REG - 3M Company - Annual Financial Report - Part 1 <Origin Href="QuoteRef">MMM.N</Origin>
RNS Number : 6559E3M Company12 February 2018Click on, or paste the following link into your web browser, to view the associated PDF document.
http://www.rns-pdf.londonstockexchange.com/rns/6559E_-2018-2-12.pdf
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-K
x ANNUAL REPORT PURSUANT TO SECTION13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December31, 2017
Commission file number 1-3285
3M COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification No.41-0417775
Principal executive offices: 3M Center, St. Paul, Minnesota 55144
Telephone number: (651) 733-1110
SECURITIES REGISTERED PURSUANT TO SECTION12(b)OF THE ACT:
Titleofeachclass
Nameofeachexchange
onwhichregisteredCommon Stock, Par Value $.01 Per Share
Floating Rate Notes due 2018
1.500% Notes due 2026
Floating Rate Notes due 2020
0.375% Notes due 2022
0.950% Notes due 2023
1.750% Notes due 2030
1.500% Notes due 2031
New York Stock Exchange,Inc.
Chicago Stock Exchange,Inc.New York Stock Exchange, Inc.
New York Stock Exchange, Inc.
New York Stock Exchange, Inc.
New York Stock Exchange, Inc.
New York Stock Exchange, Inc.
New York Stock Exchange, Inc.
New York Stock Exchange, Inc.
Note: The common stock of the Registrant is also traded on the SWX Swiss Exchange.
Securities registered pursuant to section 12(g)of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule405 of the Securities Act. YesxNoo
Indicate by check mark if the Registrant is not required to file reports pursuant to Section13 or Section15(d)of the Act. YesoNox
Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. YesxNoo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNoo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in PartIII of this Form10-K or any amendment to this
Form10-K.x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule12b-2 of the Act). Yeso Nox
The aggregate market value of voting stock held by nonaffiliates of the Registrant, computed by reference to the closing price and shares outstanding, was approximately $149.2 billion as of January31, 2018 (approximately $124.2 billion as of June30, 2017, the last business day of the Registrant's most recently completed second quarter).
Shares of common stock outstanding at January31, 2018: 595.5 million
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Company's definitive proxy statement (to be filed pursuant to Regulation 14A within 120 days after Registrant's fiscal year-end of December31, 2017) for its annual meeting to be held on May8, 2018, are incorporated by reference in this Form10-K in response to PartIII,Items 10, 11, 12, 13 and 14.
3M COMPANY
FORM10-K
For the Year Ended December31, 2017
Pursuant to Part IV, Item 16, a summary of Form 10-K content follows, including hyperlinked cross-references (in the EDGAR filing). This allows users to easily locate the corresponding items in Form 10-K, where the disclosure is fully presented. The summary does not include certain Part III information that will be incorporated by reference from the proxy statement, which will be filed after this Form 10-K filing.
3M COMPANY
ANNUAL REPORT ON FORM10-K
For the Year Ended December31, 2017
PARTI
Item 1. Business.
3M Company was incorporated in 1929 under the laws of the State of Delaware to continue operations begun in 1902. The Company's ticker symbol is MMM. As used herein, the term "3M" or "Company" includes 3M Company and its subsidiaries unless the context indicates otherwise. In this document, for any references to Note 1 through Note 19, refer to the Notes to Consolidated Financial Statements in Item 8.
Available Information
The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company files annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Roomat 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Roomby calling the SEC at 1-800-SEC-0330.
3M also makes available free of charge through its website (http://investors.3M.com) the Company's Annual Report on Form10-K, Quarterly Reports on Form10-Q, Current Reports on Form8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.
General
3M is a diversified technology company with a global presence in the following businesses: Industrial; Safety and Graphics; Health Care; Electronics and Energy; and Consumer. 3M is among the leading manufacturers of products for many of the markets it serves. Most 3M products involve expertise in product development, manufacturing and marketing, and are subject to competition from products manufactured and sold by other technologically oriented companies.
At December31, 2017, the Company employed 91,536 people (full-time equivalents), with 36,958 employed in the United States and 54,578employed internationally.
Business Segments
As described in Notes 3 and 17, effective in the first quarter of 2017, the Company changed its business segment reporting in its continuing effort to improve the alignment of its businesses around markets and customers. 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. 3M's five business segments bring together common or related 3M technologies, enhancing the development of innovative products and services and providing for efficient sharing of business resources. Financial information and other disclosures relating to 3M's business segments and operations in major geographic areas are provided in the Notes to Consolidated Financial Statements.
Industrial Business:The Industrial segment serves a broad range of markets, such as automotive original equipment manufacturer (OEM) and automotive aftermarket (auto body shops and retail), electronics and automotive electrification, appliance, paper and printing, packaging, food and beverage, and construction. Industrial products include tapes, a wide variety of coated, non-woven and bonded abrasives, adhesives, advanced ceramics, sealants, specialty materials, purification (filtration products), closure systems for personal hygiene products, acoustic systems products, and components and products that are used in the manufacture, repair and maintenance of automotive, marine, aircraft and specialty vehicles. 3M is also a leading global supplier of precision grinding technology serving customers in the area of hard-to-grind precision applications in industrial, automotive, aircraft and cutting tools. 3M develops and produces advanced technical ceramics for demanding applications in the automotive, oil and gas, solar, industrial, electronics and defense industries. In August 2015, 3M acquired assets and liabilities associated with Polypore International, Inc.'s Separations Media business, a leading provider of microporous membranes and modules for filtration in the life sciences, industrial and specialty segments. In the first quarter of 2016, 3M sold the assets of its pressurized polyurethane foam adhesives business, and in October 2016 sold the assets of its adhesive-backed temporary protective films business.
Major industrial products include vinyl, polyester, foil and specialty industrial tapes and adhesives; Scotch Masking Tape, Scotch Filament Tape and Scotch Packaging Tape; packaging equipment; 3M VHB Bonding Tapes; conductive, low surface energy, sealants, hot melt, spray and structural adhesives; reclosable fasteners; label materials for durable goods; coated, nonwoven and microstructured surface finishing and grinding abrasives for the industrial market; a comprehensive line of filtration products for the separation, clarification and purification of fluids and gases; and fluoroelastomers for seals, tubes and gaskets in engines.
Major industrial products used in the transportation industry include insulation components, including Thinsulate Acoustic Insulation and components for cabin noise reduction and catalytic converters; functional and decorative graphics; abrasion-resistant films; adhesives; sealants; masking tapes; fasteners and tapes for attaching nameplates, trim, moldings, interior panels and carpeting; coated, nonwoven and microstructured finishing and grinding abrasives; structural adhesives; and other specialty materials. In addition, 3M provides paint finishing and detailing products, including a complete system of cleaners, dressings, polishes, waxes and other products.
Safety and Graphics Business: The Safety and Graphics segment serves a broad range of markets that increase the safety and productivity of people, facilities and systems. Major product offerings include personal protection products, such as respiratory, hearing, eye and fall protection equipment; commercial solutions, including commercial graphics sheeting and systems, architectural design solutions for surfaces, and cleaning and protection products for commercial establishments; transportation safety solutions, such as retroreflective sign sheeting; and roofing granules for asphalt shingles. In August 2015, 3M acquired Capital Safety Group S.A.R.L., a leading global provider of fall protection equipment. As discussed in Note 2, in October 2017, 3M completed the acquisition of the underlying legal entities and associated assets of Scott Safety, a premier manufacturer of innovative products, including self-contained breathing apparatus systems, gas and flame detection instruments, and other safety devices that complement 3M's personal safety portfolio. In January 2017, 3M sold the assets of its safety prescription eyewear business.
This segment's products include personal protection products, such as certain disposable and reusable respirators, fall protection equipment, personal protective equipment, head and face protection, body protection, hearing protection and protective eyewear, plus reflective materials that are widely used on apparel, footwear and accessories, enhancing visibility in low-light situations.
Major commercial graphics products include films, inks, and related products used to produce graphics for vehicles, signs and interior surfaces.
In transportation safety, 3M provides reflective sheeting used on highway signs, vehicle license plates, construction work-zone devices, trucks and other vehicles, and also provides pavement marking systems. In December 2015, 3M sold Faab Fabricauto, a French manufacturer of license plates and signage solutions, and in the first quarter of 2016 completed the sale of its library systems business. As discussed in Note 2, in May 2017, 3M completed the related sale or transfer of control, as applicable, of its identity management business. In June 2017, 3M also completed the sale of its tolling and automated license/number plate recognition business and in October 2017, sold its electronic monitoring business.
Other segment products include spill-control sorbents; nonwoven abrasive materials for floor maintenance and commercial cleaning; floor matting; and natural and color-coated mineral granules for asphalt shingles.
Health Care Business:The Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, dental and orthodontic practitioners, health information systems, and food manufacturing and testing. Products and services provided to these and other markets include medical and surgical supplies, skin health and infection prevention products, oral care solutions (dental and orthodontic products), health information systems, inhalation and transdermal drug delivery systems, and food safety products. In March 2015, 3M acquired Ivera Medical Corp., a manufacturer of health care products that disinfect and protect devices used for access into a patient's bloodstream.
In advanced wound management, 3M is a supplier of medical tapes, dressings, wound closure products, orthopedic casting materials, in addition to acute wound care, skin integrity and disinfecting port protection products. In infection prevention, 3M markets a variety of surgical drapes, masks and preps, electrodes, stethoscopes, as well as sterilization assurance equipment and patient warming solutions designed to prevent hypothermia in surgical settings. Other products include drug delivery systems, such as metered-dose inhalers, transdermal skin patches and related components. Oral care solutions include restoratives, adhesives, finishing and polishing products, crowns, impression materials, preventive sealants, professional tooth whiteners, prophylaxis and orthodontic appliances, as well as digital workflow solutions to transform traditional impression and analog processes. In health information systems, 3M develops and markets computer software for hospital coding and data classification, and provides related consulting services. 3M provides food safety products that make it faster and easier for food processors to test the microbiological quality of food. As discussed in Note 2, in September 2017, 3M purchased all of the ownership interests of Elution Technologies, LLC, a Vermont-based manufacturer of test kits that help enable food and beverage companies ensure their products are free from certain potentially harmful allergens such as peanuts, soy or milk.
Electronics and Energy Business: The Electronics and Energy segment serves customers in electronics and energy markets, including solutions that improve the dependability, cost-effectiveness, and performance of electronic devices; electrical products, including infrastructure protection; telecommunications networks; and power generation and distribution.
This segment's electronics solutions include the display materials and systems business, which provides films that serve numerous market segments of the electronic display industry. 3M provides distinct products for five market segments, including products for: 1) LCD computer monitors 2) LCD televisions 3) handheld devices such as cellular phones and tablets 4) notebook PCs and 5) automotive displays. This segment also provides desktop and notebook computer screen filters that address display light control, privacy, and glare reduction needs. Major electronics products also include packaging and interconnection devices; high performance fluids and abrasives used in the manufacture of computer chips, and for cooling electronics and lubricating computer hard disk drives; and high-temperature and display tapes. Flexible circuits use electronic packaging and interconnection technology, providing more connections in less space, and are used in ink-jet printer cartridges, cell phones and electronic devices. This segment also includes touch systems products, including touch screens, touch monitors, and touch sensor components. In December 2016, 3M sold the assets of its cathode battery technology out-licensing business.
This segment's energy solutions include electrical products, including infrastructure protection, telecommunications, and renewable energy. This segment serves the world's electrical and telecommunications markets, including electrical utilities, electrical construction, maintenance and repair, original equipment manufacturers (OEM), telecommunications central office, outside plant and enterprise, as well as aerospace, military, automotive and medical markets, with products that enable the efficient transmission of electrical power and speed the delivery of information. Products in this segment include pressure sensitive tapes and resins, electrical insulation, a wide array of fiber-optic and copper-based telecommunications systems for rapid deployment of fixed and wireless networks, as well as the 3M Aluminum Conductor Composite Reinforced (ACCR) electrical power cable that increases transmission capacity for existing power lines. This segment also includes renewable energy component solutions for the solar and wind power industries, as well as infrastructure products solutions that provide municipalities both protection and detection solutions for electrical, oil, natural gas, water, rebar and other infrastructure assets.
Consumer Business: The Consumer segment serves markets that include consumer retail, office retail, office business to business, home improvement, drug and pharmacy retail, and other markets. Products in this segment include office supply products, stationery products, home improvement products (do-it-yourself), home care products, protective material products, certain consumer retail personal safety products, and consumer health care products.
Major consumer products include Scotch brand products, such as Scotch Magic Tape, Scotch Glue Stick and Scotch Cushioned Mailer; Post-it Products, such as Post-it Flags, Post-it Note Pads, Post-it Labeling& Cover-up Tape, and Post-it Pop-up Notes and Dispensers; home improvement products, including surface-preparation and wood-finishing materials, Command Adhesive Products and Filtrete Filters for furnaces and air conditioners; home care products, including Scotch-Brite Scour Pads, Scotch-Brite Scrub Sponges, Scotch-Brite Microfiber Cloth products, O-Cel-O Sponges; protective material products, such as Scotchgard Fabric Protectors; certain maintenance-free respirators; certain consumer retail personal safety products, including safety glasses, hearing protectors, and 3M Thinsulate Insulation, which is used in jackets, pants, gloves, hats and boots to keep people warm; Nexcare Adhesive Bandages; and ACE branded (and related brands) elastic bandage, supports and thermometer product lines.
Distribution
3M products are sold through numerous distribution channels, including directly to users and through numerous wholesalers, retailers, jobbers, distributors and dealers in a wide variety of trades in many countries around the world. Management believes the confidence of wholesalers, retailers, jobbers, distributors and dealers in 3M and its products - a confidence developed through long association with skilled marketing and sales representatives - has contributed significantly to 3M's position in the marketplace and to its growth.
Research and Patents
Research and product development constitutes an important part of 3M's activities and has been a major driver of 3M's sales and profit growth. 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, 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.
The Company's products are sold around the world under various trademarks. The Company also owns, or holds licenses to use, numerous U.S. and foreign patents. The Company's research and development activities generate a steady stream of inventions that are covered by new patents. Patents applicable to specific products extend for varying periods according to the date of patent application filing or patent grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country.
The Company believes that its patents provide an important competitive advantage in many of its businesses. In general, no single patent or group of related patents is in itself essential to the Company as a whole or to any of the Company's business segments.
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.
Environmental Law Compliance
3M's manufacturing operations are affected by national, state and local environmental laws around the world. 3M has made, and plans to continue making, necessary expenditures for compliance with applicable laws. 3M is also involved in remediation actions relating to environmental matters from past operations at certain sites (refer to "Environmental Matters and Litigation" in Note 15, Commitments and Contingencies).
Environmental expenditures relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed. Reserves for liabilities for 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.
In 2017, 3M expended about $33 million for capital projects related to protecting the environment. This amount excludes expenditures for remediation actions relating to existing matters caused by past operations that do not contribute to current or future revenues, which are expensed. Capital expenditures for environmental purposes have included pollution control devices - such as wastewater treatment plant improvements, scrubbers, containment structures, solvent recovery units and thermal oxidizers - at new and existing facilities constructed or upgraded in the normal course of business. Consistent with the Company's emphasis on environmental responsibility, capital expenditures (other than for remediation projects) for known projects are presently expected to be about $66 million over the next two years for new or expanded programs to build facilities or modify manufacturing processes to minimize waste and reduce emissions.
While the Company cannot predict with certainty the future costs of such cleanup activities, capital expenditures or operating costs for environmental compliance, the Company does not believe they will have a material effect on its capital expenditures, earnings or competitive position.
Executive Officers
Following is a list of the executive officers of 3M, and their age, present position, the year elected to their present position and other positions they have held during the past five years. No family relationships exist among any of the executive officers named, nor is there any undisclosed arrangement or understanding pursuant to which any person was selected as an officer. This information is presented in the table below as of the date of the 10-K filing (February8, 2018).
Name
Age
PresentPosition
Year Elected
to Present
PositionOtherPositionsHeldDuring2013-2017
Inge. G. Thulin
64
Chairman of the Board, President and Chief Executive Officer
2012
John P. Banovetz
50
Senior Vice President, Research and Development and Chief Technology Officer
2017
Managing Director, DACH Region, 2016-2017
Vice President, Corporate Research Laboratory, Research and Development, 2015-2016
Global Business Director, Industrial Adhesives and Tapes Division, 2012-2015
James L. Bauman
58
Executive Vice President, Industrial Business Group
2017
Executive Vice President, Electronics and Energy Business Group, 2015-2017
Senior Vice President, Business Transformation, Americas, 2015
Senior Vice President, Asia Pacific, 2012-2014
Julie L. Bushman
56
Executive Vice President, International Operations
2017
Senior Vice President, Business Transformation and Information Technology, 2013-2017
Executive Vice President, Safety and Graphics, 2012-2013
Name
Age
PresentPosition
Year Elected
to Present
PositionOtherPositionsHeldDuring2013-2017
Joaquin Delgado
57
Executive Vice President, Consumer Business Group
2016
Executive Vice President, Health Care Business Group 2012-2016
Ivan K. Fong
56
Senior Vice President, Legal Affairs and General Counsel
2012
Nicholas C. Gangestad
53
Senior Vice President and Chief Financial Officer
2014
Vice President, Corporate Controller and Chief Accounting Officer, 2011-2014
Eric D. Hammes
43
Senior Vice President, Business Transformation & Information Technology
2017
Vice President, Corporate Controller and Chief Accounting Officer, 2014-2017
Vice President, Finance, International and Staff Operations, 2013-2014
Finance Director, Health Care Business, 2012-2013
Paul A. Keel
48
Senior Vice President, Business Development and Marketing-Sales
2017
Senior Vice President, Supply Chain, 2014-2017
Managing Director, 3M United Kingdom-Ireland Region, 2013-2014
Vice President and General Manager, Skin and Wound Care Division, 2010-2013
Ashish K. Khandpur
50
Executive Vice President, Electronics & Energy Business Group
2017
Senior Vice President, Research and Development, and Chief Technology Officer, 2014-2017
Vice President and General Manager, Personal Safety Division, 2014
Vice President, Research and Development, Industrial Business Group, 2013
Jon T. Lindekugel
53
Senior Vice President, Supply Chain
2017
Senior Vice President, Business Development and Marketing-Sales, 2015-2017
Senior Vice President, Business Development, 2014-2015
President, Health Information Systems Inc., 2008-2014
Frank R. Little
57
Executive Vice President, Safety and Graphics Business Group
2013
Vice President and General Manager, Personal Safety Division, 2013
Kristen M. Ludgate
55
Senior Vice President, Corporate Communications and Enterprise Services
2018
Vice President, Global Human Resources Business Operations, Human Resources, 2017-2018
Vice President, Associate General Counsel and Chief Compliance Officer, Compliance and Business Conduct, 2015-2017
Associate General Counsel, Labor and Employment, Office of General Counsel, 2013-2015
Marlene M. McGrath
55
Senior Vice President, Human Resources
2012
Michael F. Roman
58
Chief Operating Officer and Executive Vice President
2017
Executive Vice President, Industrial Business Group, 2014-2017
Senior Vice President, Business Development, 2013-2014
Vice President and General Manager, Industrial Adhesives and Tapes Division, 2011-2013
Hak Cheol Shin
60
Vice Chair and Executive Vice President
2017
Executive Vice President, International Operations, 2011-2017
Michael G. Vale
51
Executive Vice President, Health Care Business Group
2016
Executive Vice President, Consumer Business Group, 2012-2016
Cautionary Note Concerning Factors That MayAffect Future Results
This Annual Report on Form10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to shareholders and in press releases. In addition, the Company's representatives may from time to time make oral forward-looking statements.
