REG - 3M Company - Annual Financial Report - Part 1 <Origin Href="QuoteRef">MMM.N</Origin> - Part 5
13/02/2018 07:05
- Part 5: For the preceding part double click ID:nRSM6559Ed
was $2.0 billion. Additional details about 3M's long-term
debt can be found in Note 11, including references to information regarding
derivatives and/or hedging instruments, further discussed in Note 13,
associated with the Company's long-term debt.
Commodity Prices Risk:
The Company manages commodity price risks through negotiated supply contracts,
price protection agreements and commodity price swaps. 3M used commodity price
swaps as cash flow hedges of forecasted commodity transactions to manage price
volatility, but discontinued this practice in the first quarter of 2015. The
related mark-to-market gain or loss on qualifying hedges was included in other
comprehensive income to the extent effective, and reclassified into cost of
sales in the period during which the hedged transaction affected earnings. The
Company may enter into other commodity price swaps to offset, in part,
fluctuation and costs associated with the use of certain commodities and
precious metals. These instruments are not designated in hedged relationships
and the extent to which they were outstanding at December 31, 2017 was not
material.
Value At Risk:
The value at risk analysis is performed annually to assess the Company's
sensitivity to changes in currency rates, interest rates, and commodity
prices. A Monte Carlo simulation technique was used to test the impact on
after-tax earnings related to financial instruments (primarily debt),
derivatives and underlying exposures outstanding at December 31, 2017. The
model (third-party bank dataset) used a 95 percent confidence level over a
12-month time horizon. The exposure to changes in currency rates model used 9
currencies, interest rates related to two currencies, and commodity prices
related to five commodities. This model does not purport to represent what
actually will be experienced by the Company. This model does not include
certain hedge transactions, because the Company believes their inclusion would
not materially impact the results. The following table summarizes the possible
adverse and positive impacts to after-tax earnings related to these exposures.
Adverse impact on after-tax Positive impact on after-tax
earnings earnings
(Millions) 2017 2016 2017 2016
Foreign exchange rates $ (242) $ (245) $ 253 $ 264
Interest rates (15) (13) 14 (2)
Commodity prices (3) (2) 3 1
In addition to the possible adverse and positive impacts discussed in the
preceding table related to foreign exchange rates, recent historical
information is as follows. 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. This estimate includes 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.
An analysis of the global exposures related to purchased components and
materials is performed at each year-end. A one percent price change would
result in a pre-tax cost or savings of approximately $75 million per year. The
global energy exposure is such that a ten percent price change would result in
a pre-tax cost or savings of approximately $40 million per year. Global energy
exposure includes energy costs used in 3M production and other facilities,
primarily electricity and natural gas.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
A complete summary of Form 10-K content, including the index to financial
statements, is found at the beginning of this document.
Management's Responsibility for Financial Reporting
Management is responsible for the integrity and objectivity of the financial
information included in this report. The financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Where necessary, the financial statements reflect
estimates based on management's judgment.
Management has established and maintains a system of internal control over
financial reporting for the Company and its subsidiaries. This system and its
established accounting procedures and related controls are designed to provide
reasonable assurance that assets are safeguarded, that the books and records
properly reflect all transactions, that policies and procedures are
implemented by qualified personnel, and that published financial statements
are properly prepared and fairly presented. The Company's system of internal
control over financial reporting is supported by widely communicated written
policies, including business conduct policies, which are designed to require
all employees to maintain high ethical standards in the conduct of Company
affairs. Internal auditors continually review the accounting and control
system.
3M Company
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an adequate system
of internal control over financial reporting. Management conducted an
assessment of the Company's internal control over financial reporting based on
the framework established by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control - Integrated Framework (2013).
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2017 excluded Scott Safety, which
was acquired by the Company in October 2017 in a purchase business
combination. Scott Safety is a wholly-owned subsidiary whose total assets and
total net sales both represented less than 1 percent of the Company's
consolidated financial statement amounts as of and for the year ended December
31, 2017. Companies are allowed to exclude acquisitions from their assessment
of internal control over financial reporting during the first year of
acquisition while integrating the acquired company under guidelines
established by the Securities and Exchange Commission. Based on the
assessment, management concluded that, as of December 31, 2017, the Company's
internal control over financial reporting is effective.
The Company's internal control over financial reporting as of December 31,
2017 has been audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which is included herein,
which expresses an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting as of December 31, 2017.
3M Company
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of 3M Company
Opinions on the Financial Statements and Internal Control over Financial
Reporting
We have audited the accompanying consolidated balance sheets of 3M Company and
its subsidiaries as of December 31, 2017 and 2016, and the related
consolidated statements of income, comprehensive income, changes in equity and
cash flows for each of the three years in the period ended December 31, 2017,
including the related notes (collectively referred to as the "consolidated
financial statements"). We also have audited the Company's internal control
over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of December 31, 2017 and 2016, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2017 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as
of December 31, 2017, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial
statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management's Report on
Internal Control over Financial Reporting. Our responsibility is to express
opinions on the Company's consolidated financial statements and on the
Company's internal control over financial reporting based on our audits. We
are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent
with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing
procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial
statements. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As described in Management's Report on Internal Control over Financial
Reporting, management has excluded Scott Safety from its assessment of
internal control over financial reporting as of December 31, 2017 because it
was acquired by the Company in a purchase business combination during 2017.
We have also excluded Scott Safety from our audit of internal control over
financial reporting. Scott Safety is a wholly-owned subsidiary whose total
assets and total net sales excluded from management's assessment and our audit
of internal control over financial reporting both represent less than 1
percent of the related consolidated financial statement amounts as of and for
the year ended December 31, 2017.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 8, 2018
We have served as the Company's auditor since 1975.
