
anti-abuse tax (BEAT), 3) the creation of a new provision designed to tax global intangible low-taxed income (GILTI), 4) a
general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, 5) limitations on the use of
foreign tax credits to reduce the U.S. income tax liability, 6) limitations on the deductibility of certain executive
compensation, and 7) the repeal of the domestic production activity deduction. Considering the impacts of the TCJA and
other factors, the Company currently estimates its effective tax rate for 2018 will be approximately 20 to 22 percent. The
tax rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, changes in
tax laws, measurement period adjustment effects on the provisional items and remaining analyses to complete noted in Note 9
related to the 2017 impact of the TCJA, employee share-based payment accounting; as well as recurring factors, such as the
geographic mix of income before taxes.
Refer to Note 9 for further discussion of income taxes.
Net Income Attributable to Noncontrolling Interest:
(Millions) 2017 2016 2015
Net income attributable to noncontrolling interest $ 11 $ 8 $ 8
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 amount primarily 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 $111 million and
$127 million in 2017 and 2016, 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 $152 million and $69 million in 2017 and 2016, respectively. Refer to Note 13 in the
Consolidated Financial Statements for additional information concerning 3M's hedging activities.
PERFORMANCE BY BUSINESS SEGMENT
For a detailed discussion of the markets served and types of products offered by 3M's business segments, see Item 1,
Business Segments. Financial information and other disclosures are provided in the Notes to the Consolidated Financial
Statements. Effective in the first quarter of 2017, as part of 3M's continuing effort to improve the alignment of its
businesses around markets and customers, the Company made the following changes:
Integration of former Renewable Energy Division
· 3M's former Renewable Energy Division (RED) has been integrated into existing divisions within the Electronics and
Energy business segment and Safety and Graphics business segment. 3M is committed to leadership in sustainability and to
enabling the advancement of energy solutions into the future. Integrating RED's offerings into larger divisions already
serving these segments will provide increased scale and build on strength by leveraging 3M's existing brands, go-to-market
capabilities, and relationships to support growth objectives.
Creation of Automotive and Aerospace Solutions Division
· 3M created the Automotive and Aerospace Solutions Division, which combined the former Automotive Division and
Aerospace and Commercial Transportation Division, which were both within the Industrial business segment. Combining the
strengths along with the deep industry knowledge of each business will enable this new division to utilize shared
technology platforms and processes to deliver a broader set of innovative solutions, along with world-class quality and
service to 3M's customers. This combination will help accelerate the Company's profitable growth and market relevance
across the automotive, aerospace and commercial transportation industries.
Consolidation of U.S. customer account activity - impacting dual credit reporting
· The Company consolidated its customer account activity in the U.S. into more centralized sales districts. This
improved alignment reduces the complexity for customers when interacting with multiple businesses within 3M, creating a
better customer experience. 3M business segment reporting measures include dual credit to business segments for certain
U.S. sales and related operating income. This dual credit is based on which business segment provides customer account
activity with respect to a particular product sold in the U.S. The alignment of U.S. customer accounts to fewer, more
focused sales districts changed the attribution of dual credit across 3M's 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; Health Care;
Electronics and Energy; 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 17. Corporate and Unallocated includes a variety of
miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain
insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and
certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the Company determines not to allocate
directly to its business segments. Because this category includes a variety of miscellaneous items, it is subject to
fluctuation on a quarterly and annual basis.
Corporate and Unallocated operating expenses increased by $80 million in 2017 when compared to 2016. In both the first and
second quarters of 2017, a portion of the severance actions were reflected in Corporate and Unallocated. In the fourth
quarter, an incremental $58 million was reflected within Corporate and Unallocated related to the Company's actuarial
adjustments to its respirator mask/asbestos liability accrual. In addition, 3M's defined benefit pension and postretirement
expense allocation to Corporate and Unallocated increased by approximately $30 million in 2017.
Corporate and Unallocated operating expenses decreased by $77 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.
Operating Business Segments:
Each of 3M's business segments were impacted by the following pre-tax amounts:
Incremental divestiture gains, net of strategic investments charges, by business segment:
(Millions) 2017
Industrial (193)
Safety and Graphics 553
Health Care (43)
Electronics and Energy (120)
Consumer (86)
Corporate and Unallocated (50)
Total $ 61
Restructuring 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.
The following discusses total year results for 2017 compared to 2016 and 2016 compared to 2015, for each business segment.
Refer to the preceding year 2017 and 2016 sales results by geographic area/business segment sections for additional sales
change information.
Industrial Business (34.5% of consolidated sales):
2017 2016 2015
Sales (millions) $ 10,911 $ 10,399 $ 10,388
Sales change analysis:
Organic local-currency 4.9 % (0.1) %
Acquisitions - 1.6
Divestitures (0.5) (0.3)
Translation 0.5 (1.1)
Total sales change 4.9 % 0.1 %
Operating income
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