Forward-looking statements relate to future events and typically address the Company's expected future business and financial performance. Words such as "plan," "expect," "aim," "believe," "project," "target," "anticipate," "intend," "estimate," "will," "should," "could," "forecast" and other words and terms of similar meaning, typically identify such forward-looking statements. In particular, these include, among others, statements relating to:
the Company's strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance, and market position,
worldwide economic, political, and capital markets conditions, such as interest rates, foreign currency exchange rates, financial conditions of our suppliers and customers, and natural and other disasters or climate change affecting the operations of the Company or our suppliers and customers,
new business opportunities, product development, and future performance or results of current or anticipated products,
the scope, nature or impact of acquisition, strategic alliance and divestiture activities,
the outcome of contingencies, such as legal and regulatory proceedings,
future levels of indebtedness, common stock repurchases and capital spending,
future availability of and access to credit markets,
pension and postretirement obligation assumptions and future contributions,
asset impairments,
tax liabilities,
information technology security, and
the effects of changes in tax (including the newly enacted Tax Cuts and Jobs Act), environmental and other laws and regulations in the United States and other countries in which we operate.
The Company assumes no obligation to update or revise any forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those reflected in any such forward-looking statements depending on a variety of factors. Important information as to these factors can be found in this document, including, among others, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings of "Overview," "Financial Condition and Liquidity" and annually in "Critical Accounting Estimates." Discussion of these factors is incorporated by reference from PartI,Item 1A, "Risk Factors," of this document, and should be considered an integral part of PartII,Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." For additional information concerning factors that may cause actual results to vary materially from those stated in the forward-looking statements, see our reports on Form10-K, 10-Q and 8-K filed with the SEC from time to time.
Item 1A. Risk Factors.
Provided below is a cautionary discussion of what we believe to be the most important risk factors applicable to the Company. Discussion of these factors is incorporated by reference into and considered an integral part of PartII,Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations."
*Results are impacted by the effects of, and changes in, worldwide economic, political, and capital markets conditions. The Company operates in more than 70 countries and derives approximately 60 percent of its revenues from outside the United States. The Company's business is subject to global competition and geopolitical risks and may be adversely affected by factors in the United States and other countries that are beyond its control, such as slower economic growth, disruptions in financial markets, economic downturns in the form of either contained or widespread recessionary conditions, inflation, elevated unemployment levels, sluggish or uneven recovery, government deficit reduction and other austerity measures in specific countries or regions, or in the various industries in which the Company operates; social, political or labor conditions in specific countries or regions; natural and other disasters or climate change affecting the operations of the Company or its customers and suppliers; or adverse changes in the availability and cost of capital, interest rates, tax rates, tax laws, or exchange control, ability to expatriate earnings and other regulations in the jurisdictions in which the Company operates.
*Change in the Company's credit ratings could increase cost of funding. The Company's credit ratings are important to 3M's cost of capital. The major rating agencies routinely evaluate the Company's credit profile and assign debt ratings to 3M. This evaluation is based on a number of factors, which include financial strength, business and financial risk, as well as transparency with rating agencies and timeliness of financial reporting. 3M currently has an AA- credit rating with a stable outlook from Standard& Poor's and has an A1 credit rating with a stable outlook from Moody's Investors Service. The Company's credit ratings have served to lower 3M's borrowing costs and facilitate access to a variety of lenders. The addition of further leverage to the Company's capital structure could impact 3M's credit ratings in the future. Failure to maintain strong investment grade ratings would adversely affect the Company's cost of funding and could adversely affect liquidity and access to capital markets.
*The Company's results are affected by competitive conditions and customer preferences. Demand for the Company's products, which impacts revenue and profit margins, is affected by (i)the development and timing of the introduction of competitive products; (ii)the Company's response to downward pricing to stay competitive; (iii)changes in customer order patterns, such as changes in the levels of inventory maintained by customers and the timing of customer purchases which may be affected by announced price changes, changes in the Company's incentive programs, or the customer's ability to achieve incentive goals; and (iv)changes in customers' preferences for our products, including the success of products offered by our competitors, and changes in customer designs for their products that can affect the demand for some of the Company's products.
*Foreign currency exchange rates and fluctuations in those rates may affect the Company's ability to realize projected growth rates in its sales and earnings. Because the Company's financial statements are denominated in U.S. dollars and approximately 60 percent of the Company's revenues are derived from outside the United States, the Company's results of operations and its ability to realize projected growth rates in sales and earnings could be adversely affected if the U.S. dollar strengthens significantly against foreign currencies.
*The Company's growth objectives are largely dependent on the timing and market acceptance of its new product offerings, including its ability to continually renew its pipeline of new products and to bring those products to market. This ability may be adversely affected by difficulties or delays in product development, such as the inability to identify viable new products, obtain adequate intellectual property protection, or gain market acceptance of new products. There are no guarantees that new products will prove to be commercially successful.
*The Company's future results are subject to fluctuations in the costs and availability of purchased components, compounds, raw materials and energy, including oil and natural gas and their derivatives, due to shortages, increased demand, supply interruptions, currency exchange risks, natural disasters and other factors. The Company depends on various components, compounds, raw materials, and energy (including oil and natural gas and their derivatives) supplied by others for the manufacturing of its products. It is possible that any of its supplier relationships could be interrupted due to natural and other disasters and other events, or be terminated in the future. Any sustained interruption in the Company's receipt of adequate supplies could have a material adverse effect on the Company. In addition, while the Company has a process to minimize volatility in component and material pricing, no assurance can be given that the Company will be able to successfully manage price fluctuations or that future price fluctuations or shortages will not have a material adverse effect on the Company.
*Acquisitions, strategic alliances, divestitures, and other unusual events resulting from portfolio management actions and other evolving business strategies, and possible organizational restructuring could affect future results. The Company monitors its business portfolio and organizational structure and has made and may continue to make acquisitions, strategic alliances, divestitures and changes to its organizational structure. With respect to acquisitions, future results will be affected by the Company's ability to integrate acquired businesses quickly and obtain the anticipated synergies.
*The Company's future results may be affected if the Company generates fewer productivity improvements than estimated. The Company utilizes various tools, such as Lean Six Sigma, and engages in ongoing global business transformation. Business transformation is defined as changes in processes and internal/external service delivery across 3M to move to more efficient business models to improve operational efficiency and productivity, while allowing 3M to serve customers with greater speed and efficiency. This is enabled by the ongoing multi-year phased implementation of an enterprise resource planning (ERP) system on a worldwide basis. There can be no assurance that all of the projected productivity improvements will be realized.
*The Company employs information technology systems to support its business, including ongoing phased implementation of an ERP system as part of business transformation on a worldwide basis over the next several years. Security breaches and other disruptions to the Company's information technology infrastructure could interfere with the Company's operations, compromise information belonging to the Company or its customers, suppliers, and employees, exposing the Company to liability which could adversely impact the Company's business and reputation. In the ordinary course of business, the Company relies on information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. Additionally, the Company collects and stores certain data, including proprietary business information, and may have access to confidential or personal information in certain of our businesses that is subject to privacy and security laws, regulations and customer-imposed controls. Despite our cybersecurity measures (including employee and third-party training, monitoring of networks and systems, patching, maintenance, and backup of systems and data), the Company's information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attacks by hackers, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, service or cloud provider breaches, natural disasters or other catastrophic events. It is possible for such vulnerabilities to remain undetected for an extended period, up to and including several years. While we have experienced, and expect to continue to experience, these types of threats to the Company's information technology networks and infrastructure, none of them to date has had a material impact to the Company. There may be other challenges and risks as the Company upgrades and standardizes its ERP system on a worldwide basis. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to the Company's reputation, which could adversely affect the Company's business. Although the Company maintains insurance coverage for various cybersecurity risks, there can be no guarantee that all costs or losses incurred will be fully insured.
*The Company's defined benefit pension and postretirement plans are subject to financial market risks that could adversely impact our results. The performance of financial markets and discount rates impact the Company's funding obligations under its defined benefit plans. Significant changes in market interest rates, decreases in the fair value of plan assets and investment losses on plan assets, and relevant legislative or regulatory changes relating to defined benefit plan funding may increase the Company's funding obligations and adversely impact its results of operations and cash flows.
*The Company's future results may be affected by various legal and regulatory proceedings and legal compliance risks, including those involving product liability, antitrust, intellectual property, environmental, the U.S. Foreign Corrupt Practices Act and other anti-bribery, anti-corruption, or other matters. The outcome of these legal proceedings may differ from the Company's expectations because the outcomes of litigation, including regulatory matters, are often difficult to reliably predict. Various factors or developments can lead the Company to change current estimates of liabilities and related insurance receivables where applicable, or make such estimates for matters previously not susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in future charges that could have a material adverse effect on the Company's results of operations or cash flows in any particular period. For a more detailed discussion of the legal proceedings involving the Company and the associated accounting estimates, see the discussion in Note 15 "Commitments and Contingencies" within the Notes to Consolidated Financial Statements.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
In the U.S., 3M's general offices, corporate research laboratories, and certain division laboratories are located in St. Paul, Minnesota. The Company operates 80 manufacturing facilities in 29 states. Internationally, the Company operates 125 manufacturing and converting facilities in 37 countries.
3M owns the majority of its physical properties. 3M's physical facilities are highly suitable for the purposes for which they were designed. Because 3M is a global enterprise characterized by substantial intersegment cooperation, properties are often used by multiple business segments.
Item 3. Legal Proceedings.
Discussion of legal matters is incorporated by reference from PartII,Item 8, Note 15, "Commitments and Contingencies," of this document, and should be considered an integral part of PartI,Item 3, "Legal Proceedings."
Item 4. Mine Safety Disclosures.
Pursuant to Section1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"), the Company is required to disclose, in connection with the mines it operates, information concerning mine safety violations or other regulatory matters in its periodic reports filed with the SEC. For the year 2017, the information concerning mine safety violations or other regulatory matters required by Section1503(a)of the Act is included in Exhibit95 to this annual report.
PARTII
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Equity compensation plans' information is incorporated by reference from PartIII,Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," of this document, and should be considered an integral part of Item 5. At January31, 2018, there were 78,331 shareholders of record. 3M's stock is listed on the New York Stock Exchange,Inc. (NYSE), the Chicago Stock Exchange,Inc., and the SWX Swiss Exchange. Cash dividends declared and paid totaled $1.175 and $1.11 per share for each quarter in 2017 and 2016, respectively. Stock price comparisons follow:
Stock price comparisons (NYSE composite transactions)
(Pershareamounts)
FirstQuarter
Second Quarter
ThirdQuarter
Fourth Quarter
Year
2017 High
$
193.50
$
214.57
$
214.65
$
244.23
$
244.23
2017 Low
173.55
188.62
197.17
210.03
173.55
2016 High
$
167.50
$
175.14
$
182.27
$
180.06
$
182.27
2016 Low
134.64
163.17
173.51
163.85
134.64
Issuer Purchases of Equity Securities
Repurchases of 3M common stock are made to support the Company's stock-based employee compensation plans and for other corporate purposes. In February2016, 3M's Board of Directors authorized the repurchase of up to $10 billion of 3M's outstanding common stock, with no pre-established end date.
Issuer Purchases of Equity Securities
(registered pursuant to Section12 of the Exchange Act)
Maximum
Approximate
DollarValueof
TotalNumberof
SharesthatMay
SharesPurchased
YetBePurchased
TotalNumberof
AveragePrice
asPartofPublicly
underthePlans
SharesPurchased
Paidper
AnnouncedPlans
orPrograms
Period
(1)
Share
orPrograms(2)
(Millions)
January1-31, 2017
1,245,580
$
177.61
1,245,347
$
6,835
February1-28, 2017
1,038,362
$
182.41
1,037,719
$
6,645
March1-31, 2017
1,168,893
$
190.75
1,168,893
$
6,422
Total January1-March31, 2017
3,452,835
$
183.50
3,451,959
$
6,422
April1-30, 2017
934,900
$
191.64
933,463
$
6,244
May1-31, 2017
1,017,290
$
197.80
1,017,000
$
6,042
June1-30, 2017
396,770
$
208.83
396,770
$
5,960
Total April1-June30, 2017
2,348,960
$
197.21
2,347,233
$
5,960
July1-31, 2017
431,272
$
205.00
431,272
$
5,871
August1-31, 2017
572,552
$
204.69
572,552
$
5,754
September1-30, 2017
893,559
$
209.62
893,559
$
5,567
Total July1-September30, 2017
1,897,383
$
207.08
1,897,383
$
5,567
October1-31, 2017
982,356
$
220.27
980,804
$
5,351
November1-30, 2017
621,143
$
231.38
621,143
$
5,207
December1-31, 2017
575,924
$
237.86
575,924
$
5,070
Total October1-December31, 2017
2,179,423
$
228.08
2,177,871
$
5,070
Total January1-December31, 2017
9,878,601
$
201.13
9,874,446
$
5,070
(1) The total number of shares purchased includes: (i)shares purchased under the Board's authorizations described above, and (ii)shares purchased in connection with the exercise of stock options.
(2) The total number of shares purchased as part of publicly announced plans or programs includes shares purchased under the Board's authorizations described above.
Item 6. Selected Financial Data.
(Dollarsinmillions,exceptpershareamounts)
2017
2016
2015
2014
2013
Years ended December31:
Net sales
$
31,657
$
30,109
$
30,274
$
31,821
$
30,871
Net income attributable to 3M
4,858
5,050
4,833
4,956
4,659
Per share of 3M common stock:
Net income attributable to 3M - basic
8.13
8.35
7.72
7.63
6.83
Net income attributable to 3M - diluted
7.93
8.16
7.58
7.49
6.72
Cash dividends declared per 3M common share
4.70
4.44
3.075
3.59
3.395
Cash dividends paid per 3M common share
4.70
4.44
4.10
3.42
2.54
At December31:
Total assets
$
37,987
$
32,906
$
32,883
$
31,374
$
33,304
Long-term debt (excluding portion due within one year) and long-term capital lease obligations
12,156
10,723
8,799
6,764
4,367
Cash dividends declared and paid totaled $1.175 and $1.11 per share for each quarter in 2017 and 2016, respectively. 3M typically declares and pays dividends in the same quarter. In December 2013 and 2014, 3M declared dividends that were paid in the following first quarter.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of 3M's financial statements with a narrative from the perspective of management. 3M's MD&A is presented in eight sections:
Overview
Results of Operations
Performance by Business Segment
Performance by Geographic Area
Critical Accounting Estimates
New Accounting Pronouncements
Financial Condition and Liquidity
Financial Instruments
Forward-looking statements in Item7 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to the section entitled "Cautionary Note Concerning Factors That MayAffect Future Results" in Item1 and the risk factors provided in Item 1A for discussion of these risks and uncertainties).
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. As described in Note 17, effective in the first quarter of 2017, 3M improved the alignment of its businesses around markets and customers. Segment information presented herein reflects the impact of these changes for all periods presented. 3M manages its operations in five operating business segments: Industrial; Safety and Graphics; Health Care; Electronics and Energy; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis.
Earnings per share (EPS) attributable to 3M common shareholders - diluted:
The following table provides the increase (decrease) in diluted earnings per share for the fourth quarter and year 2017 compared to the same period last year, in addition to 2016 compared to 2015.
Threemonthsended
Yearended
(Earnings per diluted share)
December31, 2017
December31, 2017
December31, 2016
Same period last year
$
1.88
$
8.16
$
7.58
Increase/(decrease) in earnings per share - diluted, due to:
Organic growth/other productivity
0.33
0.86
0.16
Acquisitions and divestitures
(0.02)
0.54
0.14
Incremental strategic investments
(0.06)
(0.51)
0.14
Legal - respirator mask actuarial reserve
(0.07)
(0.07)
-
Foreign exchange impacts
-
(0.13)
(0.14)
Shares of common stock outstanding
-
0.08
0.24
Other net interest
(0.09)
(0.10)
(0.05)
Income tax rate, excluding Tax Cuts and Jobs Act (TCJA)
0.13
0.34
0.09
Current period, excluding TCJA
$
2.10
$
9.17
$
8.16
TCJA enactment impact
(1.25)
(1.24)
-
Current period
$
0.85
$
7.93
$
8.16
Year 2017 and fourth quarter EPS:
For the fourth quarter of 2017, net income attributable to 3M was $523 million, or $0.85 per diluted share, compared to $1.155 billion, or $1.88 per diluted share, in the fourth quarter of 2016, a decrease of 54.8 percent on a per diluted share. Excluding the $762 million impact related to the enactment of the Tax Cuts and Jobs Act (TCJA), net income was $1.285 billion, or $2.10 per diluted share, an increase of 11.7 percent on a per diluted share basis compared to the fourth quarter of 2016. For the full year 2017, net income attributable to 3M was $4.858 billion, or $7.93 per diluted share, compared to $5.050 billion, or $8.16 per diluted share, for the full year 2016, a decrease of 2.8 percent on a per diluted share basis. Excluding the 2017 impact related to TCJA, net income was $5.620 billion, or $9.17 per diluted share, an increase of 12.4 percent on a per diluted share basis compared to 2016. The Company refers to various measures excluding the 2017 net impact of enactment of the Tax Cuts and Jobs Act. These non-GAAP measures are further described and reconciled to the most directly comparable GAAP financial measures in the section that follows.
Organic growth/productivity in 2017 includes benefits from higher organic local-currency sales, raw material cost decreases from sourcing cost reduction projects, and business transformation, which is having a positive impact on 3M's productivity efforts. These benefits were partially offset by higher defined benefit pension expenses. During both the fourth quarter and full year 2017, organic growth and productivity were the primary drivers for the year-on-year benefit.
Acquisitions and divestitures decreased earnings per diluted share by 2 cents year-on-year for the fourth quarter of 2017, while increasing earnings per diluted share by 54 cents year-on-year for the full year 2017. Acquisition impacts, which are measured for the first twelve months post-transaction, relate primarily to the acquisition of Scott Safety (fourth quarter 2017). The net impact related to Scott Safety includes income from operations, more than offset by the transaction and integration costs of the acquisition. Interest expense related to financing costs of Scott Safety are also included. The net impact related to Scott Safety was equivalent to a year-on-year decrease of 7 cents per diluted share. Full year 2017 had year-on-year operating income impacts from the following divestitures: Polyfoam and the remaining portion of the library system business (both in first quarter 2016), protective films business and cathode battery technology out-license business (both in fourth quarter 2016), prescription safety eyewear business (January 2017), identity management business and tolling and automated license/number plate recognition business (both in the second quarter of 2017), and electronic monitoring business (fourth quarter 2017). The incremental year-on-year pre-tax gain on divestiture impact, net of lost operating loss/(income) during the fourth quarter of 2017 was $26 million, or approximately 5 cents per diluted share. For the full year 2017, the year-on-year net pre-tax increase from divestitures was approximately $474 million, which is equivalent to a year-on-year increase of 61 cents per diluted share (primarily related to the identity management business). Additional discussion on divestitures is provided later within the "Divestitures and Strategic Investments" section.
Operating income results include year-on-year incremental strategic investments that decreased pre-tax earnings by approximately $51 million and $413 million in the fourth quarter and full year 2017, respectively. These incremental strategic investments are comprised of 3M's investments in growth initiatives and optimization of its portfolio and supply chain footprint. Additional discussion on strategic investments is provided later within the "Divestitures and Strategic Investments" section.
In the fourth quarter of 2017, as a result of the Company's regular review of its respirator mask/asbestos liabilities, the Company increased its accruals. This incremental increase resulted in a year-on-year decrease of 7 cents per diluted share. Refer to Note 15 for more details.
Foreign currency impacts (net of hedging) decreased pre-tax earnings by approximately $3 million and $111 million year-on-year in the fourth quarter and full year 2017, respectively, excluding the impact of foreign currency changes on tax rates. This had a minimal impact per diluted share in the fourth quarter of 2017, and is equivalent to a year-on-year decrease of 13 cents per diluted share for the full year 2017.
Weighted-average diluted shares outstanding in the fourth quarter and full year 2017 declined 0.1 percent and 1.0 percent year-on-year, respectively, which benefited earnings per share. The Company purchased $504 million and $2.1 billion of its own stock in the fourth quarter and full year 2017, respectively.
Other net interest decreased earnings per share for both fourth quarter and full year 2017, largely due to the loss on extinguishment of debt, higher U.S. average balances, and higher interest rates. The early extinguishment of debt resulted in a charge of $96 million, which contributed to a year-on-year decrease of 11 cents per diluted share for both the fourth quarter and full year 2017. Additionally, the portion of interest expense related to the financing costs of acquiring Scott Safety, which was equivalent to a year-on-year decrease of 2 cents per diluted share, is included in the acquisitions and divestitures impact described above.