3M Company and Subsidiaries
Consolidated Statement of Income
Years ended December 31
(Millions, except per share amounts) 2017 2016 2015
Net sales $ 31,657 $ 30,109 $ 30,274
Operating expenses
Cost of sales 16,001 15,040 15,383
Selling, general and administrative expenses 6,572 6,222 6,229
Research, development and related expenses 1,850 1,735 1,763
Gain on sale of businesses (586) (111) (47)
Total operating expenses 23,837 22,886 23,328
Operating income 7,820 7,223 6,946
Other expense (income), net 272 170 123
Income before income taxes 7,548 7,053 6,823
Provision for income taxes 2,679 1,995 1,982
Net income including noncontrolling interest $ 4,869 $ 5,058 $ 4,841
Less: Net income attributable to noncontrolling interest 11 8 8
Net income attributable to 3M $ 4,858 $ 5,050 $ 4,833
Weighted average 3M common shares outstanding - basic 597.5 604.7 625.6
Earnings per share attributable to 3M common shareholders - basic $ 8.13 $ 8.35 $ 7.72
Weighted average 3M common shares outstanding - diluted 612.7 618.7 637.2
Earnings per share attributable to 3M common shareholders - diluted $ 7.93 $ 8.16 $ 7.58
Cash dividends paid per 3M common share $ 4.70 $ 4.44 $ 4.10
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
3M Company and Subsidiaries
Consolidated Statement of Comprehensive Income
Years ended December 31
(Millions) 2017 2016 2015
Net income including noncontrolling interest $ 4,869 $ 5,058 $ 4,841
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment 373 (331) (586)
Defined benefit pension and postretirement plans adjustment 52 (524) 489
Cash flow hedging instruments, unrealized gain (loss) (203) (33) 25
Total other comprehensive income (loss), net of tax 222 (888) (72)
Comprehensive income (loss) including noncontrolling interest 5,091 4,170 4,769
Comprehensive (income) loss attributable to noncontrolling interest (14) (6) (6)
Comprehensive income (loss) attributable to 3M $ 5,077 $ 4,164 $ 4,763
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
3M Company and Subsidiaries
Consolidated Balance Sheet
At December 31
December 31, December 31,
(Dollars in millions, except per share amount) 2017 2016
Assets
Current assets
Cash and cash equivalents $ 3,053 $ 2,398
Marketable securities - current 1,076 280
Accounts receivable - net of allowances of $103 and $88 4,911 4,392
Inventories
Finished goods 1,915 1,629
Work in process 1,218 1,039
Raw materials and supplies 901 717
Total inventories 4,034 3,385
Prepaids 937 821
Other current assets 266 450
Total current assets 14,277 11,726
Property, plant and equipment 24,914 23,499
Less: Accumulated depreciation (16,048) (14,983)
Property, plant and equipment - net 8,866 8,516
Goodwill 10,513 9,166
Intangible assets - net 2,936 2,320
Other assets 1,395 1,178
Total assets $ 37,987 $ 32,906
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt $ 1,853 $ 972
Accounts payable 1,945 1,798
Accrued payroll 870 678
Accrued income taxes 310 299
Other current liabilities 2,709 2,472
Total current liabilities 7,687 6,219
Long-term debt 12,096 10,678
Pension and postretirement benefits 3,620 4,018
Other liabilities 2,962 1,648
Total liabilities $ 26,365 $ 22,563
Commitments and contingencies (Note 15)
Equity
3M Company shareholders' equity:
Common stock par value, $.01 par value $ 9 $ 9
Shares outstanding - 2017: 594,884,237
Shares outstanding - 2016: 596,726,278
Additional paid-in capital 5,352 5,061
Retained earnings 39,115 37,907
Treasury stock (25,887) (25,434)
Accumulated other comprehensive income (loss) (7,026) (7,245)
Total 3M Company shareholders' equity 11,563 10,298
Noncontrolling interest 59 45
Total equity $ 11,622 $ 10,343
Total liabilities and equity $ 37,987 $ 32,906
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
3M Company and Subsidiaries
Consolidated Statement of Changes in Equity
Years Ended December 31
3M Company Shareholders
Common Accumulated
Stock and Other
Additional Comprehensive Non-
Paid-in Retained Treasury Income controlling
(Dollars in millions, except per share amounts) Total Capital Earnings Stock (Loss) Interest
Balance at December 31, 2014 $ 12,863 $ 4,388 $ 34,038 $ (19,307) $ (6,289) $ 33
Net income 4,841 4,833 8
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (586) (584) (2)
Defined benefit pension and post-retirement plans adjustment 489 489 -
Cash flow hedging instruments - unrealized gain (loss) 25 25 -
Total other comprehensive income (loss), net of tax (72)
Dividends declared ($3.075 per share, Note 7) (1,913) (1,913)
Stock-based compensation, net of tax impacts 412 412
Reacquired stock (5,304) (5,304)
Issuances pursuant to stock option and benefit plans 641 (662) 1,303
Balance at December 31, 2015 $ 11,468 $ 4,800 $ 36,296 $ (23,308) $ (6,359) $ 39
Net income 5,058 5,050 8
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (331) (329) (2)
Defined benefit pension and post-retirement plans adjustment (524) (524) -
Cash flow hedging instruments - unrealized gain (loss) (33) (33) -
Total other comprehensive income (loss), net of tax (888)
Dividends declared ($4.44 per share, Note 7) (2,678) (2,678)
Stock-based compensation 270 270
Reacquired stock (3,699) (3,699)
Issuances pursuant to stock option and benefit plans 812 (761) 1,573
Balance at December 31, 2016 $ 10,343 $ 5,070 $ 37,907 $ (25,434) $ (7,245) $ 45
Net income 4,869 4,858 11
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment 373 370 3
Defined benefit pension and post-retirement plans adjustment 52 52 -
Cash flow hedging instruments - unrealized gain (loss) (203) (203) -
Total other comprehensive income (loss), net of tax 222
Dividends declared ($4.70 per share, Note 7) (2,803) (2,803)
Stock-based compensation 291 291
Reacquired stock (2,044) (2,044)
Issuances pursuant to stock option and benefit plans 744 (847) 1,591
Balance at December 31, 2017 $ 11,622 $ 5,361 $ 39,115 $ (25,887) $ (7,026) $ 59
Supplemental share information 2017 2016 2015
Treasury stock
Beginning balance 347,306,778 334,702,932 308,898,462
Reacquired stock 10,209,963 22,602,748 34,072,584
Issuances pursuant to stock options and benefit plans (8,367,922) (9,998,902) (8,268,114)
Ending balance 349,148,819 347,306,778 334,702,932
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
3M Company and Subsidiaries
Consolidated Statement of Cash Flows
Years ended December 31
(Millions) 2017 2016 2015
Cash Flows from Operating Activities
Net income including noncontrolling interest $ 4,869 $ 5,058 $ 4,841
Adjustments to reconcile net income including noncontrolling interest to net
cash provided by operating activities
Depreciation and amortization 1,544 1,474 1,435
Company pension and postretirement contributions (967) (383) (267)
Company pension and postretirement expense 333 251 556
Stock-based compensation expense 324 298 276
Gain on sale of businesses (586) (111) (47)
Deferred income taxes 107 7 395
Excess tax benefits from stock-based compensation - - (154)
Changes in assets and liabilities
Accounts receivable (245) (313) (58)
Inventories (387) 57 3
Accounts payable 24 148 9
Accrued income taxes (current and long-term) 967 101 (744)
Other - net 257 75 175
Net cash provided by operating activities 6,240 6,662 6,420
Cash Flows from Investing Activities
Purchases of property, plant and equipment (PP&E) (1,373) (1,420) (1,461)
Proceeds from sale of PP&E and other assets 49 58 33
Acquisitions, net of cash acquired (2,023) (16) (2,914)
Purchases of marketable securities and investments (2,152) (1,410) (652)
Proceeds from maturities and sale of marketable securities and investments 1,354 1,247 1,952
Proceeds from sale of businesses, net of cash sold 1,065 142 123
Other - net (6) (4) 102
Net cash used in investing activities (3,086) (1,403) (2,817)
Cash Flows from Financing Activities
Change in short-term debt - net 578 (797) 860
Repayment of debt (maturities greater than 90 days) (962) (992) (800)
Proceeds from debt (maturities greater than 90 days) 1,987 2,832 3,422
Purchases of treasury stock (2,068) (3,753) (5,238)
Proceeds from issuance of treasury stock pursuant to stock option and benefit 734 804 635
plans
Dividends paid to shareholders (2,803) (2,678) (2,561)
Excess tax benefits from stock-based compensation - - 154
Other - net (121) (42) (120)
Net cash used in financing activities (2,655) (4,626) (3,648)
Effect of exchange rate changes on cash and cash equivalents 156 (33) (54)
Net increase (decrease) in cash and cash equivalents 655 600 (99)
Cash and cash equivalents at beginning of year 2,398 1,798 1,897
Cash and cash equivalents at end of period $ 3,053 $ 2,398 $ 1,798
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
Notes to Consolidated Financial Statements
NOTE 1. Significant Accounting Policies
Consolidation: 3M is a diversified global manufacturer, technology innovator
and marketer of a wide variety of products. All subsidiaries are consolidated.