As discussed in the section below, the Company recorded a net tax expense of $762 million related to the enactment of the TCJA, which was equivalent to a decrease of $1.25 per diluted share in the fourth quarter of 2017. The effective tax rate for the fourth quarter 2017 was 68.6 percent, an increase of 40.4 percentage points versus 2016. Excluding the impact of TCJA, the effective income tax rate was 23.0 percent in the fourth quarter 2017, a decrease of 5.2 percentage points versus 2016. For the full year 2017, the effective tax rate was 35.5 percent, an increase of 7.2 percentage points versus 2016. Excluding the impact of TCJA, the effective income tax rate was 25.4 percent in the full year 2017, a decrease of 2.9 percentage points versus 2016. Excluding the impact of TCJA, the fourth quarter and full year 2017 change in tax rate was driven largely by increasing benefits from our supply chain centers of expertise, favorable geographic mix and other items, as referenced in Note 9.
Income, earnings per share, and effective tax rate adjusted for impacts of the Tax Cuts and Jobs Act (TCJA) - (non-GAAP measures):
During the fourth quarter of 2017, 3M recorded a net tax expense of $762 million related to the enactment of the Tax Cuts and Jobs Act (TCJA). The expense is primarily related to the TCJA's transition tax on previously unremitted earnings of non-U.S. subsidiaries and is net of remeasurement of 3M's deferred tax assets and liabilities considering the TCJA's newly enacted tax rates and certain other impacts. This provisional amount is subject to adjustment during the measurement period of up to one year following the December 2017 enactment of the TCJA, as provided by recent SEC guidance. See additional information in Note 9. In addition to reporting financial results in accordance with U.S. GAAP, the Company also provides non-GAAP measures that adjust for the net impact of enactment of the TCJA. This item represents a significant charge that impacted the Company's financial results. Income, earnings per share, and the effective tax rate are all measures for which 3M provides the reported GAAP measure and an adjusted measure. The adjusted measures are not in accordance with, nor are they a substitute for, GAAP measures. The Company considers these non-GAAP measures in evaluating and managing the Company's operations. The Company believes that discussion of results adjusted for this item is meaningful to investors as it provides a useful analysis of ongoing underlying operating trends. The determination of this item may not be comparable to similarly titled measures used by other companies.
ThreemonthsendedDecember31, 2017
Q4 2016
Q4 2017
Adjusted income, earnings per share, & effective tax rate (non-GAAP measures) (Dollars in millions, except per share amounts)
Reported GAAP Measure
Reported GAAP Measure
Adjustment for TCJA
Adjusted Non-GAAP Measure
Operating income
$
1,665
$
1,821
$
-
$
1,821
Income before taxes
$
1,610
$
1,672
$
-
$
1,672
Provision for income taxes
$
454
$
1,147
$
(762)
$
385
Effective tax rate
28.2
%
68.6
%
23.0
%
Net income attributable to 3M
$
1,155
$
523
$
762
$
1,285
Earnings per diluted share
$
1.88
$
0.85
$
1.25
$
2.10
Earnings per diluted share percent change
(54.8)
%
11.7
%
YearendedDecember31, 2017
Year End 2016
Year End 2017
Adjusted income, earnings per share, & effective tax rate (non-GAAP measures) (Dollars in millions, except per share amounts)
Reported GAAP Measure
Reported GAAP Measure
Adjustment for TCJA
Adjusted Non-GAAP Measure
Operating income
$
7,223
$
7,820
$
-
$
7,820
Income before taxes
$
7,053
$
7,548
$
-
$
7,548
Provision for income taxes
$
1,995
$
2,679
$
(762)
$
1,917
Effective tax rate
28.3
%
35.5
%
25.4
%
Net income attributable to 3M
$
5,050
$
4,858
$
762
$
5,620
Earnings per diluted share
$
8.16
$
7.93
$
1.24
$
9.17
Earnings per diluted share percent change
(2.8)
%
12.4
%
Year 2016 EPS:
For total year 2016, productivity and other increased earnings, helped by lower defined benefit pension and postretirement expenses, higher selling prices, lower raw material costs, and productivity benefits related to the fourth quarter 2015 restructuring. These benefits were partially offset by the impact of flat organic sales and lower asset utilization.
Acquisition and divestiture impacts, which are measured for the first twelve months post-transaction, related to the acquisitions of Membrana and Capital Safety (third quarter 2015) and Semfinder (September 2016), and the divestitures of Polyfoam (first quarter 2016), the library systems business (fourth quarter 2015/first quarter 2016), and the license plate converting business in France (fourth quarter 2015). In addition, in the fourth quarter of 2016, 3M sold the assets of its protective films business and its cathode battery technology out-licensing business. On a combined basis, these acquisition/divestiture year-on-year impacts resulted in a 14 cents per diluted share benefit to earnings per share in 2016, driven by solid performances from 2015 acquisitions and year-on-year divestiture gains. Refer to Note 2 for further discussion of these acquisition/divestiture impacts.
Restructuring actions (included within incremental strategic investments in the preceding table) resulted in an after-tax charge of 14 cents per diluted share in 2015, which provided a year-on-year benefit in 2016.
Foreign exchange impacts (net of hedging) decreased pre-tax earnings by approximately $127 million year-on-year in 2016, excluding the impact of foreign currency changes on tax rates. This was equivalent to a year-on-year decrease of 14 cents per diluted share for 2016.
Weighted-average diluted shares outstanding in 2016 declined 3 percent versus 2015, which benefited earnings per share. The benefits from share repurchases, net of issuances, were partially offset by the adoption of ASU No. 2016-09, which increased the calculated number of diluted shares in 2016.
Higher average debt balances led to an increase in interest expense year-on-year in 2016.
The income tax rate was 28.3 percent in 2016, a decline of 0.8 percentage points versus last year. The 2016 change in tax rate was driven by a number of factors as referenced in Note 9, including the first quarter 2016 adoption of Accounting Standards Update (ASU) No. 2016-09 (discussed in Note 1).
Fourth quarter 2017 sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the fourth quarters of 2017 and 2016, followed by additional discussion of business segment results.
Threemonthsended
Threemonthsended
2017 vs 2016
December31, 2017
December31, 2016
%change
Net
%of
Oper.
Net
%of
Oper.
Net
Oper.
(Dollarsinmillions)
Sales
Total
Income
Sales
Total
Income
Sales
Income
Business Segments
Industrial
$
2,718
34.0
%
$
527
$
2,543
34.7
%
$
558
6.9
%
(5.5)
%
Safety and Graphics
1,545
19.3
406
1,343
18.3
271
15.0
50.0
Health Care
1,474
18.4
464
1,390
19.0
413
6.0
12.3
Electronics and Energy
1,321
16.6
334
1,175
16.0
325
12.5
2.6
Consumer
1,174
14.7
269
1,094
14.9
229
7.3
17.6
Corporate and Unallocated
(4)
-
(127)
2
-
(83)
-
-
Elimination of Dual Credit
(238)
(3.0)
(52)
(218)
(2.9)
(48)
-
-
Total Company
$
7,990
100.0
%
$
1,821
$
7,329
100.0
%
$
1,665
9.0
%
9.4
%
ThreemonthsendedDecember31, 2017
Organic
Worldwide
local-
Total
SalesChangeAnalysis
currency
sales
ByBusinessSegment
sales
Acquisitions
Divestitures
Translation
change
Industrial
3.9
%
-
%
-
%
3.0
%
6.9
%
Safety and Graphics
10.7
10.2
(9.1)
3.2
15.0
Health Care
3.1
0.1
-
2.8
6.0
Electronics and Energy
11.0
-
(0.3)
1.8
12.5
Consumer
5.4
-
-
1.9
7.3
Total Company
6.0
%
1.8
%
(1.5)
%
2.7
%
9.0
%
From a business segment perspective, 3M achieved both total sales growth and organic local-currency sales growth (which includes organic volume and selling price impacts) in all five business segments. Operating income margins were 22.8 percent, with four of five business segments above 22 percent.
In Industrial, total sales increased 6.9 percent, or 3.9 percent on an organic local currency basis, with organic sales growth in abrasives, automotive and aerospace solutions, industrial adhesives and tapes, automotive aftermarket, and separation and purification. Organic sales declined in advanced materials. Operating income margins were 19.4 percent, down 2.5 percentage points, with the decline driven by incremental strategic investments and a fourth quarter 2016 gain on sale of the temporary protective films business.
In Safety and Graphics, total sales increased 15.0 percent, or 10.7 percent on an organic local currency basis. Organic sales grew in all businesses, led by personal safety, roofing granules, and transportation safety. Operating income margins were 26.3 percent, up 6.1 percentage points, with 2.4 percentage points of this increase driven by divestitures, partially offset by acquisitions and incremental strategic investments.
In Health Care, total sales increased 6.0 percent, or 3.1 percent on an organic local currency sales basis. Organic sales grew in food safety, health information systems, medical consumables, and oral care. Organic sales declined in drug delivery systems. Operating income margins were 31.5 percent, up 1.8 percentage points.
In Electronics and Energy, total sales increased 12.5 percent, or 11.0 percent on an organic local currency basis. Electronics-related organic sales increased 14 percent, with growth in both electronics materials solutions and display materials and systems. Energy-related organic sales increased 4 percent as growth in electrical markets was partially offset by declines in telecommunications markets. Operating income margins were 25.2 percent, down 2.5 percentage points. The fourth quarter 2016 gain on sale of intellectual property and fourth quarter 2017 incremental strategic investments negatively impacted operating income margins by 3.3 percentage points.
In Consumer, total sales increased 7.3 percent, or 5.4 percent on an organic local currency basis. Organic sales grew in consumer health care, home improvement, and stationery and office, while sales in home care were flat. Operating income margins were 22.9 percent, up 2.0 percentage points
Year 2017 sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the years ended December31, 2017 and 2016. Refer to the section entitled "Performance by Business Segment" later in MD&A for additional discussion concerning both 2017 versus 2016 results and 2016 versus 2015 results, including Corporate and Unallocated. Refer to Note 17 for additional information on business segments, including Elimination of Dual Credit.
2017 vs 2016
2017
2016
%change
Net
%of
Oper.
Net
%of
Oper.
Net
Oper.
(Dollarsinmillions)
Sales
Total
Income
Sales
Total
Income
Sales
Income
Business Segments
Industrial
$
10,911
34.5
%
$
2,289
$
10,399
34.5
%
$
2,395
4.9
%
(4.4)
%
Safety and Graphics
6,148
19.4
2,067
5,881
19.5
1,423
4.5
45.3
Health Care
5,813
18.4
1,781
5,566
18.5
1,763
4.4
1.0
Electronics and Energy
5,159
16.3
1,254
4,643
15.4
1,041
11.1
20.4
Consumer
4,589
14.5
993
4,484
14.9
1,065
2.3
(6.8)
Corporate and Unallocated
1
-
(352)
7
-
(272)
-
-
Elimination of Dual Credit
(964)
(3.1)
(212)
(871)
(2.8)
(192)
-
-
Total Company
$
31,657
100.0
%
$
7,820
$
30,109
100.0
%
$
7,223
5.1
%
8.3
%
YearendedDecember31, 2017
Worldwide SalesChange
Organic local-
Total sales
ByBusinessSegment
currency sales
Acquisitions
Divestitures
Translation
change
Industrial
4.9
%
-
%
(0.5)
%
0.5
%
4.9
%
Safety and Graphics
6.1
2.2
(4.3)
0.5
4.5
Health Care
3.9
-
-
0.5
4.4
Electronics and Energy
11.0
-
(0.2)
0.3
11.1
Consumer
1.7
-
-
0.6
2.3
Total Company
5.2
%
0.4
%
(1.0)
%
0.5
%
5.1
%
Fourth-quarter 2017 sales results by geographic area/business segment:
Percent change information compares the fourth quarter 2017 with the same period last year, unless otherwise indicated. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis.
ThreemonthsendedDecember31, 2017
Europe,
Latin
United
Asia
MiddleEast
America/
Other
States
Pacific
&Africa
Canada
Unallocated
Worldwide
Net sales (millions)
$
3,081
$
2,474
$
1,684
$
756
$
(5)
$
7,990
% of worldwide sales
38.5
%
31.0
%
21.1
%
9.4
%
-
100.0
%
Components of net sales change:
Volume - organic
3.1
%
12.0
%
5.4
%
1.2
%
-
5.8
%
Price
(0.3)
(0.1)
1.4
1.3
-
0.2
Organic local-currency sales
2.8
11.9
6.8
2.5
-
6.0
Acquisitions
2.2
0.7
3.2
0.7
-
1.8
Divestitures
(2.0)
(0.7)
(1.7)
(1.5)
-
(1.5)
Translation
-
2.5
8.8
2.3
-
2.7
Total sales change
3.0
%
14.4
%
17.1
%
4.0
%
-
9.0
%
Total sales change:
Industrial
0.5
%
10.9
%
15.4
%
6.8
%
-
6.9
%
Safety and Graphics
9.8
%
21.1
%
28.1
%
(0.2)
%
-
15.0
%
Health Care
1.1
%
14.4
%
11.7
%
6.1
%
-
6.0
%
Electronics and Energy
6.1
%
15.8
%
13.4
%
0.6
%
-
12.5
%
Consumer
4.7
%
11.0
%
16.9
%
8.3
%
-
7.3
%
Organic local-currency sales change:
Industrial
0.5
%
8.1
%
6.1
%
4.7
%
-
3.9
%
Safety and Graphics
9.4
%
18.2
%
12.4
%
0.7
%
-
10.7
%
Health Care
1.0
%
10.9
%
3.3
%
3.8
%
-
3.1
%
Electronics and Energy
7.2
%
14.6
%
6.0
%
(1.6)
%
-
11.0
%
Consumer
4.7
%
7.5
%
7.9
%
5.5
%
-
5.4
%
Additional information beyond what is included in the preceding table is as follows:
In the Asia Pacific geographic area, where 3M's Electronics and Energy business is concentrated, sales benefited from strengthened demand across most electronics market segments in addition to strong growth in 3M's Safety and Graphics business. In China/Hong Kong, total sales increased 21 percent and organic local-currency sales increased 18 percent. In Japan, total sales increased 6 percent, as organic local-currency sales growth of 7 percent was partially offset by foreign currency translation impacts.
In the EMEA geographic area, Central/East Europe and Middle East/Africa had total sales increase by 14 percent, with organic local-currency sales increases of 12 percent. West Europe total sales grew 18 percent, driven by foreign currency translation impacts, in addition to organic local-currency sales growth of 5 percent.
In the Latin America/Canada geographic area, total sales increased 7 percent in Mexico, driven by foreign currency translation impacts, in addition to organic local-currency sales growth of 3 percent. In Canada, total sales increased 13 percent, driven by organic local-currency sales growth of 8 percent. In Brazil, total sales and organic local-currency sales increased 3 percent.
Selling prices were up 0.2 percent year-on-year for the fourth quarter of 2017. In Asia Pacific, strong volume growth in electronics had a negative impact on price. EMEA and Latin America/Canada had price growth, while U.S. selling prices declined slightly.
Year 2017 sales results by geographic area/business segment:
Percent change information compares the full year 2017 with the same period last year, unless otherwise indicated. Additional discussion of business segment results is provided in the Performance by Business Segment section.
YearendedDecember31, 2017
Europe,
Latin
United
Asia
MiddleEast
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.
YearendedDecember31, 2016
Europe,
Latin
United
Asia
MiddleEast
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 February2016, 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 January2018, 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:
ThreemonthsendedDecember31, 2017
YearendedDecember31, 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:
Threemonthsended
Yearended
(Millions)
December31, 2017
December31, 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
(Percentofnetsales)
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.
Threemonthsended
Yearended
(Percent of net sales)
December31, 2017
December31, 2017
December31, 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:
(Percentofpre-taxincome)
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 March2015 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,Plantand
Equipment-net
Employeesasof December31,
CapitalSpending
asof December31,
(Millions,exceptEmployees)
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 January1, 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 Note12 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 strategic asset allocation of the plan, long-term capital market return expectations, and expected performance from active investment management. For the primary U.S. qualified pension plan, the expected long-term rate of return on an annualized basis for 2018 is 7.25%, equal to 2017. Refer to Note 12 for information on how the 2017 rate was determined. Return on assets assumptions for international pension and other post-retirement benefit plans are calculated on a plan-by-plan basis using plan asset allocations and expected long-term rate of return assumptions. The weighted average expected return for the international pension plan is 5.02% for 2018, compared to 5.16% for 2017.
For the year ended December31, 2017, the Company recognized total consolidated defined benefit pre-tax pension and postretirement expense (after settlements, curtailments, special termination benefits and other) of $333 million, up from $251million in 2016. Defined benefit pension and postretirement expense (before settlements, curtailments, special termination benefits and other) is anticipated to increase to approximately $409 million in 2018, an increase of $76 million compared to 2017.
The table below summarizes the impact on 2018 pension expense for the U.S. and international pension plans of a 0.25 percentage point increase/decrease in the expected long-term rate of return on plan assets and discount rate assumptions used to measure plan liabilities and 2017 net periodic benefit cost. The table assumes all other factors are held constant, including the slope of the discount rate yield curves.
Increase (Decrease) in Net Periodic Benefit Cost
Discount Rate
Expected Return on Assets
(Millions)
-0.25%
+0.25%
-0.25%
+0.25%
U.S. pension plans
$
34
$
(33)
$
38
$
(38)
International pension plans
24
(23)
16
(16)
Asset Impairments:
As of December31, 2017, net property, plant and equipment totaled $8.9 billion and net identifiable intangible assets totaled $2.9 billion. Management makes estimates and assumptions in preparing the consolidated financial statements for which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed in the business, including assets of acquired businesses. These estimates and assumptions are closely monitored by management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or an impairment recorded based on a change in the expected use of the asset or performance of the related asset group.
Of the $2.9 billion in net identifiable intangible assets, $0.6 billion relates to indefinite-lived tradenames, primarily Capital Safety, whose tradenames ($520 million at acquisition date) have been in existence for over 55 years (refer to Note 2 for more detail). The primary valuation technique used in estimating the fair value of indefinite lived intangible assets (tradenames) is a discounted cash flow approach. Specifically, a relief of royalty rate is applied to estimated sales, with the resulting amounts then discounted using an appropriate market/technology discount rate. The relief of royalty rate is the estimated royalty rate a market participant would pay to acquire the right to market/produce the product. If the resulting discounted cash flows are less than the book value of the indefinite lived intangible asset, impairment exists, and the asset value must be written down. Based on impairment testing in the third quarter of 2017, no impairment was indicated. The discounted cash flows related to the Capital Safety tradename exceeded its book value by more than 15 percent.
3M goodwill totaled approximately $10.5 billion as of December31, 2017. 3M's annual goodwill impairment testing is performed in the fourth quarter of each year. Impairment testing for goodwill is done at a reporting unit level, with all goodwill assigned to a reporting unit. Reporting units are one level below the business segment level, but are required to be combined when reporting units within the same segment have similar economic characteristics. At 3M, reporting units correspond to a division. 3M did not combine any of its reporting units for impairment testing.
An impairment loss would be recognized when the carrying amount of the reporting unit's net assets exceeds the estimated fair value of the reporting unit, and the loss would equal that difference. The estimated fair value of a reporting unit is determined using earnings for the reporting unit multiplied by a price/earnings ratio for comparable industry groups, or by using a discounted cash flow analysis. 3M typically uses the price/earnings ratio approach for stable and growing businesses that have a long history and track record of generating positive operating income and cash flows. 3M uses the discounted cash flow approach for start-up, loss position and declining businesses, in addition to using for businesses where the price/earnings ratio valuation method indicates additional review is warranted. 3M also uses discounted cash flow as an additional tool for businesses that may be growing at a slower rate than planned due to economic or other conditions.