All intercompany transactions are eliminated. As used herein, the term "3M" or
"Company" refers to 3M Company and subsidiaries unless the context indicates
otherwise.
Basis of presentation: Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform to the current year
presentation.
Foreign currency translation: Local currencies generally are considered the
functional currencies outside the United States. Assets and liabilities for
operations in local-currency environments are translated at month-end exchange
rates of the period reported. Income and expense items are translated at
month-end exchange rates of each applicable month. Cumulative translation
adjustments are recorded as a component of accumulated other comprehensive
income (loss) in shareholders' equity.
3M has a subsidiary in Venezuela, the financial statements of which are
remeasured under Accounting Standards Codification (ASC) 830, Foreign Currency
Matters, as if its functional currency were that of its parent because
Venezuela's economic environment is considered highly inflationary. The
operating income of this subsidiary is immaterial as a percent of 3M's
consolidated operating income for 2017. The Venezuelan government sets
official rates of exchange and conditions precedent to purchase foreign
currency at these rates with local currency. The government also operates
various expanded secondary currency exchange mechanisms that have been
eliminated and replaced from time to time. Such rates and conditions have been
and continue to be subject to change. For the periods presented, the financial
statements of 3M's Venezuelan subsidiary were remeasured utilizing the rate
associated with the secondary auction mechanism, Tipo de Cambio
Complementario, which was redesigned by the Venezuelan government in June 2017
(DICOM2), or its predecessor. During the same periods, the Venezuelan
government's official exchange was Tipo de Cambio Protegido (DIPRO), or its
predecessor. 3M's uses of these rates were based upon evaluation of a number
of factors including, but not limited to, the exchange rate the Company's
Venezuelan subsidiary may legally use to convert currency, settle transactions
or pay dividends; the probability of accessing and obtaining currency by use
of a particular rate or mechanism; and the Company's intent and ability to use
a particular exchange mechanism. The Company continues to monitor these
circumstances. Changes in applicable exchange rates or exchange mechanisms may
continue in the future. These changes could impact the rate of exchange
applicable to remeasure the Company's net monetary assets (liabilities)
denominated in Venezuelan Bolivars (VEF). As of December 31, 2017, the
Company had a balance of net monetary assets denominated in VEF of less than
10 billion VEF and the DIPRO and DICOM2 exchange rates were approximately 10
VEF and 3,300 VEF per U.S. dollar, respectively.
A need to deconsolidate the Company's Venezuelan subsidiary's operations may
result from a lack of exchangeability of VEF-denominated cash coupled with an
acute degradation in the ability to make key operational decisions due to
government regulations in Venezuela. 3M monitors factors such as its ability
to access various exchange mechanisms; the impact of government regulations on
the Company's ability to manage its Venezuelan subsidiary's capital structure,
purchasing, product pricing, and labor relations; and the current political
and economic situation within Venezuela. Based upon a review of factors as of
December 31, 2017, the Company continues to consolidate its Venezuelan
subsidiary. As of December 31, 2017, the balance of accumulated other
comprehensive loss associated with this subsidiary was approximately $145
million and the amount of intercompany receivables due from this subsidiary
and its total equity balance were not significant.
Use of estimates: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Cash and cash equivalents: Cash and cash equivalents consist of cash and
temporary investments with maturities of three months or less when acquired.
Marketable securities: Marketable securities include available-for-sale debt
securities and are recorded at fair value. Cost of securities sold use the
first in, first out (FIFO) method. The classification of marketable securities
as current or non-current is based on the availability for use in current
operations. 3M reviews impairments associated with its marketable securities
in accordance with the measurement guidance provided by ASC
320, Investments-Debt and Equity Securities, when determining the
classification of the impairment as "temporary" or "other-than-temporary". A
temporary impairment charge results in an unrealized loss being recorded in
accumulated other comprehensive income as a component of shareholders' equity.
Such an unrealized loss does not reduce net income for the applicable
accounting period because the loss is not viewed as other-than-temporary. The
factors evaluated to differentiate between temporary and other-than-temporary
include the projected future cash flows, credit ratings actions, and
assessment of the credit quality of the underlying collateral, as well as
other factors. Amounts are reclassified out of accumulated other comprehensive
income and into earnings upon sale or "other-than-temporary" impairment.
Investments: Investments primarily include equity method, cost method, and
available-for-sale equity investments. Available-for-sale investments are
recorded at fair value at each reporting date and subject to ASC 320, as
described above.
Other assets: Other assets include deferred income taxes, product and other
insurance receivables, the cash surrender value of life insurance policies,
and other long-term assets. Investments in life insurance are reported at the
amount that could be realized under contract at the balance sheet date, with
any changes in cash surrender value or contract value during the period
accounted for as an adjustment of premiums paid. Cash outflows and inflows
associated with life insurance activity are included in "Purchases of
marketable securities and investments" and "Proceeds from maturities and sale
of marketable securities and investments," respectively.
Inventories: Inventories are stated at the lower of cost or market, with cost
generally determined on a first-in, first-out basis.
Property, plant and equipment: Property, plant and equipment, including
capitalized interest and internal direct engineering costs, are recorded at
cost. Depreciation of property, plant and equipment generally is computed
using the straight-line method based on the estimated useful lives of the
assets. The estimated useful lives of buildings and improvements primarily
range from ten to forty years, with the majority in the range of twenty to
forty years. The estimated useful lives of machinery and equipment primarily
range from three to fifteen years, with the majority in the range of five to
ten years. Fully depreciated assets other than capitalized internally
developed software are retained in property, plant and equipment and
accumulated depreciation accounts until disposal. Upon disposal, assets and
related accumulated depreciation are removed from the accounts and the net
amount, less proceeds from disposal, is charged or credited to operations.