As described in Note 17, effective in the first quarter of 2017, 3M made business segment reporting changes. For any product moves that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill of the associated reporting units. During the first quarter of 2017, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed. The discussion that follows relates to the separate fourth quarter 2017 annual impairment test and is in the context of the reporting unit structure that existed at that time.
As of October1, 2017, 3M had 24 primary reporting units, with ten reporting units accounting for approximately 86 percent of the goodwill. These ten reporting units were comprised of the following divisions: Advanced Materials, Communication Markets, Display Materials and Systems, Health Information Systems,Industrial Adhesives and Tapes,Infection Prevention, Oral Care Solutions, Personal Safety, Separation and Purification, and Transportation Safety. The estimated fair value for all reporting units was in excess of carrying value by approximately 40 percent or more. 3M's market value at both December 31, 2017, and September 30, 2017, was significantly in excess of its shareholders' equity of approximately $12 billion.
As discussed in Note 2, 3M announced the sale of substantially all of its Communication Markets division, which is expected to close in 2018, which will result in an associated goodwill reduction of approximately $270 million upon sale.
In 2017, 3M determined fair values using either an industry price-earnings ratio approach or a discounted cash flows analysis. Where applicable, 3M used a weighted-average discounted cash flow analysis for certain divisions, using projected cash flows that were weighted based on different sales growth and terminal value assumptions, among other factors. The weighting was based on management's estimates of the likelihood of each scenario occurring.
3M is a highly integrated enterprise, where businesses share technology and leverage common fundamental strengths and capabilities, thus many of 3M's businesses could not easily be sold on a stand-alone basis. 3M's focus on research and development has resulted in a portion of 3M's value being comprised of internally developed businesses that have no goodwill associated with them. Based on the annual test in the fourth quarter of 2017, no goodwill impairment was indicated for any of the reporting units.
Factors which could result in future impairment charges include, among others, changes in worldwide economic conditions, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk factors are discussed in Item 1A, "Risk Factors," of this document. In addition, changes in the weighted average cost of capital could also impact impairment testing results. As indicated above, during the first quarter of 2017, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by changes between reporting units and determined that no impairment existed. Long-lived assets with a definite life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If future non-cash asset impairment charges are taken, 3M would expect that only a portion of the long-lived assets or goodwill would be impaired. 3M will continue to monitor its reporting units and asset groups in 2018 for any triggering events or other indicators of impairment.
Income Taxes:
The extent of 3M's operations involves dealing with uncertainties and judgments in the application of complex tax regulations in a multitude of jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes will be due. The Company follows guidance provided by ASC 740,Income Taxes, regarding uncertainty in income taxes, to record these liabilities (refer to Note 9 for additional information). The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the tax liabilities. If the Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary.
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 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. As discussed in Note 9, this expense 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.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.
FINANCIAL CONDITION AND LIQUIDITY
The strength and stability of 3M's business model and strong free cash flow capability, together with proven capital markets access, positions the Company to be able to add further leverage to its capital structure. Investing in 3M's businesses to drive organic growth remains the first priority for capital deployment, including research and development, capital expenditures, and commercialization capability. Investment in organic growth will be supplemented by complementary acquisitions. 3M will also continue to return cash to shareholders through dividends and share repurchases. Sources for cash availability in the United States, such as ongoing cash flow from operations and access to capital markets, have historically been sufficient to fund dividend payments to shareholders, as well as funding U.S. acquisitions and other items as needed. The TCJA creates additional repatriation opportunities for 3M to access international cash positions on a continual and on-going basis and will help support U.S. capital deployments needs. For those international earnings still considered to be reinvested indefinitely, the Company currently has no plans or intentions to repatriate these funds for U.S. operations. See Note 9 for further information on earnings considered to be reinvested indefinitely.
3M's primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances. 3M believes it will have continuous access to the commercial paper market. 3M's commercial paper program permits the Company to have a maximum of $5 billion outstanding with a maximum maturity of 397 days from date of issuance. At December 31, 2017, there was approximately $745 million in commercial paper issued and outstanding.
Total Debt:
The strength of 3M's capital structure and significant ongoing cash flows provide 3M proven access to capital markets. Additionally, the Company's maturity profile is staggered to help ensure refinancing needs in any given year are reasonable in proportion to the total portfolio. 3M currently has an AA- credit rating with a stable outlook from Standard& Poor's and has an A1 credit rating with a stable outlook from Moody's Investors Service.
The Company's total debt was $2.3 billion higher at December 31, 2017 when compared to December31, 2016. Increases in debt related to October 2017 debt issuances of $2.0 billion, commercial paper of $745 million outstanding at year end 2017, and the net impact of repayments and borrowings of international subsidiaries along with foreign currency effects. These are partially offset by June 2017 repayments of $650 million aggregate principal amount of medium-term notes and the October 2017 $305 million debt tender. For discussion of repayments of and proceeds from debt refer to the following "Cash Flows from Financing Activities" section.
Effective February24, 2017, the Company updated its "well-known seasoned issuer" (WKSI) shelf registration statement, which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M's previous shelf registration dated May16, 2014. In May 2016, in connection with the WKSI shelf, 3M entered into an amended and restated distribution agreement relating to the future issuance and sale (from time to time) of the Company's medium-term notes program (Series F), up to the aggregate principal amount of $18 billion, which was an increase from the previous aggregate principal amount up to $9 billion of the same Series.
As of December 31, 2017, the total amount of debt issued as part of the medium-term notes program (Series F), inclusive of debt issued in 2011, 2012, 2014, 2015, 2016, and the 2017 debt referenced above, is approximately $13.1 billion (utilizing the foreign exchange rates applicable at the time of issuance for the Euro denominated debt). Information with respect to long-term debt issuances and maturities for the periods presented is included in Note 11.
In March 2016, 3M amended and restated its existing $2.25 billion five-year revolving credit facility expiring in August 2019 to a $3.75 billion five-year revolving credit facility expiring in March 2021. This credit agreement includes a provision under which 3M may request an increase of up to $1.25 billion (at lenders' discretion), bringing the total facility up to $5.0 billion. This revolving credit facility is undrawn at December 31, 2017. Under the $3.75 billion credit agreement, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the same period. At December 31, 2017, this ratio was approximately 29 to 1. Debt covenants do not restrict the payment of dividends. Apart from the committed facilities, an additional $288 million in stand-alone letters of credit and bank guarantees were also issued and outstanding at December 31, 2017. These instruments are utilized in connection with normal business activities.
Cash, Cash Equivalents and Marketable Securities:
At December 31, 2017, 3M had $4.2 billion of cash, cash equivalents and marketable securities, of which approximately $3.975 billion was held by the Company's foreign subsidiaries and approximately $180 million was held by the United States. These balances are invested in bank instruments and other high-quality fixed income securities. At December31, 2016, cash, cash equivalents and marketable securities held by the Company's foreign subsidiaries and by the United States totaled approximately $2.35 billion and $350 million, respectively. Specifics concerning marketable securities investments are provided in Note 10.
Net Debt (non-GAAP measure):
Net debt is not defined under U.S. GAAP and may not be computed the same as similarly titled measures used by other companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term marketable securities. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be important indicators of liquidity and financial position. The following table provides net debt as of December31, 2017 and 2016.
December 31,
2017 versus
(Millions)
2017
2016
2016
Total debt
$
13,949
$
11,650
$
2,299
Less: Cash, cash equivalents and marketable securities
4,156
2,695
1,461
Net debt (non-GAAP measure)
$
9,793
$
8,955
$
838
Refer to the preceding "Total Debt" and "Cash, Cash Equivalents and Marketable Securities" sections for additional details.
Balance Sheet:
3M's strong balance sheet and liquidity provide the Company with significant flexibility to fund its numerous opportunities going forward. The Company will continue to invest in its operations to drive growth, including continual review of acquisition opportunities.
The Company uses working capital measures that place emphasis and focus on certain working capital assets. These measures include working capital, accounts receivable turns, and inventory turns.
Working Capital (non-GAAP measure):
December 31,
2017 versus
(Millions)
2017
2016
2016
Current assets
$
14,277
$
11,726
$
2,551
Less: Current liabilities
7,687
6,219
1,468
Working capital (non-GAAP measure)
$
6,590
$
5,507
$
1,083
Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. Working capital is not defined under U.S. generally accepted accounting principles and may not be computed the same as similarly titled measures used by other companies. The Company defines working capital as current assets minus current liabilities. 3M believes working capital is meaningful to investors as a measure of operational efficiency and short-term financial health.
Working capital increased $1.1 billion during 2017 when compared to December 31, 2016. Current asset balance changes increased working capital by $2.6 billion, driven by increases in cash/cash equivalents and marketable securities, in addition to higher accounts receivable and inventories (discussed further below). Current liability balance changes decreased working capital by $1.5 billion, largely due to increases in short-term borrowings, with commercial paper outstanding of $745 million at December 31, 2017 compared to none outstanding at December 31, 2016.
Accounts Receivable and Inventory Turns (non-GAAP measures):
Accounts receivable and inventory turns are not defined under U.S. generally accepted accounting principles and may not be computed the same as similarly titled measures used by other companies. 3M defines accounts receivable turns as quarterly net sales multiplied by 4 divided by ending accounts receivable - net, and defines inventory turns as quarterly manufacturing cost multiplied by 4 divided by ending inventory. 3M believes accounts receivable turns is meaningful to investors as a measure of how efficiently the Company manages credit and collects from its customers. For inventory turns calculation purposes, manufacturing cost is defined as cost of sales less freight and engineering costs. 3M believes inventory turns is meaningful to investors as a measure of how quickly inventory is sold. Details of these calculations follow.
Accounts receivable turns (non-GAAP measure)
December 31,
2017 versus
(Millions, except turns)
2017
2016
2016
Quarterly net sales
$
7,990
$
7,329
$
661
Ending accounts receivable - net
$
4,911
$
4,392
$
519
Accounts receivable turns
6.51
6.67
(0.16)
Inventory turns (non-GAAP measure)
December 31,
2017 versus
(Millions, except turns)
2017
2016
2016
Quarterly cost of sales
$
4,080
$
3,716
$
364
Less: Freight and engineering
$
172
$
160
$
12
Manufacturing cost
$
3,908
$
3,556
$
352
Ending inventory
$
4,034
$
3,385
$
649
Inventory turns
3.88
4.20
(0.32)
Accounts receivable increased $519 million year-on-year in 2017, primarily due to increased sales. In addition, foreign currency impacts increased 2017 accounts receivable by $215 million and acquisitions, net of divestitures, increased accounts receivable by $57 million. As a result, accounts receivable turns decreased 2 percent versus 2016.
Inventory increased $649 million year-on-year in 2017. Foreign currency impacts increased 2017 inventory by $210 million and acquisitions, net of divestitures, increased inventory by $51 million. Higher fourth quarter sales contributed to a 10 percent increase in cost of sales, while inventory increased 19 percent, which combined contributed to an 8 percent decrease in inventory turns.
On a seasonal basis, both accounts receivable and inventory turns are historically higher at year-end, driven by lower year-end accounts receivable and inventory balances.
Return on Invested Capital (non-GAAP measure):
Return on Invested Capital (ROIC) is not defined under U.S. generally accepted accounting principles. Therefore, ROIC should not be considered a substitute for other measures prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines ROIC as adjusted net income (net income including non-controlling interest plus after-tax interest expense) divided by average invested capital (equity plus debt). The Company believes ROIC is meaningful to investors as it focuses on shareholder value creation. The calculation is provided in the below table.
In 2017, ROIC of 21.3 percent was lower than both 2016 and 2015. This decrease related to the net impact of the enactment of the TCJA and increases in commercial paper borrowings in conjunction with the December 2017 U.S. defined benefit pension plan contribution, which combined reduced ROIC by 3 percentage points in 2017.
Years ended December31
(Millions)
2017
2016
2015
Return on Invested Capital (non-GAAP measure)
Net income including non-controlling interest
$
4,869
$
5,058
$
4,841
Interest expense (after-tax) (1)
208
143
106
Adjusted net income (Return)
$
5,077
$
5,201
$
4,947
Average shareholders' equity (including non-controlling interest) (2)
$
11,627
$
11,316
$
12,484
Average short-term and long-term debt (3)
12,156
11,725
9,266
Average invested capital
$
23,783
$
23,041
$
21,750
Return on invested capital (non-GAAP measure)
21.3
%
22.6
%
22.7
%
(1) Effective income tax rate used for interest expense
35.5
%
28.3
%
29.1
%
(2) Calculation of average equity (includes non-controlling interest)
Ending total equity as of:
March 31
$
11,040
$
11,495
$
13,673
June 30
11,644
11,658
12,851
September 30
12,202
11,769
11,945
December 31
11,622
10,343
11,468
Average total equity
$
11,627
$
11,316
$
12,484
(3) Calculation of average debt
Ending short-term and long-term debt as of:
March 31
$
11,711
$
11,139
$
6,566
June 30
11,301
11,749
8,484
September 30
11,663
12,361
11,216
December 31
13,949
11,650
10,797
Average short-term and long-term debt
$
12,156
$
11,725
$
9,266
Cash Flows:
Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts in the Consolidated Statement of Cash Flows exclude the effects of acquisitions, divestitures and exchange rate impacts on cash and cash equivalents, which are presented separately in the cash flows. Thus, the amounts presented in the following operating, investing and financing activities tables reflect changes in balances from period to period adjusted for these effects.
Cash Flows from Operating Activities:
YearsEnded December31
(Millions)
2017
2016
2015
Net income including noncontrolling interest
$
4,869
$
5,058
$
4,841
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)
Income taxes (deferred and accrued income taxes)
1,074
108
(349)
Excess tax benefits from stock-based compensation
-
-
(154)
Accounts receivable
(245)
(313)
(58)
Inventories
(387)
57
3
Accounts payable
24
148
9
Other - net
257
75
175
Net cash provided by operating activities
$
6,240
$
6,662
$
6,420
Cash flows from operating activities can fluctuate significantly from period to period, as pension funding decisions, tax timing differences and other items can significantly impact cash flows.
In 2017, cash flows provided by operating activities decreased $422 million compared to the same period last year. Factors that decreased operating cash flows were increases in pension contributions, plus year-on-year increases in working capital. In December 2017, 3M contributed $600 million to its U.S. defined benefit pension plan, contributing to a year-on-year increase in pension and postretirement contributions of $584 million. The combination of accounts receivable, inventories and accounts payable increased working capital by $608 million in 2017, compared to working capital increases of $108 million in 2016. In 2017, year-on-year decreases in income tax payments (net of refunds) increased operating cash flows by $284 million. Additional discussion on working capital changes is provided earlier in the "Financial Condition and Liquidity" section. Information concerning defined benefit pension and postretirement contributions and expense is provided in Note 12, with additional discussion in the preceding Results of Operations section. Gain on sale of businesses in the preceding table reflects an adjustment for divestiture gains in 2017 (discussed in Note 2), as cash divestiture activity is presented as proceeds from sale of businesses within investing activities, not operating activities.
In 2016, cash flows provided by operating activities increased $242 million compared to the same period in 2015, with this increase primarily due to lower year-on-year cash taxes and higher net income. These items were partially offset by higher Company pension contributions. The combination of accounts receivable, inventories and accounts payable increased working capital by $108 million in 2016, compared to working capital increase of $46 million in 2015. Gain on sale of businesses in the preceding table reflects an adjustment for divestiture gains in 2016 (discussed in Note 2), as cash divestiture activity is presented as proceeds from sale of businesses within investing activities, not operating activities.
Cash Flows from Investing Activities:
Years ended December31
(Millions)
2017
2016
2015
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 and proceeds from maturities and sale of marketable securitiesandinvestments, net
(798)
(163)
1,300
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)
Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. The Company expects 2018 capital spending to be approximately $1.5 billion to $1.8 billion as 3M continues to invest in its businesses.
3M invests in renewal and maintenance programs, which pertain to cost reduction, cycle time, maintaining and renewing current capacity, eliminating pollution, and compliance. Costs related to maintenance, ordinary repairs, and certain other items are expensed. 3M also invests in growth, which adds to capacity, driven by new products, both through expansion of current facilities and new facilities, plus research facilities. Finally, 3M also invests in other initiatives, such as information technology (IT) and corporate laboratory facilities.
Investments included continued expansion and sustainment of current and new facilities across many geographies, focusing on growth, productivity and capacity. Other investments include IT systems and infrastructure, particularly the ongoing multi-year phased implementation of an ERP system on a worldwide basis. Additional specific investments in 2015 included a new state-of-the-art, four story, 400,000 square foot research facility at 3M Center in St. Paul, Minnesota.
Refer to Note 2 for information on acquisitions and divestitures. The Company is actively considering additional acquisitions, investments and strategic alliances to strengthen its portfolio, and from time to time may also divest certain businesses.
Acquisitions, net of cash acquired, in 2017 primarily includes the purchase of Scott Safety. In 2015, this amount consisted mostly of the Capital Safety and Membrana acquisitions. Proceeds from sale of businesses in 2017 primarily relate to the divestiture of the assets of the prescription safety eyewear, identity management, tolling and automated license/number plate recognition and electronic monitoring businesses within the Safety and Graphics business segment. Proceeds from sale of businesses in 2016 related to the divestiture of the assets of the pressurized polyurethane foam adhesives business (formerly known as Polyfoam) within the Industrial business segment and the completion of the divestiture of the Library business within the Safety and Graphics business segment. In addition, in the fourth quarter of 2016, 3M sold the assets of its protective films business within the Industrial business segment and its cathode battery technology out-licensing business within the Electronics and Energy business segment.
Purchases of marketable securities and investments and proceeds from maturities and sale of marketable securities and investments are primarily attributable to asset-backed securities, certificates of deposit/time deposits, commercial paper, and other securities, which are classified as available-for-sale. Net proceeds from maturities and sale of marketable securities in 2015 were used to help fund the August 2015 acquisitions of Capital Safety and Membrana. Refer to Note 10 for more details about 3M's diversified marketable securities portfolio. Purchases of investments include additional survivor benefit insurance, plus cost method and equity investments.
Cash Flows from Financing Activities:
Years ended December31
(Millions)
2017
2016
2015
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
Total cash change in debt
$
1,603
$
1,043
$
3,482
Purchases of treasury stock
(2,068)
(3,753)
(5,238)
Proceeds from issuances of treasury stock pursuant to stock option and benefit plans
734
804
635
Dividends paid to stockholders
(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)
2017 Debt Activity:
The Company's total debt was $2.3 billion higher at December 31, 2017 when compared to December31, 2016. Increases in debt related to October 2017 debt issuances of $2.0 billion, commercial paper of $745 million outstanding at year end 2017, and the net impact of repayments and borrowings of international subsidiaries. These are partially offset by June 2017 repayments of $650 million aggregate principal amount of medium-term notes and the October 2017 $305 million debt tender. Net commercial paper issuances and repayments and borrowings by international subsidiaries are largely reflected in "Change in short-term debt - net" in the preceding table. Foreign exchange rate changes also impacted debt balances.
Proceeds from debt for 2017 primarily related to the October 2017 issuance of $650 million aggregate principal amount of 5.5-year fixed rate medium-term notes due 2023 with a coupon rate of 2.25%, $850 million aggregate principal amount of 10-year fixed rate medium-term notes due 2027 with a coupon rate of 2.875%, and $500 million aggregate principal amount of 30-year fixed rate medium-term notes due 2047 with a coupon rate of 3.625%. Refer to Note 11 for more detail of these debt issuances.
In October 2017, via cash tender offers, 3M repurchased $305 million aggregate principal amount of its outstanding notes. This included $110 million of its $330 million principal amount of 6.375% notes due 2028 and $195 million of its $750 million principal amount of 5.70% notes due 2037. The Company recorded an early debt extinguishment charge of $96 million in the fourth quarter of 2017 within interest expense associated with the differential between the carrying value and the amount paid to acquire the tendered notes and related expenses.
2016 Debt Activity:
Total debt at December 31, 2016 increased $853 million when compared to year-end 2015, with the increase 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 May2015 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 February2016, 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 PartII,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 January2018, 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 December31
(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 December31, 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 December31, 2017, follows:
Contractual Obligations
Paymentsduebyyear
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 December31, 2017. In addition, as of December31, 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 December31, 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 December31, 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.
Adverseimpactonafter-tax
Positiveimpactonafter-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 December31, 2017, the Company's internal control over financial reporting is effective.
The Company's internal control over financial reporting as of December31, 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 December31, 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 December31
(Millions,exceptpershareamounts)
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 December31
(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 December31
December31,
December31,
(Dollarsinmillions,exceptpershareamount)
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 December31
3MCompanyShareholders
Common
Accumulated
Stockand
Other
Additional
Comprehensive
Non-
Paid-in
Retained
Treasury
Income
controlling
(Dollarsinmillions,exceptpershareamounts)
Total
Capital
Earnings
Stock
(Loss)
Interest
Balance at December31, 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 plansadjustment
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 taximpacts
412
412
Reacquired stock
(5,304)
(5,304)
Issuances pursuant to stock optionand benefit plans
641
(662)
1,303
Balance at December31, 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 optionand benefit plans
812
(761)
1,573
Balance at December31, 2016
$
10,343
$
5,070
$
37,907
$
(25,434)
$
(7,245)
$
45
Net income
4,869
4,858
11
Other comprehensive income (loss), net oftax:
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, Note7)
(2,803)
(2,803)
Stock-based compensation
291
291
Reacquired stock
(2,044)
(2,044)
Issuances pursuant to stock optionand benefit plans
744
(847)
1,591
Balance at December31, 2017
$
11,622
$
5,361
$
39,115
$
(25,887)
$
(7,026)
$
59
Supplementalshareinformation
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 December31
(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 tonet cash provided byoperating 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 plans
734
804
635
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 December31, 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 December31, 2017, the Company continues to consolidate its Venezuelan subsidiary. As of December31, 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 December31, 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 December31, 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 December31 follow:
Earnings Per Share Computations
(Amountsinmillions,exceptpershareamounts)
2017
2016
2015
Numerator:
Net income attributable to 3M
$
4,858
$
5,050
$
4,833
Denominator:
Denominator for weighted average 3M common shares outstanding - basic
597.5
604.7
625.6
Dilution associated with the Company's stock-based compensation plans
15.2
14.0
11.6
Denominator for weighted average 3M common shares outstanding - diluted
612.7
618.7
637.2
Earnings per share attributable to 3M common shareholders - basic
$
8.13
$
8.35
$
7.72
Earnings per share attributable to 3M common shareholders - diluted
$
7.93
$
8.16
$
7.58
Stock-based compensation: The Company recognizes compensation expense for its stock-based compensation programs, which include stock options, restricted stock, restricted stock units (RSUs), performance shares, and the General Employees' Stock Purchase Plan (GESPP). Under applicable accounting standards, the fair value of share-based compensation is determined at the grant date and the recognition of the related expense is recorded over the period in which the share-based compensation vests. However, with respect to income taxes, the related deduction from taxes payable is based on the award's intrinsic value at the time of exercise (for an option) or on the fair value upon vesting of the award (for RSUs), which can be either greater (creating an excess tax benefit) or less (creating a tax deficiency) than the deferred tax benefit recognized as compensation cost is recognized in the financial statements. Beginning in 2016, as a result of 3M's adoption of Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, these excess tax benefits/deficiencies are recognized as income tax benefit/expense in the statement of income and, within the statement of cash flows, are classified in operating activities in the same manner as other cash flows related to income taxes. The extent of excess tax benefits/deficiencies is subject to variation in 3M stock price and timing/extent of RSU vestings and employee stock option exercises. Prior to 2016, excess tax benefits were recognized in additional paid-in capital within equity, and, with respect to statement of cash flows, were reflected as a financing cash inflow. Based on the adoption methodology of ASU No. 2016-09 applied, periods prior to 2016 were not changed.
Comprehensive income: Total comprehensive income and the components of accumulated other comprehensive income (loss) are presented in the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Changes in Equity. Accumulated other comprehensive income (loss) is composed of foreign currency translation effects (including hedges of net investments in international companies), defined benefit pension and postretirement plan adjustments, unrealized gains and losses on available-for-sale debt and equity securities, and unrealized gains and losses on cash flow hedging instruments.
Derivatives and hedging activities: All derivative instruments within the scope of ASC 815, Derivatives and Hedging, are recorded on the balance sheet at fair value. The Company uses interest rate swaps, currency and commodity price swaps, and foreign currency forward and option contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity market volatility. All hedging instruments that qualify for hedge accounting are designated and effective as hedges, in accordance with U.S. generally accepted accounting principles. If the underlying hedged transaction ceases to exist, all changes in fair value of the related derivatives that have not been settled are recognized in current earnings. Instruments that do not qualify for hedge accounting are marked to market with changes recognized in current earnings. Cash flows from derivative instruments are classified in the statement of cash flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships. The Company does not hold or issue derivative financial instruments for trading purposes and is not a party to leveraged derivatives.
Credit risk: 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. 3M enters into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow each counterparty to net settle amounts owed between a 3M entity and the counterparty as a result of multiple, separate derivative transactions. The Company does not anticipate nonperformance by any of these counterparties. 3M has elected to present the fair value of derivative assets and liabilities within the Company's consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation.
Fair value measurements: 3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under the standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Acquisitions: The Company accounts for business acquisitions in accordance with ASC 805, Business Combinations. This standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration) and the exclusion of transaction and acquisition-related restructuring costs from acquisition accounting.
New Accounting Pronouncements
In May2014, the Financial Accounting Standards Board (FASB) issued ASU No.2014-09, Revenue from Contracts with Customers, and in August 2015 issued ASU No. 2015-14, which amended the standard as to effective date. The ASU provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard's stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle the ASU includes provisions within a five step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) an entity satisfies a performance obligation. The standard also specifies the accounting for some costs to obtain or fulfill a contract with a customer and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. During 2016, the FASB also issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU No. 2016-10, Identifying Performance Obligations and Licensing; ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers which amend ASU No. 2014-09. These amendments include clarification of principal versus agent guidance in situations in which a revenue transaction involves a third party in providing goods or services to a customer. In such circumstances, an entity must determine whether the nature of its promise to the customer is to provide the underlying goods or services (i.e., the entity is the principal in the transaction) or to arrange for the third party to provide the underlying goods or services (i.e., the entity is the agent in the transaction). The amendments clarify, in terms of identifying performance obligations, how entities would determine whether promised goods or services are separately identifiable from other promises in a contract and, therefore, would be accounted for separately. The guidance allows entities to disregard goods or services that are immaterial in the context of a contract and provides an accounting policy election to account for shipping and handling activities as fulfillment costs rather than as additional promised services. With regard to licensing, the amendments clarify how an entity would evaluate the nature of its promise in granting a license of intellectual property, which determines whether the entity recognizes revenue over time or at a point in time. The amendments also address implementation issues relative to transition (adding a practical expedient for contract modifications and clarifying what constitutes a completed contract when employing full or modified retrospective transition methods), collectability, noncash consideration, and the presentation of sales and other similar-type taxes (allowing entities to exclude sales-type taxes collected from transaction price). Finally, the amendments provide additional guidance in the areas of disclosure of performance obligations, provisions for losses on certain types of contracts, scoping, and other areas. Overall, ASU No. 2014-09, as amended, provides for either full retrospective adoption or a modified retrospective adoption by which it is applied only to the most current period presented. For 3M, the ASU is effective January 1, 2018 and the Company has concluded that it will utilize the modified retrospective method of adoption. The Company has completed analyses, executed project management relative to the process of adopting this ASU, and conducted detailed contract reviews to complete necessary adjustments to existing accounting policies and quantify the ASU's effect. For most of 3M's revenue arrangements, there are no impacts as these transactions are not accounted for under industry-specific guidance that will be superseded by the ASU and generally consist of a single performance obligation to transfer promised goods or services. 3M also engages in some arrangements for which software industry-specific guidance (which the ASU supersedes) is presently utilized. The Company also considered these arrangements in the detailed contract reviews that have been conducted. While 3M will provide expanded disclosures as a result of ASU No. 2014-09, it does not expect this standard to have a material impact on its consolidated results of operations and financial condition.
In February2015, the FASB issued ASU No.2015-02, Amendments to the Consolidation Analysis, which changes guidance related to both the variable interest entity (VIE) and voting interest entity (VOE) consolidation models. With respect to the VIE model, the standard changes, among other things, the identification of variable interests associated with fees paid to a decision maker or service provider, the VIE characteristics for a limited partner or similar entity, and the primary beneficiary determination. With respect to the VOE model, the ASU eliminates the presumption that a general partner controls a limited partnership or similar entity unless the presumption can otherwise be overcome. Under the new guidance, a general partner would largely not consolidate a partnership or similar entity under the VOE model. The Company adopted this ASU effective January1, 2016. Because 3M did not have significant involvement with entities subject to consolidation considerations impacted by the VIE model changes or with limited partnerships potentially impacted by the VOE model changes, the adoption did not have a material impact on the Company's consolidated results of operations and financial condition.
In April2015, the FASB issued ASU No.2015-05, Customer's Accounting for Fees Paid in a Cloud Arrangement, which requires a customer to determine whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for fees related to the software license element in a manner consistent with accounting for the acquisition of other acquired software licenses. If the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. An arrangement would contain a software license element if both (1)the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and (2)it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. 3M adopted this ASU prospectively to arrangements entered into, or materially modified beginning January 1, 2016. The adoption did not have a material impact on 3M's consolidated results of operations and financial condition.
In July2015, the FASB issued ASU No.2015-11, Simplifying the Measurement of Inventory, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under existing standards, the market amount requires consideration of replacement cost, net realizable value (NRV), and NRV less an approximately normal profit margin. The new ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. 3M adopted this standard prospectively beginning January1, 2017. The adoption did not have a material impact on 3M's consolidated results of operations and financial condition.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which revises the accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance requires the fair value measurement of investments in equity securities and other ownership interests in an entity, including investments in partnerships, unincorporated joint ventures and limited liability companies (collectively, equity securities) that do not result in consolidation and are not accounted for under the equity method. Entities will need to measure these investments and recognize changes in fair value in net income. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities they classify under current guidance as available-for-sale in other comprehensive income (OCI). They also will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. Instead, for these types of equity investments that do not otherwise qualify for the net asset value practical expedient, entities will be permitted to elect a practicability exception and measure the investment at cost less impairment plus or minus observable price changes (in orderly transactions). The ASU also establishes an incremental recognition and disclosure requirement related to the presentation of fair value changes of financial liabilities for which the fair value option (FVO) has been elected. Under this guidance, an entity would be required to separately present in OCI the portion of the total fair value change attributable to instrument-specific credit risk as opposed to reflecting the entire amount in earnings. This provision does not apply to derivative instruments required to be measured at fair value with changes in fair value recognized in current earnings. For 3M, this standard is effective beginning January 1, 2018 via a cumulative-effect adjustment to beginning retained earnings, except for guidance relative to equity securities without readily determinable fair values which is applied prospectively. Because the Company has historically held limited amounts of equity securities (less than $75 million in aggregate at December 31, 2017), and has not elected the FVO with respect to material financial liabilities, it does not expect this standard to have a material impact on its consolidated results of operations and financial condition.
In February 2016, the FASB issued ASU No. 2016-02, Leases, replacing existing lease accounting guidance. The new standard introduces a lessee model that would require entities to recognize assets and liabilities for most leases, but recognize expenses on their income statements in a manner similar to current accounting. The ASU does not make fundamental changes to existing lessor accounting. However, it modifies what qualifies as a sales-type and direct financing lease and related accounting and aligns a number of the underlying principles with those of the new revenue standard, ASU No. 2014-09, such as evaluating how collectability should be considered and determining when profit can be recognized. The guidance eliminates existing real estate-specific provisions and requires expanded qualitative and quantitative disclosures. The standard requires modified retrospective transition by which it is applied at the beginning of the earliest comparative period presented in the year of adoption. For 3M, the ASU is effective January1, 2019. Information under existing lease guidance with respect to rent expense for operating leases and the Company's minimum lease payments for capital and operating leases with non-cancelable terms in excess one year as of December 31, 2017 is included in Note 15. The Company is currently assessing this ASU's impact on 3M's consolidated results of operations and financial condition.
In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments. This ASU clarifies guidance used to determine if debt instruments that contain contingent put or call options would require separation of the embedded put or call feature from the debt instrument and trigger accounting for the feature as a derivative with changes in fair value recorded through income. Under the new guidance, fewer put or call options embedded in debt instruments would require derivative accounting. For 3M, this ASU was effective January 1, 2017. The Company's outstanding debt with embedded put provisions did not require separate derivative accounting under existing guidance. As a result, the adoption of this standard did not have a material impact on the Company's consolidated results of operations and financial condition.
In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminates the existing requirement to apply the equity method of accounting retrospectively (revising prior periods as if the equity method had always been applied) when an entity obtains significant influence over a previously held investment. The new guidance would require the investor to apply the equity method prospectively from the date the investment qualifies for the equity method. The investor would add the carrying value of the existing investment to the cost of any additional investment to determine the initial cost basis of the equity method investment. For 3M, this ASU was effective January 1, 2017 on a prospective basis. 3M will apply this guidance to investments that transition to the equity method after the adoption date.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. With respect to available-for-sale (AFS) debt securities, the ASU amends the current other-than-temporary impairment model. For such securities with unrealized losses, entities will still consider if a portion of any impairment is related only to credit losses and therefore recognized as a reduction in income. However, rather than also reflecting that credit loss amount as a permanent reduction in cost (amortized cost) basis of that AFS debt security, the ASU requires that credit losses be reflected as an allowance. As a result, under certain circumstances, a recovery in value could result in previous allowances, or portions thereof, reversing back into income. For 3M, this ASU is effective January 1, 2020, with early adoption permitted. Entities are required to apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently assessing this ASU's impact on 3M's consolidated result of operations and financial condition.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provides guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The ASU also provides guidance for classifying cash receipts and payments that have aspects of more than one class of cash flows. The Company early adopted ASU No. 2016-15 as of January 1, 2017. Since the associated changes in classification were immaterial to all prior periods presented, no impact was reflected in the Company's pre-2017 consolidated results of operations and financial condition presented.
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which modifies existing guidance and is intended to reduce diversity in practice with respect to the accounting for the income tax consequences of intra-entity transfers of assets. The ASU indicates that the current exception to income tax accounting that requires companies to defer the income tax effects of certain intercompany transactions would apply only to intercompany inventory transactions. That is, the exception would no longer apply to intercompany sales and transfers of other assets (e.g., intangible assets). Under the existing exception, income tax expense associated with intra-entity profits in an intercompany sale or transfer of assets is eliminated from earnings. Instead, that cost is deferred and recorded on the balance sheet (e.g., as a prepaid asset) until the assets leave the consolidated group. Similarly, the entity is prohibited from recognizing deferred tax assets for the increases in tax bases due to the intercompany sale or transfer. For 3M, this ASU is effective January 1, 2018. The standard requires modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. Upon adoption, a company would write off any income tax effects that had been deferred from past intercompany transactions involving non-inventory assets to opening retained earnings. In addition, an entity would record deferred tax assets with an offset to opening retained earnings for amounts that entity had previously not recognized under existing guidance but would recognize under the new guidance. Based on deferred tax amounts related to applicable past intercompany transactions as of December 31, 2017, the Company does not expect this ASU to have a material impact on 3M's consolidated results of operations and financial condition.
In October 2016, the FASB issued ASU No.2016-17, Interests Held through Related Parties That Are under Common Control, which modifies existing guidance with respect to how a decision maker that holds an indirect interest in a variable interest entity (VIE) through a common control party determines whether it is the primary beneficiary of the VIE as part of the analysis of whether the VIE would need to be consolidated. Under the ASU, a decision maker would need to consider only its proportionate indirect interest in the VIE held through a common control party. Previous guidance had required the decision maker to treat the common control party's interest in the VIE as if the decision maker held the interest itself. As a result of the ASU, in certain cases, previous consolidation conclusions may change. For 3M, the standard was effective January 1, 2017 with retrospective application to January 1, 2016. 3M does not have significant involvement with entities subject to consolidation considerations impacted by VIE model factors. As a result, the adoption of this ASU did not have a material impact on the Company's consolidated results of operations and financial condition.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. Under the ASU, changes in restricted cash and restricted cash equivalents would be included along with those of cash and cash equivalents in the statement of cash flows. As a result, entities would no longer present transfers between cash/equivalents and restricted cash/equivalents in the statement of cash flows. In addition, a reconciliation between the balance sheet and the statement of cash flows would be disclosed when the balance sheet includes more than one line item for cash/equivalents and restricted cash/equivalents. The Company early adopted ASU No. 2016-18 as of January 1, 2017. Due to the immaterial use of restricted cash and restricted cash equivalents, no impact was reflected in the Company's pre-2017 consolidated results of operations and financial condition presented.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs. The standard also narrows the definition of outputs. The definition of a business affects areas of accounting such as acquisitions, disposals and goodwill. Under the new guidance, fewer acquired sets are expected to be considered businesses. For 3M, this ASU is effective January 1, 2018 on a prospective basis with early adoption permitted. 3M would apply this guidance to applicable transactions after the adoption date.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. For 3M, this ASU is effective prospectively to impairment tests beginning January 1, 2020, with early adoption permitted. 3M adopted this ASU in the fourth quarter of 2017 in conjunction with its annual goodwill impairment testing. The adoption did not have an impact on 3M's consolidated results of operations and financial condition.
In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU addresses scope-related questions that arose after the FASB issued its revenue guidance in ASU No. 2014-09, Revenue from Contracts with Customers. The new standard clarifies the accounting for derecognition of nonfinancial assets and defines what is considered an in substance nonfinancial asset. Nonfinancial assets largely relate to items such as real estate, ships and intellectual property that do not constitute a business. The new ASU impacts entities derecognizing (e.g. selling) nonfinancial assets (or in substance nonfinancial assets), including partial interests therein, when the purchaser is not a customer. Under the new guidance, the seller would apply certain recognition and measurement principles of ASU No. 2014-09, Revenue from Contracts with Customers, even though the purchaser is not a customer. For 3M, this new standard is effective coincident with the Company's January 1, 2018 adoption of ASU No. 2014-09. The Company does not expect this ASU to have a material impact on 3M's consolidated results of operations and financial condition.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU changes how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Under the new standard, only the service cost component of net periodic benefit cost would be included in operating expenses and only the service cost component would be eligible for capitalization into assets such as inventory. All other net periodic benefit costs components (such as interest, expected return on plan assets, prior service cost amortization and actuarial gain/loss amortization) would be reported outside of operating income. For 3M, this ASU is effective January 1, 2018 on a retrospective basis; however, guidance limiting the capitalization to only the service cost component is applied on prospective basis. The components of 3M's net periodic defined benefit pension and postretirement benefit costs are presented in Note 12. These include components totaling a benefit of $129 million, $195 million, and a detriment of $34 million, for the fiscal years 2017, 2016, and 2015, respectively, that would no longer be included within operating expenses and instead would be reported outside of income from operations under the new standard. Further, the capitalization of service cost change is not expected to have a material impact on 3M's consolidated results of operations and financial condition.
In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium. Under existing standards, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The new guidance shortens the amortization period to the earliest call date for certain callable debt securities that have explicit, noncontingent call features and are callable at a fixed price and preset date. The amendments do not require an accounting change for securities held at a discount. For 3M, this ASU is effective January 1, 2019 with a modified retrospective transition resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Early adoption is permitted. 3M's marketable security portfolio includes very limited instances of callable debt securities held at a premium. As a result, the Company does not expect this ASU to have a material impact on 3M's consolidated results of operations and financial condition.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. The general model for accounting for modifications of share-based payment awards is to record the incremental value arising from the changes as additional compensation cost. Under the new standard, fewer changes to the terms of an award would require accounting under this modification model. For 3M, this ASU is effective January 1, 2018, with early adoption permitted. Because the Company does not typically make changes to the terms or conditions of its issued share-based payment awards, 3M does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.