Property, plant and equipment amounts are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset (asset group) may not be recoverable. An impairment loss would be
recognized when the carrying amount of an asset exceeds the estimated
undiscounted future cash flows expected to result from the use of the asset
and its eventual disposition. The amount of the impairment loss recorded is
calculated by the excess of the asset's carrying value over its fair value.
Fair value is generally determined using a discounted cash flow analysis.
Conditional asset retirement obligations: A liability is initially recorded at
fair value for an asset retirement obligation associated with the retirement
of tangible long-lived assets in the period in which it is incurred if a
reasonable estimate of fair value can be made. Conditional asset retirement
obligations exist for certain long-term assets of the Company. The obligation
is initially measured at fair value using expected present value techniques.
Over time the liabilities are accreted for the change in their present value
and the initial capitalized costs are depreciated over the remaining useful
lives of the related assets. The asset retirement obligation liability was
$106 million and $111 million at December 31, 2017 and 2016, respectively.
Goodwill: Goodwill is the excess of cost of an acquired entity over the
amounts assigned to assets acquired and liabilities assumed in a business
combination. Goodwill is not amortized. Goodwill is tested for impairment
annually in the fourth quarter of each year, and is tested for impairment
between annual tests if an event occurs or circumstances change that would
indicate the carrying amount may be impaired. Impairment testing for goodwill
is done at a reporting unit level, with all goodwill assigned to a reporting
unit. Reporting units are one level below the business segment level, but are
required to be combined when reporting units within the same segment have
similar economic characteristics. 3M did not combine any of its reporting
units for impairment testing. The impairment loss is measured as the amount by
which the carrying value of the reporting unit's net assets exceeds its
estimated fair value. The estimated fair value of a reporting unit is
determined using earnings for the reporting unit multiplied by a
price/earnings ratio for comparable industry groups, or by using a discounted
cash flow analysis. Companies have the option to first assess qualitative
factors to determine whether the fair value of a reporting unit is not "more
likely than not" less than its carrying amount, which is commonly referred to
as "Step 0". 3M has chosen not to apply Step 0 for its annual goodwill
assessments.
Intangible assets: Intangible asset types include customer related, patents,
other technology-based, tradenames and other intangible assets acquired from
an independent party. Intangible assets with a definite life are amortized
over a period ranging from one to twenty years on a systematic and rational
basis (generally straight line) that is representative of the asset's use. The
estimated useful lives vary by category, with customer related largely between
eight to seventeen years, patents largely between five to thirteen years,
other technology-based largely between two to fifteen years, definite lived
tradenames largely between three and twenty years, and other intangibles
largely between two to ten years. Costs related to internally developed
intangible assets, such as patents, are expensed as incurred, primarily in
"Research, development and related expenses."
Intangible assets with a definite life are tested for impairment whenever
events or circumstances indicate that the carrying amount of an asset (asset
group) may not be recoverable. An impairment loss is recognized when the
carrying amount of an asset exceeds the estimated undiscounted cash flows used
in determining the fair value of the asset. The amount of the impairment loss
recorded is calculated by the excess of the asset's carrying value over its
fair value. Fair value is generally determined using a discounted cash flow
analysis.
Intangible assets with an indefinite life, namely certain tradenames, are not
amortized. Indefinite-lived intangible assets are tested for impairment
annually, and are tested for impairment between annual tests if an event
occurs or circumstances change that would indicate that the carrying amount
may be impaired. An impairment loss generally would be recognized when the
fair value is less than the carrying value of the indefinite-lived intangible
asset.
Restructuring actions: Restructuring actions generally include significant
actions involving employee-related severance charges, contract termination
costs, and impairment or accelerated depreciation/amortization of assets
associated with such actions. Employee-related severance charges are largely
based upon distributed employment policies and substantive severance plans.
These charges are reflected in the quarter when the actions are probable and
the amounts are estimable, which typically is when management approves the
associated actions. Severance amounts for which affected employees were
required to render service in order to receive benefits at their termination
dates were measured at the date such benefits were communicated to the
applicable employees and recognized as expense over the employees' remaining
service periods. Contract termination and other charges primarily reflect
costs to terminate a contract before the end of its term (measured at fair
value at the time the Company provided notice to the counterparty) or costs
that will continue to be incurred under the contract for its remaining term
without economic benefit to the Company. Asset impairment charges related to
intangible assets and property, plant and equipment reflect the excess of the
assets' carrying values over their fair values.
Revenue (sales) recognition: The Company sells a wide range of products to a
diversified base of customers around the world and has no material
concentration of credit risk. Revenue is recognized when the risks and rewards
of ownership have substantively transferred to customers. This condition
normally is met when the product has been delivered or upon performance of
services. The Company records estimated reductions to revenue or records
expense for customer and distributor incentives, primarily comprised of
rebates and free goods, at the time of the initial sale. These sales
incentives are accounted for in accordance with ASC 605, Revenue Recognition.
The estimated reductions of revenue for rebates are based on the sales terms,
historical experience, trend analysis and projected market conditions in the
various markets served. Since the Company serves numerous markets, the rebate
programs offered vary across businesses, but the most common incentive relates
to amounts paid or credited to customers for achieving defined volume levels
or growth objectives. Free goods are accounted for as an expense and recorded
in cost of sales. Sales, use, value-added and other excise taxes are not
recognized in revenue.
The vast majority of 3M's sales agreements are for standard products and
services with customer acceptance occurring upon delivery of the product or
performance of the service. However, to a limited extent 3M also enters into
agreements that involve multiple elements (such as equipment, installation and
service), software, or non-standard terms and conditions.
For non-software multiple-element arrangements, the Company recognizes revenue
for delivered elements when they have stand-alone value to the customer, they
have been accepted by the customer, and for which there are only customary
refund or return rights. Arrangement consideration is allocated to the
deliverables by use of the relative selling price method. The selling price
used for each deliverable is based on vendor-specific objective evidence
(VSOE) if available, third-party evidence (TPE) if VSOE is not available, or
estimated selling price if neither VSOE nor TPE is available. Estimated
selling price is determined in a manner consistent with that used to establish
the price to sell the deliverable on a standalone basis. In addition to the
preceding conditions, equipment revenue is not recorded until the installation
has been completed if equipment acceptance is dependent upon installation or
if installation is essential to the functionality of the equipment.
Installation revenues are not recorded until installation has been completed.