In May 2017, the FASB issued ASU No. 2017-10, Determining the Customer of the Operation Services, that clarifies how an operating entity determines the customer of the operation services for transactions within the scope of a service concession arrangement. Service concession arrangements are typically agreements between a grantor and an operating entity whereby the operating entity will operate the grantor's infrastructure (i.e. airports, roadways, bridges, and prisons) for a specified period of time. The operating entity also may be required to maintain the infrastructure and provide capital-intensive maintenance to enhance or extend its life. In such arrangements, typically the operation services (i.e. operation and maintenance of a roadway) would be used by third parties (i.e. drivers). The ASU clarifies that the grantor, not the third party, is the customer of the operation services in such arrangements. For 3M, this new standard is effective coincident with the Company's January 1, 2018 adoption of ASU No. 2014-09. Because the Company is not typically a party to agreements within the scope of accounting for service concession arrangements, 3M does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.
In July 2017, the FASB issued ASU No. 2017-11, (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The new standard applies to issuers of financial instruments with down-round features. A down-round provision is a term in an equity-linked financial instrument (i.e. a freestanding warrant contract or an equity conversion feature embedded within a host debt or equity contract) that triggers a downward adjustment to the instrument's strike price (or conversion price) if equity shares are issued at a lower price (or equity-linked financial instruments are issued at a lower strike price) than the instrument's then-current strike price. The purpose of the feature is typically to protect the instrument's counterparty from future issuances of equity shares at a more favorable price. The ASU amends (1) the classification of such instruments as liabilities or equity by revising the certain guidance relative to evaluating if they must be accounted for as derivative instruments and (2) the guidance on recognition and measurement of freestanding equity-classified instruments. For 3M, this ASU is effective January 1, 2019, with early adoption permitted. Because the Company has not issued financial instruments with down-round features, 3M does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The ASU amends existing guidance to simplify the application of hedge accounting in certain situations and allow companies to better align their hedge accounting with their risk management activities. Existing standards contain certain requirements for an instrument to qualify for hedge accounting relative to initial and ongoing assessments of hedge effectiveness. While an initial quantitative test to establish the hedge relationship is highly effective would still be required, the new ASU permits subsequent qualitative assessments for certain hedges instead of a quantitative test and expands the timeline for performing the initial quantitative assessment. The ASU also simplifies related accounting by eliminating the requirement to separately measure and report hedge ineffectiveness. Instead, for qualifying cash flow and net investment hedges, the entire change in fair value (including the amount attributable to ineffectiveness) will be recorded within other comprehensive income and reclassified to earnings in the same income statement line that is used to present the earnings effect of the hedged item when the hedged item affects earnings. For fair value hedges, generally, the entire change in fair value of the hedging instrument would also be presented in the same income statement line as the hedged item. The new standard also simplifies the accounting for fair value hedges of interest rate risks and expands an entity's ability to hedge nonfinancial and financial risk components. In addition, the guidance also eases certain documentation requirements, modifies the accounting for components excluded from the assessment of hedge effectiveness, and requires additional tabular disclosures of derivative and hedge-related information. For 3M, this ASU is effective January 1, 2019, with a modified retrospective transition resulting in a cumulative-effect adjustment recorded to the opening balance of retained earnings as of the adoption date. Early adoption is permitted. The Company is currently assessing this ASU's impact on 3M's consolidated results of operations and financial condition.
NOTE 2. Acquisitions and Divestitures
Acquisitions:
3M makes acquisitions of certain businesses from time to time that are aligned with its strategic intent with respect to, among other factors, growth markets and adjacent product lines or technologies. Goodwill resulting from business combinations is largely attributable to the existing workforce of the acquired businesses and synergies expected to arise after 3M's acquisition of these businesses.
In addition to business combinations, 3M periodically acquires certain tangible and/or intangible assets and purchases interests in certain enterprises that do not otherwise qualify for accounting as business combinations. These transactions are largely reflected as additional asset purchase and investment activity.
2017 acquisitions:
In September 2017, 3M purchased all of the ownership interests of Elution Technologies, LLC, a Vermont-based manufacturer of test kits that help enable food and beverage companies ensure their products are free from certain potentially harmful allergens such as peanuts, soy or milk. Elution is reported within the Company's Health Care business.
In October 2017, 3M completed the acquisition of the underlying legal entities and associated assets of Scott Safety, which is headquartered in Monroe, North Carolina, from Johnson Controls for $2.0 billion of cash, net of cash acquired. Scott Safety is a premier manufacturer of innovative products, including self-contained breathing apparatus systems, gas and flame detection instruments, and other safety devices that complement 3M's personal safety portfolio. The business had revenues of approximately $570 million in 2016. Scott Safety is reported within 3M's Safety and Graphics business. The allocation of purchase consideration related to Scott Safety is considered preliminary with provisional amounts primarily related to intangible assets and certain tax-related, contingent liability and working capital items. 3M expects to finalize the allocation of purchase price within the one year measurement-period following the acquisition.
Pro forma information related to acquisitions has not been included because the impact on the Company's consolidated results of operations was not considered material. The following table shows the impact on the consolidated balance sheet of the purchase price allocations related to 2017 acquisitions and assigned finite-lived intangible asset weighted-average lives.
2017AcquisitionActivity
Finite-Lived
Intangible-Asset
(Millions)
Scott
Weighted-Average
Asset(Liability)
Safety
Other
Total
Lives (Years)
Accounts receivable
$
100
$
-
$
100
Inventory
79
-
79
Other current assets
10
-
10
Property, plant, and equipment
74
-
74
Purchased finite-lived intangible assets:
Customer related intangible assets
439
3
442
15
Other technology-based intangible assets
125
2
127
10
Definite-lived tradenames
285
-
285
17
Other amortizable intangible assets
-
1
1
5
Purchased goodwill
1,296
6
1,302
Accounts payable and other liabilities
(100)
-
(100)
Deferred tax asset/(liability)
(297)
-
(297)
Net assets acquired
$
2,011
$
12
$
2,023
Supplemental information:
Cash paid
$
2,020
$
12
$
2,032
Less: Cash acquired
9
-
9
Cash paid, net of cash acquired
$
2,011
$
12
$
2,023
Purchased identifiable finite-lived intangible assets related to acquisition activity in 2017 totaled $855 million. The associated finite-lived intangible assets acquired in 2017 will be amortized on a systematic and rational basis (generally straight line) over a weighted-average life of 15 years (lives ranging from four to 17 years). Acquired in-process research and development and identifiable intangible assets for which significant assumed renewals or extensions of underlying arrangements impacted the determination of their useful lives were not material.
2016 acquisitions:
In September 2016, 3M acquired all of the outstanding shares of Semfinder, headquartered in Kreuzlingen, Switzerland. Semfinder is a leading developer of precision software that enables efficient coding of medical procedures in multiple languages. The purchase price paid for these business combinations (net of cash acquired) during 2016 aggregated to $16 million. Semfinder is reported within 3M's Health Care business.
Adjustments in 2016 to the preliminary purchase price allocations of other acquisitions within the allocation period primarily related to the identification of contingent liabilities and certain tax-related items aggregating to approximately $35 million along with other balances related to the 2015 acquisition of Capital Safety Group S.A.R.L. The change to provisional amounts resulted in an immaterial impact to the results of operations in the third quarter of 2016, a portion of which related to earlier quarters in the measurement period.
Purchased identifiable finite-lived intangible assets related to acquisition activity in 2016 totaled $4 million. The associated finite-lived intangible assets acquired in 2016 will be amortized on a systematic and rational basis (generally straight line) over a weighted-average life of 8 years (lives ranging from two to 20 years). Acquired in-process research and development and identifiable intangible assets for which significant assumed renewals or extensions of underlying arrangements impacted the determination of their useful lives were not material.
2015 acquisitions:
In March2015, 3M purchased all of the outstanding shares of Ivera Medical Corp., headquartered in San Diego, California. Ivera Medical Corp. is a manufacturer of health care products that disinfect and protect devices used for access into a patient's bloodstream and is reported within 3M's Health Care business. In addition, in the first quarter of 2015, 3M purchased the remaining interest in a former equity method investment reported within 3M's Industrial business for an immaterial amount.
In August2015, 3M acquired all of the outstanding shares of Capital Safety Group S.A.R.L., with operating headquarters in Bloomington, Minnesota, from KKR& Co. L.P. for $1.7 billion, net of cash acquired. The net assets acquired included the assumption of $0.8 billion of debt. Capital Safety is a leading global provider of fall protection equipment and is reported within 3M's Safety and Graphics business.
In August2015, 3M acquired the assets and liabilities associated with Polypore International, Inc.'s Separations Media business (hereafter referred to as Membrana), headquartered in Wuppertal, Germany, for $1.0 billion. Membrana is a leading provider of microporous membranes and modules for filtration in the life sciences, industrial and specialty segments and is reported within 3M's Industrial business.
The impact on the consolidated balance sheet of the purchase price allocations related to 2015 acquisitions and assigned weighted-average intangible asset lives, including adjustments relative to other acquisitions within the measurement period, follows.Adjustments in 2015 to the preliminary allocations primarily related to the identification and valuation of certain indefinite-lived intangible assets. The change to provisional amounts resulted in an immaterial impact to results of operations in the fourth quarter of 2015, a portion of which relates to earlier quarters in the measurement period.
2015AcquisitionActivity
Finite-Lived
Intangible-Asset
(Millions)
Capital
Polypore Separations
Weighted-Average
Asset(Liability)
Safety
Media (Membrana)
Other
Total
Lives (Years)
Accounts receivable
$
66
$
30
$
7
$
103
Inventory
63
35
4
102
Other current assets
10
1
1
12
Property, plant, and equipment
36
128
7
171
Purchased finite-lived intangible assets:
Customer related intangible assets
445
270
40
755
16
Patents
44
11
7
62
7
Other technology-based intangible assets
85
42
1
128
7
Definite-lived tradenames
26
6
1
33
16
Other amortizable intangible assets
-
-
2
2
4
Purchased indefinite-lived intangible assets
520
-
-
520
Purchased goodwill
1,764
636
95
2,495
Accounts payable and other liabilities, net ofother assets
(105)
(122)
(5)
(232)
Interest bearing debt
(766)
-
-
(766)
Deferred tax asset/(liability)
(464)
-
(7)
(471)
Net assets acquired
$
1,724
$
1,037
$
153
$
2,914
Supplemental information:
Cash paid
$
1,758
$
1,037
$
154
$
2,949
Less: Cash acquired
34
-
1
35
Cash paid, net of cash acquired
$
1,724
$
1,037
$
153
$
2,914
Purchased identifiable finite-lived intangible assets related to acquisition activity in 2015 totaled $1.0 billion. The associated finite-lived intangible assets acquired in 2015 will be amortized on a systematic and rational basis (generally straight line) over a weighted-average life of 14 years (lives ranging from two to 20 years). Indefinite-lived intangible assets of $520 million relate to certain tradenames associated with the Capital Safety acquisition which have been in existence for over 55 years, have a history of leading market-share positions, have been and are intended to be continuously renewed, and the associated products of which are expected to generate cash flows for 3M for an indefinite period of time. Acquired in-process research and development and identifiable intangible assets for which significant assumed renewals or extensions of underlying arrangements impacted the determination of their useful lives were not material.
Divestitures:
3M may divest certain businesses from time to time based upon review of the Company's portfolio considering, among other items, factors relative to the extent of strategic and technological alignment and optimization of capital deployment, in addition to considering if selling the businesses results in the greatest value creation for the Company and for shareholders.
In January 2015, 3M completed the sale of its global Static Control business to Desco Industries Inc., based in Chino, California. 2014 sales of this business were $46 million. This transaction was not considered material and was reported within 3M's Electronics and Energy business.
In the fourth quarter of 2015, 3M entered into agreements with One Equity Partners Capital Advisors L.P. (OEP) to sell the assets of 3M's library systems business. The sales of the North American business and the majority of the business outside of North America closed in October and November 2015, respectively. The sale of the remainder of the library systems business closed in the first quarter of 2016 (discussed further below). In December 2015, 3M also completed the sale of Faab Fabricauto, a wholly-owned subsidiary of 3M, to Hills Numberplates Limited. The library systems business, part of the former Traffic Safety and Security Division, delivers circulation management solutions to library customers with on-premise hardware and software, maintenance and service, and an emerging cloud-based digital lending platform. Faab Fabricauto, also part of the former Traffic Safety and Security Division, is a leading French manufacturer of license plates and signage solutions. The aggregate cash proceeds relative to the 2015 global library systems and Faab Fabricauto divestiture transactions was $104 million. The Company recorded within 3M's Safety and Graphics business a net pre-tax gain of $40 million in 2015 as a result of the sale and any adjustment of carrying value.
In the first quarter of 2016, 3M completed the sale of the remainder of the assets of 3M's library systems business to One Equity Partners Capital Advisors L.P. (OEP). 3M had previously sold the North American business and the majority of the business outside of North America to OEP in the fourth quarter of 2015 which was reported within 3M's Safety and Graphics business. Also in the first quarter of 2016, 3M sold to Innovative Chemical Products Group, a portfolio company of Audax Private Equity, the assets of 3M's pressurized polyurethane foam adhesives business (formerly known as Polyfoam). This business is a provider of pressurized polyurethane foam adhesive formulations and systems into the residential roofing, commercial roofing and insulation and industrial foam segments in the United States with annual sales of approximately $20 million and was reported within 3M's Industrial business. The Company recorded a pre-tax gain of $40 million in the first quarter of 2016 as a result of the sales of these businesses.
In October 2016, 3M sold the assets of its temporary protective films business to Pregis LLC. This business, with annual sales of approximately $50 million, is a provider of adhesive-backed temporary protective films used in a broad range of industries and was reported within 3M's Industrial business. In December 2016, 3M sold the assets of its cathode battery technology out-licensing business, with annual sales of approximately $10 million, to UMICORE. This business was reported within 3M's Electronics and Energy business. The aggregate selling price relative to these two businesses was $86 million. The Company recorded a pre-tax gain of $71 million in the fourth quarter of 2016 as a result of the sales of these businesses.
In January 2017, 3M sold the assets of its safety prescription eyewear business, with annual sales of approximately $45 million, to HOYA Vision Care. The Company recorded a pre-tax gain of $29 million in the first quarter of 2017 as a result of this sale, which was reported within the Company's Safety and Graphics business.
In May 2017, 3M completed the related sale or transfer of control, as applicable, of its identity management business to Gemalto N.V. This business, with 2016 sales of approximately $205 million, is a leading provider in identity management solutions, including biometric hardware and software that enable identity verification and authentication, as well as secure materials and document readers. In June 2017, 3M also completed the sale of its tolling and automated license/number plate recognition business, with annual sales of approximately $40 million, to Neology, Inc. 3M's tolling and automated license/number plate recognition business includes RFID readers and tags, automatic vehicle classification systems, lane controller and host software, and back office software and services. It also provides mobile and fixed cameras, software, and services in automated license/number plate recognition. 3M received proceeds of $833 million, or $809 million net of cash sold, and reflected a pre-tax gain of $458 million as a result of these two divestitures, which was reported within the Company's Safety and Graphics business.
In October 2017, 3M sold its electronic monitoring business to an affiliate of Apax Partners. This business, with annual sales of approximately $95 million, is a provider of electronic monitoring technologies, serving hundreds of correctional and law enforcement agencies around the world. 3M received proceeds of $201 million, net of cash sold, and reflected a pre-tax gain of $98 million in the fourth quarter of 2017 as a result of this divestiture, which was reported within the Company's Safety and Graphics business.
In the fourth quarter of 2017, 3M sold the assets of an electrical marking/labeling business within its Electronics and Energy business. The former activity, proceeds and gain were not considered material.
In December 2017, 3M agreed to sell substantially all of its Communication Markets Division to Corning Incorporated, for $900 million, subject to closing and other adjustments. This business, with annual sales of approximately $400 million consists of optical fiber and copper passive connectivity solutions for the telecommunications industry including 3M's xDSL, FTTx, and structured cabling solutions and, in certain countries, telecommunications system integration services. This sale is expected to close in 2018, subject to consultation or information requirements with relevant works councils and to customary closing conditions and regulatory approvals. The 3M expects a pre-tax gain of approximately $500 million as a result of this divestiture that will be reported within the Company's Electronics and Energy business.
In February 2018, 3M closed on the sale of certain personal safety product offerings primarily focused on noise, environmental, and heat stress monitoring to TSI, Inc. 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.
The aggregate operating income of these businesses was approximately $45 million, $50 million and not significant in 2017, 2016 and 2015, respectively. The approximate amounts of major assets and liabilities associated with disposal groups classified as held-for-sale as of December 31, 2017 and December 31, 2016, included the following:
December31,
December31,
(Millions)
2017
2016
Accounts receivable
$
25
$
25
Property, plant and equipment (net)
20
25
Intangible assets
-
35
Deferred revenue (other current liabilities)
-
35
In addition, approximately $270 million of goodwill was estimated to be attributable to disposal groups classified as held-for-sale as of both December 31, 2017 and December 31, 2016, based upon relative fair value. The amounts above have not been segregated and are classified within the existing corresponding line items on the Company's consolidated balance sheet.
NOTE 3. Goodwill and Intangible Assets
Purchased goodwill from acquisitions totaled $1.3 billion in 2017, none of which is deductible for tax purposes. Purchased goodwill from acquisitions totaled $14 million in 2016, none of which is deductible for tax purposes. The acquisition activity in the following table also includes the net impact of adjustments to the preliminary allocation of purchase price within the one year measurement-period following prior acquisitions, which increased goodwill by $39 million during 2016. The amounts in the "Translation and other" column in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balance by business segment follows:
Goodwill
Dec.31,
2016
2016
Dec.31,
2017
2017
2017
Dec.31,
2015
acquisition
translation
2016
acquisition
divestiture
translation
2017
(Millions)
Balance
activity
andother
Balance
activity
activity
andother
Balance
Industrial
$
2,573
$
-
$
(37)
$
2,536
$
-
$
-
$
142
$
2,678
Safety and Graphics
3,342
41
(59)
3,324
1,296
(323)
122
4,419
Health Care
1,624
12
(27)
1,609
6
-
67
1,682
Electronics and Energy
1,510
-
(21)
1,489
-
-
35
1,524
Consumer
200
-
8
208
-
-
2
210
Total Company
$
9,249
$
53
$
(136)
$
9,166
$
1,302
$
(323)
$
368
$
10,513
Accounting standards require that goodwill be tested for impairment annually and between annual tests in certain circumstances such as a change in reporting units or the testing of recoverability of a significant asset group within a reporting unit. At 3M, reporting units correspond to a division.
As described in Note 17, effective in the first quarter of 2017, the Company changed its business segment reporting in its continuing effort to improve the alignment of its businesses around markets and customers. For any product changes that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill of the associated reporting units. During the first quarter of 2017, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed. The Company also completed its annual goodwill impairment test in the fourth quarter of 2017 for all reporting units and determined that no impairment existed. In addition, the Company had no impairments of goodwill in prior years.
Acquired Intangible Assets
The carrying amount and accumulated amortization of acquired finite-lived intangible assets, in addition to the balance of non-amortizable intangible assets, as of December 31, follow:
December31,
December31,
(Millions)
2017
2016
Customer related intangible assets
$
2,332
$
1,939
Patents
561
602
Other technology-based intangible assets
583
524
Definite-lived tradenames
678
420
Other amortizable intangible assets
207
211
Total gross carrying amount
$
4,361
$
3,696
Accumulated amortization - customer related
(874)
(797)
Accumulated amortization - patents
(489)
(497)
Accumulated amortization - other technology based
(292)
(302)
Accumulated amortization - definite-lived tradenames
(256)
(236)
Accumulated amortization - other
(162)
(173)
Total accumulated amortization
$
(2,073)
$
(2,005)
Total finite-lived intangible assets - net
$
2,288
$
1,691
Non-amortizable intangible assets (primarily tradenames)
648
629
Total intangible assets - net
$
2,936
$
2,320
Certain tradenames acquired by 3M are not amortized because they have been in existence for over 55 years, have a history of leading-market share positions, have been and are intended to be continuously renewed, and the associated products of which are expected to generate cash flows for 3M for an indefinite period of time.
Amortization expense for the years ended December 31 follows:
(Millions)
2017
2016
2015
Amortization expense
$
238
$
262
$
229
Expected amortization expense for acquired amortizable intangible assets recorded as of December31, 2017 follows:
After
(Millions)
2018
2019
2020
2021
2022
2022
Amortizationexpense
$
252
$
242
$
231
$
221
$
208
$
1,134
The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible assets and other events. 3M expenses the costs incurred to renew or extend the term of intangible assets.
NOTE 4. Restructuring Actions and Exit Activities
2017 Restructuring Actions:
During the second quarter of 2017, management approved and committed to undertake certain restructuring actions primarily focused on portfolio and footprint optimization. These actions affected approximately 1,300 positions worldwide and resulted in a second quarter 2017 pre-tax charge of $99 million. Remaining activities related to restructuring are expected to be completed by the end of 2018.
Restructuring charges are summarized by business segment as follows:
Second Quarter 2017
(Millions)
Employee-Related
Industrial
$
39
Safety and Graphics
9
Health Care
2
Electronics and Energy
7
Consumer
36
Corporate and Unallocated
6
Total Expense
$
99
The preceding restructuring charges were recorded in the income statement as follows:
(Millions)
Second Quarter 2017
Cost of sales
$
86
Selling, general and administrative expenses
5
Research, development and related expenses
8
Total
$
99
Restructuring actions, including cash and non-cash impacts, follow:
(Millions)
Employee-Related
Expense incurred in the second quarter of 2017
$
99
Cash payments
(8)
Adjustments
(3)
Accrued restructuring action balances as of December 31, 2017
$
88
2017 Exit Activities:
During the first quarter of 2017, the Company recorded net pre-tax charges of $24 million related to exit activities. These charges related to employee reductions, primarily in Western Europe. During the fourth quarter of 2017, the Company recorded net pre-tax charges of $23 million related to exit activities. These charges related to employee reductions, primarily in the United States and Western Europe.
2015 Restructuring Actions:
During the fourth quarter of 2015, management approved and committed to undertake certain restructuring actions primarily focused on structural overhead, largely in the U.S. and slower-growing markets, with particular emphasis on Europe, Middle East, and Africa (EMEA) and Latin America. This impacted approximately 1,700 positions worldwide and resulted in a fourth-quarter 2015 pre-tax charge of $114 million.
Components of these restructuring charges are summarized by business segment as follows:
2015
(Millions)
Employee-Related
Asset-Related
Total
Industrial
$
30
$
12
$
42
Safety and Graphics
11
-
11
Health Care
9
-
9
Electronics and Energy
8
4
12
Consumer
3
-
3
Corporate and Unallocated
37
-
37
Total Expense
$
98
$
16
$
114
The preceding restructuring charges were recorded in the income statement as follows:
(Millions)
2015
Cost of sales
40
Selling, general and administrative expenses
62
Research, development and related expenses
12
Total
$
114
Components of these restructuring actions, including cash and non-cash impacts, follow:
(Millions)
Employee-Related
Asset-Related
Total
Expense incurred
$
98
$
16
$
114
Non-cash changes
(8)
(16)
(24)
Cash payments
(27)
-
(27)
Accrued restructuring action balances as of December 31, 2015
$
63
$
-
$
63
Cash payments
(57)
-
(57)
Accrued restructuring action balances as of December 31, 2016
$
6
$
-
$
6
Cash payments
(6)
-
(6)
Accrued restructuring action balances as of December 31, 2017
$
-
$
-
$
-
Non-cash changes include certain pension settlements and special termination benefits recorded in accrued defined benefit pension and postretirement benefits and accelerated deprecation resulting from the cessation of use of certain long-lived assets.
NOTE 5. Supplemental Income Statement Information
Other expense (income), net consists of the following:
(Millions)
2017
2016
2015
Interest expense
$
322
$
199
$
149
Interest income
(50)
(29)
(26)
Total
$
272
$
170
$
123
The Company recorded an early debt extinguishment charge of approximately $96 million which was included within interest expense in the fourth quarter of 2017.
NOTE 6. Supplemental Balance Sheet Information
Accounts payable (included as a separate line item in the Consolidated Balance Sheet) includes drafts payable on demand of $74 million at December31, 2017, and $88 million at December31, 2016. Accumulated depreciation for capital leases totaled $48 million and $89 million as of December31, 2017, and 2016, respectively. Additional supplemental balance sheet information is provided in the table that follows.
(Millions)
2017
2016
Other current assets
Derivative assets-current
$
37
$
148
Insurance related (receivables, prepaid expenses and other)
71
109
Other
158
193
Total other current assets
$
266
$
450
Property, plant and equipment - at cost
Land
$
348
$
341
Buildings and leasehold improvements
7,681
7,252
Machinery and equipment
15,907
14,935
Construction in progress
843
809
Capital leases
135
162
Gross property, plant and equipment
24,914
23,499
Accumulated depreciation
(16,048)
(14,983)
Property, plant and equipment - net
$
8,866
$
8,516
Other assets
Deferred income taxes
$
511
$
422
Prepaid pension and post retirement
237
52
Insurance related receivables and other
63
68
Cash surrender value of life insurance policies
241
236
Equity method investments
70
60
Cost method and other investments
80
68
Other
193
272
Total other assets
$
1,395
$
1,178
Other current liabilities
Accrued rebates
$
516
$
458
Deferred income
513
551
Derivative liabilities
135
92
Employee benefits and withholdings
208
155
Contingent liability claims and other
179
201
Property, sales-related and other taxes
277
248
Pension and postretirement benefits
69
66
Other
812
701
Total other current liabilities
$
2,709
$
2,472
Other liabilities
Long term income taxes payable
$
1,287
$
244
Employee benefits
319
256
Contingent liability claims and other
727
719
Capital lease obligations
60
45
Deferred income
37
15
Deferred income taxes
235
145
Other
297
224
Total other liabilities
$
2,962
$
1,648
NOTE 7. Supplemental Equity and Comprehensive Income Information
Common stock ($.01 par value per share) of 3.0 billion shares is authorized, with 944,033,056 shares issued. Preferred stock, without par value, of 10 million shares is authorized but unissued.
Cash dividends declared and paid totaled $1.175 and $1.11 per share for each quarter in 2017 and 2016, respectively, which resulted in total year declared dividends of $4.70 and $4.44 per share, respectively. In2015, 3M's Board of Directors declared a second, third, and fourth quarter dividend of $1.025 per share, which resulted in total year 2015 declared dividends of $3.075 per share. In December2014, 3M's Board of Directors declared a first quarter 2015 dividend of $1.025 per share (paid in March2015).
Changes in Accumulated Other Comprehensive Income (Loss) Attributable to 3M by Component
DefinedBenefit
CashFlow
Total
Pensionand
Hedging
Accumulated
Cumulative
Postretirement
Instruments,
Other
Translation
Plans
Unrealized
Comprehensive
(Millions)
Adjustment
Adjustment
Gain(Loss)
Income (Loss)
Balance at December31, 2014, net of tax:
$
(1,095)
$
(5,293)
$
99
$
(6,289)
Other comprehensive income (loss), before tax:
Amounts before reclassifications
(447)
367
212
132
Amounts reclassified out
-
537
(174)
363
Total other comprehensive income (loss), before tax
(447)
904
38
495
Tax effect
(137)
(415)
(13)
(565)
Total other comprehensive income (loss), netof tax
(584)
489
25
(70)
Balance at December31, 2015, net of tax:
$
(1,679)
$
(4,804)
$
124
$
(6,359)
Other comprehensive income (loss), before tax:
Amounts before reclassifications
(244)
(1,122)
57
(1,309)
Amounts reclassified out
-
421
(109)
312
Total other comprehensive income (loss), before tax
(244)
(701)
(52)
(997)
Tax effect
(85)
177
19
111
Total other comprehensive income (loss), netof tax
(329)
(524)
(33)
(886)
Balance at December31, 2016, net of tax:
$
(2,008)
$
(5,328)
$
91
$
(7,245)
Other comprehensive income (loss), before tax:
Amounts before reclassifications
91
(600)
(311)
(820)
Amounts reclassified out
-
483
(7)
476
Total other comprehensive income (loss), before tax
91
(117)
(318)
(344)
Tax effect
279
169
115
563
Total other comprehensive income (loss), netof tax
370
52
(203)
219
Balance at December31, 2017, net of tax:
$
(1,638)
$
(5,276)
$
(112)
$
(7,026)
Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation does include impacts from items such as net investment hedge transactions. Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income.
Reclassifications out of Accumulated Other Comprehensive Income Attributable to 3M
Amounts Reclassified from
DetailsaboutAccumulatedOther
AccumulatedOtherComprehensiveIncome
ComprehensiveIncomeComponents
YearendedDecember31,
LocationonIncome
(Millions)
2017
2016
2015
Statement
Gains (losses) associated with defined benefit pension and postretirement plans amortization
Transition asset
$
-
$
1
$
1
See Note 12
Prior service benefit
89
92
79
See Note 12
Net actuarial loss
(570)
(506)
(626)
See Note 12
Curtailments/Settlements
(2)
(8)
9
See Note 12
Total before tax
(483)
(421)
(537)
Tax effect
116
148
176
Provision for income taxes
Net of tax
$
(367)
$
(273)
$
(361)
Cash flow hedging instruments gains (losses)
Foreign currency forward/option contracts
$
8
$
110
$
178
Cost of sales
Commodity price swap contracts
-
-
(2)
Cost of sales
Interest rate swap contracts
(1)
(1)
(2)
Interest expense
Total before tax
7
109
174
Tax effect
(3)
(39)
(63)
Provision for income taxes
Net of tax
$
4
$
70
$
111
Total reclassifications for the period, net of tax
$
(363)
$
(203)
$
(250)
NOTE 8. Supplemental Cash Flow Information
(Millions)
2017
2016
2015
Cash income tax payments, net of refunds
$
1,604
$
1,888
$
2,331
Cash interest payments
214
194
134
Cash interest payments include interest paid on debt and capital lease balances, including net interest payments/receipts related to accreted debt discounts/premiums, payment of debt issue costs, as well as net interest payments/receipts associated with interest rate swap contracts. Cash interest payments exclude the cash paid for early debt extinguishment costs. Additional details are described in Note 11.
Individual amounts in the Consolidated Statement of Cash Flows exclude the impacts of acquisitions, divestitures and exchange rate impacts, which are presented separately.
Transactions related to investing and financing activities with significant non-cash components are as follows:
3M sold and leased-back, under a capital lease, certain recently constructed machinery and equipment in return for municipal bonds with the City of Nevada, Missouri during 2017 and 2016 valued at approximately $13 million and $12 million, respectively, as of the transaction date.
In addition, as discussed in Note 7, in the fourth quarter of 2014, 3M's Board of Directors declared a first quarter 2015 dividend of $1.025 per share (paid in March2015).
NOTE 9. Income Taxes
Income Before Income Taxes
(Millions)
2017
2016
2015
United States
$
4,149
$
4,366
$
4,399
International
3,399
2,687
2,424
Total
$
7,548
$
7,053
$
6,823
Provision for Income Taxes
(Millions)
2017
2016
2015
Currently payable
Federal
$
1,022
$
1,192
$
1,338
State
59
75
101
International
722
733
566
Tax Cuts and Jobs Act (TCJA) non-current transition tax provision
623
-
-
Deferred
Federal
162
(3)
(55)
State
15
9
6
International
76
(11)
26
Total
$
2,679
$
1,995
$
1,982
Components of Deferred Tax Assets and Liabilities
(Millions)
2017
2016
Deferred tax assets:
Accruals not currently deductible
Employee benefit costs
$
178
$
195
Product and other claims
204
326
Miscellaneous accruals
98
92
Pension costs
760
1,217
Stock-based compensation
210
302
Net operating/capital loss carryforwards
89
93
Foreign tax credits
32
22
Currency translation
59
-
Inventory
51
53
Gross deferred tax assets
1,681
2,300
Valuation allowance
(81)
(47)
Total deferred tax assets
$
1,600
$
2,253
Deferred tax liabilities:
Product and other insurance receivables
$
(6)
$
(27)
Accelerated depreciation
(447)
(730)
Intangible amortization
(784)
(903)
Currency translation
-
(276)
Other
(87)
(40)
Total deferred tax liabilities
$
(1,324)
$
(1,976)
Net deferred tax assets
$
276
$
277
The net deferred tax assets are included as components of Other Assets and Other Liabilities within the Consolidated Balance Sheet. See Note 6 "Supplemental Balance Sheet Information" for further details.
As of December31, 2017, the Company had tax effected operating losses, capital losses, and tax credit carryovers for federal (approximately $7 million), state (approximately $12 million), and international (approximately $70 million), with all amounts net before valuation allowances. The federal tax attribute carryovers will expire after 15 to 20 years, the state after 5 to 10 years, and the international after one to three years or have an indefinite carryover period. The tax attributes being carried over arise as certain jurisdictions may have tax losses or may have inabilities to utilize certain losses without the same type of taxable income. As of December31, 2017, the Company has provided $81 million of valuation allowance against certain of these deferred tax assets based on management's determination that it is more-likely-than-not that the tax benefits related to these assets will not be realized.
Reconciliation of Effective Income Tax Rate
2017
2016
2015
Statutory U.S. tax rate
35.0
%
35.0
%
35.0
%
State income taxes - net of federal benefit
0.8
0.9
1.1
International income taxes - net
(6.3)
(2.7)
(3.9)
U.S. TCJA - net impacts
10.1
-
-
U.S. research and development credit
(0.7)
(0.5)
(0.5)
Reserves for tax contingencies
2.2
0.2
(1.0)
Domestic Manufacturer's deduction
(1.8)
(1.8)
(1.8)
Employee share-based payments
(3.2)
(2.8)
(0.1)
All other - net
(0.6)
-
0.3
Effective worldwide 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, impacted by several factors. Primary factors that increased the Company's effective tax rate included the impacts due to the Tax Cuts and Jobs Act (TCJA) being enacted in 2017 (see further information below) and remeasurements and establishment of 3M's uncertain tax positions. Combined, these factors increased the Company's effective tax rate by 12.1 percentage points. The increase was partially offset by a 4.9 percentage point decrease, which related to international taxes that were impacted by increasing benefits from the Company's supply chain centers of expertise, changes to the geographic mix of income before taxes and prior year cash optimization actions, higher year-on-year excess tax benefit for employee share-based payment, increased benefits from the R&D tax credit, a reduction of state taxes, and other items.
The effective tax rate for 2016 was 28.3 percent, compared to 29.1 percent in 2015, a decrease of 0.8 percentage points, impacted by several factors. Primary factors that decreased the Company's effective tax rate included the recognition of excess tax benefits beginning in 2016 related to employee share-based payments (resulting from the adoption of ASU No. 2016-09, as discussed in Note 1) and a reduction in state taxes. Combined, these factors decreased the Company's effective tax rate by 3.2 percentage points. The decrease was partially offset by a 2.4 percentage point increase, which related to remeasurements of 3M's uncertain tax positions and international taxes that were impacted by changes to both the geographic mix of income before taxes and additional tax expense related to global cash optimization actions.
The TCJA was enacted in December 2017. Among other things, the TCJA reduces the U.S. federal corporate tax rate from 35 percent to 21 percent beginning in 2018, requires companies to pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for enactment effects of the TCJA. SAB 118 provides a measurement period of up to one year from the TCJA's enactment date for companies to complete their accounting under ASC 740. In accordance with SAB 118, to the extent that a company's accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.
In connection with 3M's initial analysis of the impact of the enactment of the TCJA, the Company recorded a net tax expense of $762 million in the fourth quarter of 2017. For various reasons that are discussed more fully below, including the issuance of additional technical and interpretive guidance, 3M has not completed its accounting for the income tax effects of certain elements of the TCJA. However, with respect to the following, 3M was able to make reasonable estimates of the TCJA's effects and, as such, recorded provisional amounts:
Transition tax: The transition tax is a tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of the Company's non-U.S. subsidiaries. To determine the amount of the transition tax, 3M must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. 3M was able to make a reasonable estimate of the transition tax and recorded a provisional obligation and additional income tax expense of $745 million in the fourth quarter of 2017. However, the Company is continuing to gather additional information and will consider additional technical guidance to more precisely compute and account for the amount of the transition tax. This amount may change when 3M finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. The TCJA's transition tax is payable over eight years beginning in 2018. As of December 31, 2017, 3M reflected $122 million and $623 million in current accrued income taxes and long term income taxes payable, respectively.
Remeasurement of deferred tax assets/liabilities and other impacts: 3M remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent under the TCJA. 3M is still analyzing certain aspects of the TCJA, considering additional technical guidance, and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. This includes the potential impacts of the global low-taxed income ("GILTI") provision within the TCJA on deferred tax assets/liabilities. 3M also is considering other impacts of the 2017 enactment of the TCJA including, but not limited to effects on the Company's indefinite reinvestment assertion. As discussed further below in this Note 9, 3M previously has not provided deferred taxes on unremitted earnings attributable to international companies that have been considered to be reinvested indefinitely. The full effects of underlying tax rates of the TCJA causes some reassessment of previous indefinite reinvestment assertions with respect to certain jurisdictions. While 3M was able to make a reasonable estimate of these impacts, it may be affected by other analyses related to the TCJA, including, but not limited to, the calculation of the transition tax on deferred foreign income. The provisional amount recorded in the fourth quarter of 2017 related to deferred tax assets/liabilities and other impacts was a net additional income tax expense of $17 million.
3M has not completed its full analysis with respect to the GILTI provision within the TCJA and is not yet able to make reasonable estimates of its related effects. Therefore, no provisional adjustments relative to GILTI were recorded. Currently, 3M has not yet elected a policy as to whether it will recognize deferred taxes for basis differences expected to reverse as GILTI or whether 3M will account for GILTI as period costs if and when incurred. 3M is not aware of other elements of the TCJA for which the Company was not yet able to make reasonable estimates of the enactment impact and for which it would continue accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the TCJA.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2005.
The IRS has completed its field examination of the Company's U.S. federal income tax returns for the years 2005 through 2014. The Company protested certain IRS positions within these tax years and entered into the administrative appeals process with the IRS. In December 2012, the Company received a statutory notice of deficiency for the 2006 year. The Company filed a petition in Tax Court in the first quarter of 2013 relating to the 2006 tax year.
Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2015, 2016, and 2017. It is anticipated that the IRS will complete its examination of the Company for 2015 by the end of the third quarter of 2018, for 2016 by the end of the first quarter of 2018, and for 2017 by the end of the first quarter of 2019. As of December31, 2017, the IRS has not proposed any significant adjustments to the Company's tax positions for which the Company is not adequately reserved.
Payments relating to other proposed assessments arising from the 2005 through 2017 examinations may not be made until a final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also audit activity in several U.S. state and foreign jurisdictions.
3M anticipates changes to the Company's uncertain tax positions due to the closing and resolution of audit issues for various audit years mentioned above and closure of statutes. Currently, the Company is estimating a decrease in unrecognized tax benefits during the next 12 months as a result of anticipated resolutions of audit issues.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (UTB) is as follows:
Federal, State and Foreign Tax
(Millions)
2017
2016
2015
Gross UTB Balance at January1
$
319
$
381
$
583
Additions based on tax positions related to the current year
119
67
77
Additions for tax positions of prior years
149
43
140
Reductions for tax positions of prior years
(38)
(66)
(399)
Settlements
(3)
(95)
(4)
Reductions due to lapse of applicable statute of limitations
(16)
(11)
(16)
Gross UTB Balance at December31
$
530
$
319
$
381
Net UTB impacting the effective tax rate at December31
$
526
$
333
$
369
The total amount of UTB, if recognized, would affect the effective tax rate by $526 million as of December31, 2017, $333 million as of December31, 2016, and $369 million as of December31, 2015. The ending net UTB results from adjusting the gross balance for items such as Federal, State, and non-U.S. deferred items, interest and penalties, and deductible taxes. The net UTB is included as components of Other Assets, Accrued Income Taxes, and Other Liabilities within the Consolidated Balance Sheet.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized in the consolidated statement of income on a gross basis approximately $20 million of expense, $10 million of expense, and $2 million of expense in 2017, 2016, and 2015, respectively. The amount of interest and penalties recognized may be an expense or benefit due to new or remeasured unrecognized tax benefit accruals. At December31, 2017, and December31, 2016, accrued interest and penalties in the consolidated balance sheet on a gross basis were $68 million and $52 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
As a result of certain employment commitments and capital investments made by 3M, income from certain manufacturing activities in the following countries is subject to reduced tax rates or, in some cases, is exempt from tax for years through the following: Thailand (2018), China (2019), Korea (2019), Switzerland (2023), Singapore (2025), and Brazil (2073). The income tax benefits attributable to the tax status of these subsidiaries are estimated to be $228 million (37 cents per diluted share) in 2017, $142 million (23 cents per diluted share) in 2016, and $114 million (18 cents per diluted share) in 2015.