For arrangements (or portions of arrangements) falling within software revenue
recognition standards and that do not involve significant production,
modification, or customization, revenue for each software or software-related
element is recognized when the Company has VSOE of the fair value of all of
the undelivered elements and applicable criteria have been met for the
delivered elements. When the arrangements involve significant production,
modification or customization, long-term construction-type accounting
involving proportional performance is employed.
For prepaid service contracts, sales revenue is recognized on a straight-line
basis over the term of the contract, unless historical evidence indicates the
costs are incurred on other than a straight-line basis. License fee revenue is
recognized as earned, and no revenue is recognized until the inception of the
license term.
On occasion, agreements will contain milestones, or 3M will recognize revenue
based on proportional performance. For these agreements, and depending on the
specifics, 3M may recognize revenue upon completion of a substantive
milestone, or in proportion to costs incurred to date compared with the
estimate of total costs to be incurred.
Accounts receivable and allowances: Trade accounts receivable are recorded at
the invoiced amount and do not bear interest. The Company maintains allowances
for bad debts, cash discounts, product returns and various other items. The
allowance for doubtful accounts and product returns is based on the best
estimate of the amount of probable credit losses in existing accounts
receivable and anticipated sales returns. The Company determines the
allowances based on historical write-off experience by industry and regional
economic data and historical sales returns. The Company reviews the allowance
for doubtful accounts monthly. The Company does not have any significant
off-balance-sheet credit exposure related to its customers.
Advertising and merchandising: These costs are charged to operations in the
period incurred, and totaled $411 million in 2017, $385 million in 2016 and
$368 million in 2015.
Research, development and related expenses: These costs are charged to
operations in the period incurred and are shown on a separate line of the
Consolidated Statement of Income. Research, development and related expenses
totaled $1.850 billion in 2017, $1.735 billion in 2016 and $1.763 billion in
2015. Research and development expenses, covering basic scientific research
and the application of scientific advances in the development of new and
improved products and their uses, totaled $1.335 billion in 2017, $1.225
billion in 2016 and $1.223 billion in 2015. Related expenses primarily include
technical support; internally developed patent costs, which include costs and
fees incurred to prepare, file, secure and maintain patents; amortization of
externally acquired patents and externally acquired in-process research and
development; and gains/losses associated with certain corporate approved
investments in R&D-related ventures, such as equity method effects and
impairments.
Internal-use software: The Company capitalizes direct costs of services used
in the development of, and external software acquired for use as, internal-use
software. Amounts capitalized are amortized over a period of three to seven
years, generally on a straight-line basis, unless another systematic and
rational basis is more representative of the software's use. Amounts are
reported as a component of either machinery and equipment or capital leases
within property, plant and equipment. Fully depreciated internal-use software
assets are removed from property, plant and equipment and accumulated
depreciation accounts.
Environmental: Environmental expenditures relating to existing conditions
caused by past operations that do not contribute to current or future revenues
are expensed. Reserves for liabilities related to anticipated remediation
costs are recorded on an undiscounted basis when they are probable and
reasonably estimable, generally no later than the completion of feasibility
studies, the Company's commitment to a plan of action, or approval by
regulatory agencies. Environmental expenditures for capital projects that
contribute to current or future operations generally are capitalized and
depreciated over their estimated useful lives.
Income taxes: The provision for income taxes is determined using the asset and
liability approach. Under this approach, deferred income taxes represent the
expected future tax consequences of temporary differences between the carrying
amounts and tax basis of assets and liabilities. The Company records a
valuation allowance to reduce its deferred tax assets when uncertainty
regarding their realizability exists. As of December 31, 2017 and 2016, the
Company had valuation allowances of $81 million and $47 million on its
deferred tax assets, respectively. The increase in valuation allowance at
December 31, 2017 relates to certain U.S. and international jurisdictions with
taxable loss or tax credit carryforwards that are expected to expire prior to
utilization. The Company recognizes and measures its uncertain tax positions
based on the rules under ASC 740, Income Taxes.
Earnings per share: The difference in the weighted average 3M shares
outstanding for calculating basic and diluted earnings per share attributable
to 3M common shareholders is the result of the dilution associated with the
Company's stock-based compensation plans. Certain options outstanding under
these stock-based compensation plans during the years 2017, 2016 and 2015 were
not included in the computation of diluted earnings per share attributable to
3M common shareholders because they would have had an anti-dilutive effect
(0.8 million average options for 2017, 3.6 million average options for 2016,
and 5.0 million average options for 2015). The computations for basic and
diluted earnings per share for the years ended December 31 follow:
Earnings Per Share Computations
(Amounts in millions, except per share amounts) 2017 2016
- More to follow, for following part double click ID:nRSM6559Ef primarily due to
May 2016 debt issuances (approximately $1.1 billion at issue date exchange rates) and September 2016 debt issuances of
approximately $1.75 billion. This increase was partially offset by the repayment of $1 billion aggregate principal amount
of medium-term notes due September 2016 along with the net impact of repayments and borrowings by international
subsidiaries, primarily Japan and Korea (approximately $0.8 million decrease), which is reflected in "Change in short-term
debt-net" in the preceding table. Foreign exchange rate changes also impacted debt balances.
Proceeds from debt for 2016 primarily related to the May 2016 issuance of 500 million Euro aggregate principal amount of
5.75-year fixed rate medium-term notes due February 2022 with a coupon rate of 0.375% and 500 million Euro aggregate
principal amount of 15-year fixed rate medium-term notes due 2031 with a coupon rate of 1.50%. In September 2016, 3M issued
$600 million aggregate principal amount of five-year fixed rate medium-term notes due 2021 with a coupon rate of 1.625%,
$650 million aggregate principal amount of 10-year fixed rate medium-term notes due 2026 with a coupon rate of 2.250%, and
$500 million aggregate principal amount of 30-year fixed rate medium-term notes due 2046 with a coupon rate of 3.125%. All
of these 2016 issuances were under the medium-term notes program (Series F).
2015 Debt Activity:
In 2015, the change in short-term debt primarily related to bank borrowings by international subsidiaries, primarily Japan
and Korea. Repayment of debt primarily related to debt assumed (and paid off) as part of the Capital Safety acquisition.
Proceeds from debt primarily related to the May 2015 issuance of 650 million Euros aggregate principal amount of five-year
floating rate medium-term notes due 2020, 600 million Euros aggregate principal amount of eight-year fixed rate medium-term
notes due 2023, and 500 million Euros aggregate principal amount of fifteen-year fixed rate medium-term notes due 2030,
which in the aggregate total approximately $1.9 billion at issue date exchange rates. In addition, August 2015 issuances
included $450 million aggregate principal amount of three-year fixed rate medium-term notes due 2018, $500 million
aggregate principal amount of five-year fixed rate medium-term notes due 2020, and $550 million aggregate principal amount
of 10-year fixed rate medium-term notes due 2025, which in aggregate total $1.5 billion.
Repurchases of Common Stock:
Repurchases of 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. This authorization 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 and $5.2 billion in 2016 and 2015, respectively. The Company
expects full-year 2018 gross share repurchases to be between $2.0 billion to $5.0 billion. For more information, refer to
the table titled "Issuer Purchases of Equity Securities" in Part II, Item 5. The Company does not utilize derivative
instruments linked to the Company's stock.
Dividends Paid to Shareholders:
Cash dividends paid to shareholders totaled $2.803 billion ($4.70 per share) in 2017, $2.678 billion ($4.44 per share) in
2016, and $2.561 billion ($4.10 per share) in 2015. 3M has paid dividends since 1916. 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 is equivalent to an
annual dividend of $5.44 per share and marked the 60th consecutive year of dividend increases.
Other cash flows from financing activities may include various other items, such as changes in cash overdraft balances, and
principal payments for capital leases. In addition, in 2017, this included a payment related to the $96 million in interest
expense associated with premiums and fees for the early retirement of debt. See Note 11 for additional details.
Free Cash Flow (non-GAAP measure):
Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting principles (GAAP).
Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP
and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net
cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the
entire free cash flow amount is available for discretionary expenditures. The Company defines free cash flow conversion as
free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flow conversion
are meaningful to investors as they are useful measures of performance and the Company uses these measures as an indication
of the strength of the company and its ability to generate cash. The first quarter of each year is typically 3M's seasonal
low for free cash flow and free cash flow conversion. Below find a recap of free cash flow and free cash flow conversion
for 2017, 2016 and 2015.
In 2017, free cash flow conversion was impacted by enactment of the TCJA, along with an additional U.S. pension
contribution of $600 million that 3M made following the signing of tax reform. On a combined basis, these items benefited
free cash flow conversion by 3 percentage points. Refer to the preceding "Cash Flows from Operating Activities" section for
discussion of additional items that impacted operating cash flow. Refer to the preceding "Cash Flows from Investing
Activities" section for discussion on capital spending for property, plant and equipment.
Years ended December 31
(Millions) 2017 2016 2015
Major GAAP Cash Flow Categories
Net cash provided by operating activities $ 6,240 $ 6,662 $ 6,420
Net cash provided by (used in) investing activities (3,086) (1,403) (2,817)
Net cash used in financing activities (2,655) (4,626) (3,648)
Free Cash Flow (non-GAAP measure)
Net cash provided by operating activities $ 6,240 $ 6,662 $ 6,420
Purchases of property, plant and equipment (PP&E) (1,373) (1,420) (1,461)
Free cash flow $ 4,867 $ 5,242 $ 4,959
Net income attributable to 3M $ 4,858 $ 5,050 $ 4,833
Free cash flow conversion 100 % 104 % 103 %
Off-Balance Sheet Arrangements and Contractual Obligations:
As of December 31, 2017, the Company has not utilized special purpose entities to facilitate off-balance sheet financing
arrangements. Refer to the section entitled "Warranties/Guarantees" in Note 15 for discussion of accrued product warranty
liabilities and guarantees.
In addition to guarantees, 3M, in the normal course of business, periodically enters into agreements that require the
Company to indemnify either major customers or suppliers for specific risks, such as claims for injury or property damage
arising out of the use of 3M products or the negligence of 3M personnel, or claims alleging that 3M products infringe
third-party patents or other intellectual property. While 3M's maximum exposure under these indemnification provisions
cannot be estimated, these indemnifications are not expected to have a material impact on the Company's consolidated
results of operations or financial condition.
A summary of the Company's significant contractual obligations as of December 31, 2017, follows:
Contractual Obligations
Payments due by year
After
(Millions) Total 2018 2019 2020 2021 2022 2022
Total debt (Note 11) $ 13,949 $ 1,853 $ 692 $ 1,368 $ 1,333 $ 1,191 $ 7,512
Interest on long-term debt 3,375 269 256 251 241 212 2,146
Operating leases (Note 15) 1,098 258 212 160 106 88 274
Capital leases (Note 15) 76 12 10 9 6 5 34
Tax Cuts and Jobs Act (TCJA) transition tax payments (Note 9) 745 122 59 59 59 111 335
Unconditional purchase obligations and other 1,561 1,032 211 150 99 56 13
Total contractual cash obligations $ 20,804 $ 3,546 $ 1,440 $ 1,997 $ 1,844 $ 1,663 $ 10,314
Long-term debt payments due in 2018, 2019, and 2020 include floating rate notes totaling $54 million, $71 million, and $95
million, respectively, as a result of put provisions associated with these debt instruments.
During the fourth quarter of 2017, 3M recorded a net tax expense related to the enactment of the Tax Cuts and Jobs Act
(TCJA). The expense is primarily related to the TCJA's transition tax. The transition tax is payable over 8 years at the
election of the taxpayer. As discussed in Note 9, this balance is a provisional amount and 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.
Unconditional purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally
binding on the Company. Included in the unconditional purchase obligations category above are certain obligations related
to take or pay contracts, capital commitments, service agreements and utilities. These estimates include both unconditional
purchase obligations with terms in excess of one year and normal ongoing purchase obligations with terms of less than one
year. Many of these commitments relate to take or pay contracts, in which 3M guarantees payment to ensure availability of
products or services that are sold to customers. The Company expects to receive consideration (products or services) for
these unconditional purchase obligations. Contractual capital commitments are included in the preceding table, but these
commitments represent a small part of the Company's expected capital spending. The purchase obligation amounts do not
represent the entire anticipated purchases in the future, but represent only those items for which the Company is
contractually obligated. The majority of 3M's products and services are purchased as needed, with no unconditional
commitment. For this reason, these amounts will not provide a reliable indicator of the Company's expected future cash
outflows on a stand-alone basis.
Other obligations, included in the preceding table within the caption entitled "Unconditional purchase obligations and
other," include the current portion of the liability for uncertain tax positions under ASC 740, which is expected to be
paid out in cash in the next 12 months. The Company is not able to reasonably estimate the timing of the long-term
payments, other than the transition tax prescribed under the Tax Cuts and Jobs Act (TCJA) which is separately included in
the table above, or the amount by which the liability will increase or decrease over time; therefore, the long-term portion
of the net tax liability of $523 million is excluded from the preceding table. Refer to Note 9 for further details.
As discussed in Note 12, the Company does not have a required minimum cash pension contribution obligation for its U.S.
plans in 2018 and Company contributions to its U.S. and international pension plans are expected to be largely
discretionary in future years; therefore, amounts related to these plans are not included in the preceding table.
FINANCIAL INSTRUMENTS
The Company enters into foreign exchange forward contracts, options and swaps to hedge against the effect of exchange rate
fluctuations on cash flows denominated in foreign currencies and certain intercompany financing transactions. The Company
manages interest rate risks using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may
enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the
difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.
The Company manages commodity price risks through negotiated supply contracts, price protection agreements and commodity
price swaps.
Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", for further discussion of foreign exchange
rates risk, interest rates risk, commodity prices risk and value at risk analysis.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the context of Item 7A, 3M is exposed to market risk due to the risk of loss arising from adverse changes in foreign
currency exchange rates, interest rates and commodity prices. Changes in those factors could cause fluctuations in earnings
and cash flows. Senior management provides oversight for risk management and derivative activities, determines certain of
the Company's financial risk policies and objectives, and provides guidelines for derivative instrument utilization. Senior
management also establishes certain associated procedures relative to control and valuation, risk analysis, counterparty
credit approval, and ongoing monitoring and reporting.
The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps, currency
swaps, commodity price swaps, and forward and option contracts. However, the Company's risk is limited to the fair value of
the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit
limits, and by selecting major international banks and financial institutions as counterparties. The Company does not
anticipate nonperformance by any of these counterparties.
Foreign Exchange Rates Risk:
Foreign currency exchange rates and fluctuations in those rates may affect the Company's net investment in foreign
subsidiaries and may cause fluctuations in cash flows related to foreign denominated transactions. 3M is also exposed to
the translation of foreign currency earnings to the U.S. dollar. The Company enters into foreign exchange forward and
option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies.
These transactions are designated as cash flow hedges. 3M may dedesignate these cash flow hedge relationships in advance of
the occurrence of the forecasted transaction. The maximum length of time over which 3M hedges its exposure to the
variability in future cash flows of the forecasted transactions is 36 months. In addition, 3M enters into foreign currency
forward contracts that are not designated in hedging relationships to offset, in part, the impacts of certain intercompany
activities (primarily associated with intercompany licensing arrangements and intercompany financing transactions). As
circumstances warrant, the Company also uses foreign currency forward contracts and foreign currency denominated debt as
hedging instruments to hedge portions of the Company's net investments in foreign operations. The dollar equivalent gross
notional amount of the Company's foreign exchange forward and option contracts designated as either cash flow hedges or net
investment hedges was $3.6 billion at December 31, 2017. The dollar equivalent gross notional amount of the Company's
foreign exchange forward and option contracts not designated as hedging instruments was $5.0 billion at December 31, 2017.
In addition, as of December 31, 2017, the Company had 4.4 billion Euros in principal amount of foreign currency denominated
debt designated as non-derivative hedging instruments in certain net investment hedges as discussed in Note 13 in the "Net
Investment Hedges" section.
Interest Rates Risk:
The Company may be impacted by interest rate volatility with respect to existing debt and future debt issuances. 3M manages
interest rate risk and expense using a mix of fixed and floating rate debt. In addition, the Company may enter into
interest rate swaps that are designated and qualify as fair value hedges. Under these arrangements, the Company agrees to
exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an
agreed-upon notional principal amount. The dollar equivalent (based on inception date foreign currency exchange rates)
gross notional amount of the Company's interest rate swaps at December 31, 2017 was $2.0 billion. Additional details about
3M's long-term debt can be found in Note 11, including references to information regarding derivatives and/or hedging
instruments, further discussed in Note 13, associated with the Company's long-term debt.
Commodity Prices Risk:
The Company manages commodity price risks through negotiated supply contracts, price protection agreements and commodity
price swaps. 3M used commodity price swaps as cash flow hedges of forecasted commodity transactions to manage price
volatility, but discontinued this practice in the first quarter of 2015. The related mark-to-market gain or loss on
qualifying hedges was included in other comprehensive income to the extent effective, and reclassified into cost of sales
in the period during which the hedged transaction affected earnings. The Company may enter into other commodity price swaps
to offset, in part, fluctuation and costs associated with the use of certain commodities and precious metals. These
instruments are not designated in hedged relationships and the extent to which they were outstanding at December 31, 2017
was not material.
Value At Risk:
The value at risk analysis is performed annually to assess the Company's sensitivity to changes in currency rates, interest
rates, and commodity prices. A Monte Carlo simulation technique was used to test the impact on after-tax earnings related
to financial instruments (primarily debt), derivatives and underlying exposures outstanding at December 31, 2017. The model
(third-party bank dataset) used a 95 percent confidence level over a 12-month time horizon. The exposure to changes in
currency rates model used 9 currencies, interest rates related to two currencies, and commodity prices related to five
commodities. This model does not purport to represent what actually will be experienced by the Company. This model does not
include certain hedge transactions, because the Company believes their inclusion would not materially impact the results.
The following table summarizes the possible adverse and positive impacts to after-tax earnings related to these exposures.
Adverse impact on after-tax Positive impact on after-tax
earnings earnings
(Millions) 2017 2016 2017 2016
Foreign exchange rates $ (242) $ (245) $ 253 $ 264
Interest rates (15) (13) 14 (2)
Commodity prices (3) (2) 3 1
In addition to the possible adverse and positive impacts discussed in the preceding table related to foreign exchange
rates, recent historical information is as follows. 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. This estimate includes
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.
An analysis of the global exposures related to purchased components and materials is performed at each year-end. A one
percent price change would result in a pre-tax cost or savings of approximately $75 million per year. The global energy
exposure is such that a ten percent price change would result in a pre-tax cost or savings of approximately $40 million per
year. Global energy exposure includes energy costs used in 3M production and other facilities, primarily electricity and
natural gas.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
A complete summary of Form 10-K content, including the index to financial statements, is found at the beginning of this
document.
Management's Responsibility for Financial Reporting
Management is responsible for the integrity and objectivity of the financial information included in this report. The
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America. Where necessary, the financial statements reflect estimates based on management's judgment.
Management has established and maintains a system of internal control over financial reporting for the Company and its
subsidiaries. This system and its established accounting procedures and related controls are designed to provide reasonable
assurance that assets are safeguarded, that the books and records properly reflect all transactions, that policies and
procedures are implemented by qualified personnel, and that published financial statements are properly prepared and fairly
presented. The Company's system of internal control over financial reporting is supported by widely communicated written
policies, including business conduct policies, which are designed to require all employees to maintain high ethical
standards in the conduct of Company affairs. Internal auditors continually review the accounting and control system.
3M Company
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting.
Management conducted an assessment of the Company's internal control over financial reporting based on the framework
established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated
Framework (2013). Management's assessment of the effectiveness of the Company's internal control over financial reporting
as of December 31, 2017 excluded Scott Safety, which was acquired by the Company in October 2017 in a purchase business
combination. Scott Safety is a wholly-owned subsidiary whose total assets and total net sales both represented less than 1
percent of the Company's consolidated financial statement amounts as of and for the year ended December 31, 2017. Companies
are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first
year of acquisition while integrating the acquired company under guidelines established by the Securities and Exchange
Commission. Based on the assessment, management concluded that, as of December 31, 2017, the Company's internal control
over financial reporting is effective.
The Company's internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report which is included herein, which expresses
an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31,
2017.
3M Company
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of 3M Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of 3M Company and its subsidiaries as of December 31, 2017 and
2016, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of
the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the
"consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to
express opinions on the Company's consolidated financial statements and on the Company's internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained
in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.
As described in Management's Report on Internal Control over Financial Reporting, management has excluded Scott Safety from
its assessment of internal control over financial reporting as of December 31, 2017 because it was acquired by the Company
in a purchase business combination during 2017. We have also excluded Scott Safety from our audit of internal control over
financial reporting. Scott Safety is a wholly-owned subsidiary whose total assets and total net sales excluded from
management's assessment and our audit of internal control over financial reporting both represent less than 1 percent of
the related consolidated financial statement amounts as of and for the year ended December 31, 2017.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 8, 2018
We have served as the Company's auditor since 1975.
3M Company and Subsidiaries
Consolidated Statement of Income
Years ended December 31
(Millions, except per share amounts) 2017 2016 2015
Net sales $ 31,657 $ 30,109 $ 30,274
Operating expenses
Cost of sales 16,001 15,040 15,383
Selling, general and administrative expenses 6,572 6,222 6,229
Research, development and related expenses 1,850 1,735 1,763
Gain on sale of businesses (586) (111) (47)
Total operating expenses 23,837 22,886 23,328
Operating income 7,820 7,223 6,946
Other expense (income), net 272 170 123
Income before income taxes 7,548 7,053 6,823
Provision for income taxes 2,679 1,995 1,982
Net income including noncontrolling interest $ 4,869 $ 5,058 $ 4,841
Less: Net income attributable to noncontrolling interest 11 8 8
Net income attributable to 3M $ 4,858 $ 5,050 $ 4,833
Weighted average 3M common shares outstanding - basic 597.5 604.7 625.6
Earnings per share attributable to 3M common shareholders - basic $ 8.13 $ 8.35 $ 7.72
Weighted average 3M common shares outstanding - diluted 612.7 618.7 637.2
Earnings per share attributable to 3M common shareholders - diluted $ 7.93 $ 8.16 $ 7.58
Cash dividends paid per 3M common share $ 4.70 $ 4.44 $ 4.10
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
3M Company and Subsidiaries
Consolidated Statement of Comprehensive Income
Years ended December 31
(Millions) 2017 2016 2015
Net income including noncontrolling interest $ 4,869 $ 5,058 $ 4,841
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment 373 (331) (586)
Defined benefit pension and postretirement plans adjustment 52 (524) 489
Cash flow hedging instruments, unrealized gain (loss) (203) (33) 25
Total other comprehensive income (loss), net of tax 222 (888) (72)
Comprehensive income (loss) including noncontrolling interest 5,091 4,170 4,769
Comprehensive (income) loss attributable to noncontrolling interest (14) (6) (6)
Comprehensive income (loss) attributable to 3M $ 5,077 $ 4,164 $ 4,763
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
3M Company and Subsidiaries
Consolidated Balance Sheet
At December 31
December 31, December 31,
(Dollars in millions, except per share amount) 2017 2016
Assets
Current assets
Cash and cash equivalents $ 3,053 $ 2,398
Marketable securities - current 1,076 280
Accounts receivable - net of allowances of $103 and $88 4,911 4,392
Inventories
Finished goods 1,915 1,629
Work in process 1,218 1,039
Raw materials and supplies 901 717
Total inventories 4,034 3,385
Prepaids 937 821
Other current assets 266 450
Total current assets 14,277 11,726
Property, plant and equipment 24,914 23,499
Less: Accumulated depreciation (16,048) (14,983)
Property, plant and equipment - net 8,866 8,516
Goodwill 10,513 9,166
Intangible assets - net 2,936 2,320
Other assets 1,395 1,178
Total assets $ 37,987 $ 32,906
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt $ 1,853 $ 972
Accounts payable 1,945 1,798
Accrued payroll 870 678
Accrued income taxes 310 299
Other current liabilities 2,709 2,472
Total current liabilities 7,687 6,219
Long-term debt 12,096 10,678
Pension and postretirement benefits 3,620 4,018
Other liabilities 2,962 1,648
Total liabilities $ 26,365 $ 22,563
Commitments and contingencies (Note 15)
Equity
3M Company shareholders' equity:
Common stock par value, $.01 par value $ 9 $ 9
Shares outstanding - 2017: 594,884,237
Shares outstanding - 2016: 596,726,278
Additional paid-in capital 5,352 5,061
Retained earnings 39,115 37,907
Treasury stock (25,887) (25,434)
Accumulated other comprehensive income (loss) (7,026) (7,245)
Total 3M Company shareholders' equity 11,563 10,298
Noncontrolling interest 59 45
Total equity $ 11,622 $ 10,343
Total liabilities and equity $ 37,987 $ 32,906
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
3M Company and Subsidiaries
Consolidated Statement of Changes in Equity
Years Ended December 31
3M Company Shareholders
Common Accumulated
Stock and Other
Additional Comprehensive Non-
Paid-in Retained Treasury Income controlling
(Dollars in millions, except per share amounts) Total Capital Earnings Stock (Loss) Interest
Balance at December 31, 2014 $ 12,863 $ 4,388 $ 34,038 $ (19,307) $ (6,289) $ 33
Net income 4,841 4,833 8
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (586) (584) (2)
Defined benefit pension and post-retirement plans adjustment 489 489 -
Cash flow hedging instruments - unrealized gain (loss) 25 25 -
Total other comprehensive income (loss), net of tax (72)
Dividends declared ($3.075 per share, Note 7) (1,913) (1,913)
Stock-based compensation, net of tax impacts 412 412
Reacquired stock (5,304) (5,304)
Issuances pursuant to stock option and benefit plans 641 (662) 1,303
Balance at December 31, 2015 $ 11,468 $ 4,800 $ 36,296 $ (23,308) $ (6,359) $ 39
Net income 5,058 5,050 8
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (331) (329) (2)
Defined benefit pension and post-retirement plans adjustment (524) (524) -
Cash flow hedging instruments - unrealized gain (loss) (33) (33) -
Total other comprehensive income (loss), net of tax (888)
Dividends declared ($4.44 per share, Note 7) (2,678) (2,678)
Stock-based compensation 270 270
Reacquired stock (3,699) (3,699)
Issuances pursuant to stock option and benefit plans 812 (761) 1,573
Balance at December 31, 2016 $ 10,343 $ 5,070 $ 37,907 $ (25,434) $ (7,245) $ 45
Net income 4,869 4,858 11
Other comprehensive income (loss), net of tax:
Cumulative
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