The Company has not provided deferred taxes on unremitted earnings attributable to international companies that have been considered to be reinvested indefinitely. As noted above, the effects of the TCJA caused some reassessment of previous indefinite reinvestment assertions with respect to certain jurisdictions. While 3M was able to make a reasonable estimate of these impacts, it may be affected by other analyses related to the TCJA. The unremitted earnings relate to ongoing operations and were approximately $15 billion as of December31, 2017. Because of the multiple avenues in which to repatriate the earnings to minimize tax cost, and because a large portion of these earnings are not liquid, it is not practical to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.
NOTE 10. Marketable Securities
The Company invests in asset-backed securities, certificates of deposit/time deposits, commercial paper, and other securities. The following is a summary of amounts recorded on the Consolidated Balance Sheet for marketable securities (current and non-current).
December31,
December31,
(Millions)
2017
2016
Corporate debt securities
$
14
$
10
Commercial paper
899
14
Certificates of deposit/time deposits
76
197
U.S. municipal securities
3
3
Asset-backed securities:
Automobile loan related
16
31
Credit card related
68
18
Other
-
7
Asset-backed securities total
84
56
Current marketable securities
$
1,076
$
280
U.S. municipal securities
$
27
$
17
Non-current marketable securities
$
27
$
17
Total marketable securities
$
1,103
$
297
At December31, 2017and 2016, gross unrealized, gross realized, and net realized gains and/or losses (pre-tax) were not material.
The balance at December31, 2017, for marketable securities by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
(Millions)
December31, 2017
Due in one year or less
$
1,071
Due after one year through five years
18
Due after five years through ten years
14
Total marketable securities
$
1,103
3M has a diversified marketable securities portfolio. Within this portfolio, asset-backed securities primarily include interests in automobile loans, credit cards and other asset-backed securities. 3M's investment policy allows investments in asset-backed securities with minimum credit ratings of Aa3 by Moody's Investors Service or AA- by Standard& Poor's or Fitch Ratings or DBRS. Asset-backed securities must be rated by at least two of the aforementioned rating agencies, one of which must be Moody's Investors Service or Standard& Poor's. At December31, 2017, all asset-backed security investments were in compliance with this policy. Approximately 90 percent of all asset-backed security investments were rated AAA or A-1+ by Standard& Poor's and/or Aaa or P-1 by Moody's Investors Service and/or AAA or F1+ by Fitch Ratings. Interest rate risk and credit risk related to the underlying collateral may impact the value of investments in asset-backed securities, while factors such as general conditions in the overall credit market and the nature of the underlying collateral may affect the liquidity of investments in asset-backed securities. 3M does not currently expect risk related to its holding in asset-backed securities to materially impact its financial condition or liquidity.
NOTE 11. Long-Term Debt and Short-Term Borrowings
The following debt tables reflect effective interest rates, which include the impact of interest rate swaps, as of December31, 2017. If the debt was issued on a combined basis, the debt has been separated to show the impact of the fixed versus floating effective interest rates. Carrying value includes the impact of debt issuance costs and fair value hedging activity. Long-term debt and short-term borrowings as of December31 consisted of the following:
Long-Term Debt
Currency/
Effective
Final
(Millions)
Fixedvs.
Interest
Maturity
CarryingValue
Description/2017PrincipalAmount
Floating
Rate
Date
2017
2016
Medium-term note (repaid in 2017)
USD Fixed
-
%
-
$
-
$
649
Medium-term note (500 million Euros)
Euro Floating
-
%
2018
600
523
Medium-term note ($450 million)
USD Floating
1.50
%
2018
448
448
Medium-term note ($600 million)
USD Floating
1.63
%
2019
596
598
Medium-term note ($25 million)
USD Fixed
1.74
%
2019
25
25
Medium-term note (650 million Euros)
Euro Floating
-
%
2020
779
680
Medium-term note ($300 million)
USD Floating
1.58
%
2020
296
297
Medium-term note ($200 million)
USD Floating
1.49
%
2020
198
199
Eurobond (300 million Euros)
Euro Floating
-
%
2021
378
336
Eurobond (300 million Euros)
Euro Fixed
1.97
%
2021
358
312
Medium-term note ($600 million)
USD Fixed
1.63
%
2021
598
598
Medium-term note (500 million Euros)
Euro Fixed
0.45
%
2022
597
520
Medium-term note ($600 million)
USD Fixed
2.17
%
2022
595
593
Medium-term note (600 million Euros)
Euro Fixed
1.14
%
2023
712
619
Medium-term note ($650 million)
USD Fixed
2.26
%
2023
647
-
Medium-term note ($550 million)
USD Fixed
3.04
%
2025
546
546
Medium-term note (750 million Euros)
Euro Fixed
1.71
%
2026
885
770
Medium-term note ($650 million)
USD Fixed
2.25
%
2026
641
640
Medium-term note ($850 million)
USD Fixed
2.95
%
2027
839
-
30-year debenture ($220 million)
USD Fixed
6.01
%
2028
227
342
Medium-term note (500 million Euros)
Euro Fixed
1.90
%
2030
589
512
Medium-term note (500 million Euros)
Euro Fixed
1.54
%
2031
595
518
30-year bond ($555 million)
USD Fixed
5.73
%
2037
550
743
Floating rate note ($96 million)
USD Floating
1.29
%
2041
95
96
Medium-term note ($325 million)
USD Fixed
4.05
%
2044
313
313
Floating rate note ($55 million)
USD Floating
1.21
%
2044
54
54
Medium-term note ($500 million)
USD Fixed
3.13
%
2046
473
473
Medium-term note ($500 million)
USD Fixed
3.68
%
2047
491
-
Other borrowings
Various
1.26
%
2018-2040
73
74
Total long-term debt
$
13,198
$
11,478
Less: current portion of long-term debt
1,102
800
Long-term debt (excluding current portion)
$
12,096
$
10,678
Post-Swap Borrowing (Long-Term Debt,Including Current Portion)
2017
2016
Carrying
Effective
Carrying
Effective
(Millions)
Value
InterestRate
Value
InterestRate
Fixed-rate debt
$
9,681
2.45
%
$
8,372
2.42
%
Floating-rate debt
3,517
0.76
%
3,106
0.48
%
Total long-term debt, including current portion
$
13,198
$
11,478
Short-Term Borrowings and Current Portion of Long-Term Debt
Effective
CarryingValue
(Millions)
InterestRate
2017
2016
Current portion of long-term debt
0.67
%
$
1,102
$
800
U.S. dollar commercial paper
1.50
%
745
-
Other borrowings
5.35
%
6
172
Total short-term borrowings and current portion of long-term debt
$
1,853
$
972
Other short-term borrowings primarily consisted of bank borrowings by international subsidiaries. In 2016, these were primarily related to Japan and Korea.
Future Maturities of Long-term Debt
Maturities of long-term debt in the table below are net of the unaccreted debt issue costs such that total maturities equal the carrying value of long-term debt as of December 31, 2017. The maturities of long-term debt for the periods subsequent to December 31, 2017 are as follows (in millions):
After
2018
2019
2020
2021
2022
2022
Total
$
1,102
$
692
$
1,368
$
1,333
$
1,191
$
7,512
$
13,198
Long-term debt payments due in 2018, 2019, and 2020 include floating rate notes totaling $54 million (classified as current portion of long-term debt), $71 million (included in other borrowings in the long-term debt table), and $95 million (included within the long-term debt table), respectively, as a result of put provisions associated with these debt instruments.
Credit Facilities
In March 2016, 3M amended and restated its existing $2.25 billion five-year revolving credit facility expiring in August 2019 to a $3.75 billion five-year revolving credit facility expiring in March2021. This credit agreement includes a provision under which 3M may request an increase of up to $1.25 billion (at lender's discretion), bringing the total facility up to $5.0 billion. This revolving credit facility was undrawn at December31, 2017. Under the $3.75 billion credit agreement, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the same period. At December31, 2017, this ratio was approximately 29 to 1. Debt covenants do not restrict the payment of dividends.
Other Credit Facilities
Apart from the committed revolving facility, an additional $288 million in stand-alone letters of credit and bank guarantees were also issued and outstanding at December31, 2017. These instruments are utilized in connection with normal business activities.
Long-Term Debt Issuances
The principal amounts, interest rates and maturity dates of individual long-term debt issuances can be found in the long-term debt table found at the beginning of this note.
In October 2017, 3M issued $650 million aggregate principal amount of 5.5-year fixed rate medium-term notes due 2023 with a coupon rate of 2.25%, $850 million aggregate principal amount of 10-year fixed rate medium-term notes due 2027 with a coupon rate of 2.875%, and $500 million aggregate principal amount of 30-year fixed rate medium-term notes due 2047 with a coupon rate of 3.625%.
In May 2016, 3M issued 1 billion Euros aggregate principal amount of medium-term notes. In September 2016, 3M issued $1.75 billion aggregate principal amount of medium-term notes.
In May2015, 3M issued 1.750 billion Euros aggregate principal amount of medium-term notes. In August 2015, 3M issued $1.500 billion aggregate principal amount of medium-term notes. Upon debt issuance, the Company entered into two interest rate swaps as fair value hedges of a portion of the fixed interest rate medium-term note obligation. The first converted a $450 million three-year fixed rate note, and the second converted $300 million of a five-year fixed rate note included in this issuance to an interest rate based on a floating three-month LIBOR index.
Long-Term Debt Maturities and Extinguishments
In June 2017, 3M repaid $650 million aggregate principal amount of fixed rate medium-term notes that matured.
In October 2017, 3M, via cash tender offers, repurchased $305 million aggregate principal amount of its outstanding notes. This included $110 million of its $330 million principal amount of 6.375% notes due 2028 and $195 million of its $750 million principal amount of 5.70% notes due 2037. The Company recorded an early debt extinguishment charge of approximately $96 million in the fourth quarter of 2017 within interest expense, the cash outflow for which is recorded within other financing activities on the statement of cash flows. This charge reflected the differential between the carrying value and the amount paid to acquire the tendered notes and related expenses.
In September 2016, 3M repaid $1 billion aggregate principal amount of medium-term notes.
Floating Rate Notes
At various times, 3M has issued floating rate notes containing put provisions. 3M would be required to repurchase these securities at various prices ranging from 99 percent to 100 percent of par value according to the reduction schedules for each security. In December2004, 3M issued a forty-year $60 million floating rate note, with a rate based on a floating LIBOR index. Under the terms of this floating rate note due in 2044, holders have an annual put feature at 100 percent of par value from 2014 and every anniversary thereafter until final maturity. Under the terms of the floating rate notes due in 2027, 2040 and 2041, holders have put options that commence ten years from the date of issuance and each third anniversary thereafter until final maturity at prices ranging from 99 percent to 100 percent of par value. For the periods presented, 3M was required to repurchase an immaterial amount of principal on the aforementioned floating rate notes.
NOTE 12. Pension and Postretirement Benefit Plans
3M has company-sponsored retirement plans covering substantially all U.S. employees and many employees outside the United States. In total, 3M has over 75 defined benefit plans in 27 countries. Pension benefits associated with these plans generally are based on each participant's years of service, compensation, and age at retirement or termination. The primary U.S. defined-benefit pension plan was closed to new participants effective January1, 2009. The Company also provides certain postretirement health care and life insurance benefits for its U.S. employees who reach retirement age while employed by the Company and were employed by the Company prior to January 1, 2016. Most international employees and retirees are covered by government health care programs. The cost of company-provided postretirement health care plans for international employees is not material and is combined with U.S. amounts in the tables that follow.
The Company has made deposits for its defined benefit plans with independent trustees. Trust funds and deposits with insurance companies are maintained to provide pension benefits to plan participants and their beneficiaries. There are no plan assets in the non-qualified plan due to its nature. For its U.S. postretirement health care and life insurance benefit plans, the Company has set aside amounts at least equal to annual benefit payments with an independent trustee.
3M's primary U.S. qualified defined benefit plan does not have a mandatory cash contribution because the Company has a significant credit balance from previous discretionary contributions that can be applied to any Pension Protection Act funding requirements.
The Company also sponsors employee savings plans under Section401(k)of the Internal Revenue Code. These plans are offered to substantially all regular U.S. employees. For eligible employees hired prior to January1, 2009, employee 401(k)contributions of up to 5% of eligible compensation matched in cash at rates of 45% or 60%, depending on the plan in which the employee participates. Employees hired on or after January1, 2009, receive a cash match of 100% for employee 401(k)contributions of up to 5% of eligible compensation and receive an employer retirement income account cash contribution of 3% of the participant's total eligible compensation. All contributions are invested in a number of investment funds pursuant to the employees' elections. Employer contributions to the U.S. defined contribution plans were $159 million, $139 million and $165 million for 2017, 2016 and 2015, respectively. 3M subsidiaries in various international countries also participate in defined contribution plans. Employer contributions to the international defined contribution plans were $88 million, $87 million and $77 million for 2017, 2016 and 2015, respectively.
As a result of changes made to its U.S. postretirement health care benefit plans in 2010, the Company has transitioned all current and future retirees to a savings account benefits-based plan. These changes became effective beginning January1, 2013, for all Medicare eligible retirees and their Medicare eligible dependents and became effective beginning January1, 2016, for all non-Medicare eligible retirees and their eligible dependents. In August 2015, 3M modified the 3M Retiree Welfare Benefit Plan postretirement medical benefit reducing the future benefit for participants not retired as of January 1, 2016. For participants retiring after January 1, 2016, the Retiree Medical Savings Account (RMSA) is no longer credited with interest and the indexation on both the RMSA and the Medicare Health Reimbursement Arrangement is reduced from 3 percent to 1.5 percent per year (for those employees who are eligible for these accounts). Also effective January 1, 2016, 3M no longer offers 3M Retiree Health Care Accounts to new hires.
3M was informed in 2009, that the general partners of WG Trading Company, in which 3M's benefit plans hold limited partnership interests, are the subject of a criminal investigation as well as civil proceedings by the SEC and CFTC (Commodity Futures Trading Commission). In March2011, over the objections of 3M and six other limited partners of WG Trading Company, the district court judge ruled in favor of the court appointed receiver's proposed distribution plan (and in April2013, the United States Court of Appeals for the Second Circuit affirmed the district court's ruling). The benefit plan trustee holdings of WG Trading Company interests were adjusted to reflect the decreased estimated fair market value, inclusive of estimated insurance proceeds, as of the annual measurement dates. In the first quarter of 2014, 3M and certain 3M benefit plans filed a lawsuit that was removed by the insurers to the U.S. District Court for the District of Minnesota against five insurers seeking insurance coverage for the WG Trading Company claim. In September 2015, the court ruled in favor of the defendant insurance companies on a motion for summary judgment and dismissed the lawsuit. In October 2015, 3M and the 3M benefit plans filed a notice of appeal to the United States Court of Appeals for the Eighth Circuit. In May 2017, the appellate court affirmed the lower court's decision. The decision reduced U.S. pension and postretirement plan assets by $73 million at the December 31, 2017 measurement date and did not have a material adverse effect on the consolidated financial position of the Company.
As part of a diversified investment strategy, the U.S. pension and postretirement benefit plans made investments in the natural gas fired power generation industry during the period 2011 through 2013. In April 2017, one of these entities, Panda Temple Power, LLC, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware. This investment loss represented less than one percent of the fair value of the U.S. pension and postretirement plans' assets and was reflected in the fair value measurement as of December 31, 2017.
The following tables include a reconciliation of the beginning and ending balances of the benefit obligation and the fair value of plan assets as well as a summary of the related amounts recognized in the Company's consolidated balance sheet as of December31 of the respective years. 3M also has certain non-qualified unfunded pension and postretirement benefit plans, inclusive of plans related to supplement/excess benefits for employees impacted by particular relocations and other matters, that individually and in the aggregate are not significant and which are not included in the tables that follow. The obligations for these plans are included within other liabilities in the Company's consolidated balance sheet and aggregated less than $40 million as of December31, 2017 and 2016.
QualifiedandNon-qualified
PensionBenefits
Postretirement
UnitedStates
International
Benefits
(Millions)
2017
2016
2017
2016
2017
2016
Change in benefit obligation
Benefit obligation at beginning of year
$
16,202
$
15,856
$
6,625
$
6,322
$
2,259
$
2,216
Acquisitions/Transfers
-
-
3
(5)
-
-
Service cost
268
259
142
133
52
54
Interest cost
565
575
157
171
80
79
Participant contributions
-
-
8
8
-
-
Foreign exchange rate changes
-
-
667
(472)
3
7
Plan amendments
-
5
6
(4)
(6)
-
Actuarial (gain) loss
1,263
427
170
724
127
7
Benefit payments
(936)
(919)
(276)
(245)
(105)
(104)
Settlements, curtailments, special termination benefits and other
(2)
(1)
-
(7)
-
-
Benefit obligation at end of year
$
17,360
$
16,202
$
7,502
$
6,625
$
2,410
$
2,259
Change in plan assets
Fair value of plan assets at beginning of year
$
14,081
$
13,966
$
5,617
$
5,669
$
1,356
$
1,367
Acquisitions/Transfers
-
-
2
-
-
-
Actual return on plan assets
1,693
779
714
512
143
90
Company contributions
852
259
112
121
3
3
Participant contributions
-
-
8
8
-
-
Foreign exchange rate changes
-
-
560
(444)
-
-
Benefit payments
(936)
(919)
(276)
(245)
(105)
(104)
Settlements, curtailments, special termination benefits and other
(4)
(4)
-
(4)
-
-
Fair value of plan assets at end of year
$
15,686
$
14,081
$
6,737
$
5,617
$
1,397
$
1,356
Funded status at end of year
$
(1,674)
$
(2,121)
$
(765)
$
(1,008)
$
(1,013)
$
(903)
QualifiedandNon-qualified
PensionBenefits
Postretirement
UnitedStates
International
Benefits
(Millions)
2017
2016
2017
2016
2017
2016
Amounts recognized in the Consolidated Balance Sheet as of Dec.31,
Non-current assets
$
4
$
4
$
233
$
48
$
-
$
-
Accrued benefit cost
Current liabilities
(53)
(52)
(12)
(10)
(4)
(4)
Non-current liabilities
(1,625)
(2,073)
(986)
(1,046)
(1,009)
(899)
Ending balance
$
(1,674)
$
(2,121)
$
(765)
$
(1,008)
$
(1,013)
$
(903)
QualifiedandNon-qualified
PensionBenefits
Postretirement
UnitedStates
International
Benefits
(Millions)
2017
2016
2017
2016
2017
2016
Amounts recognized in accumulated other comprehensive income as of Dec.31,
Net transition obligation (asset)
$
-
$
-
$
-
$
-
$
-
$
-
Net actuarial loss (gain)
5,921
5,704
1,720
1,933
774
761
Prior service cost (credit)
(175)
(198)
(40)
(56)
(163)
(214)
Ending balance
$
5,746
$
5,506
$
1,680
$
1,877
$
611
$
547
The balance of amounts recognized for international plans in accumulated other comprehensive income as of December31 in the preceding table are presented based on the foreign currency exchange rate on that date.
The pension accumulated benefit obligation represents the actuarial present value of benefits based on employee service and compensation as of the measurement date and does not include an assumption about future compensation levels. The accumulated benefit obligation of the U.S. pension plans was $16.270 billion and $15.149 billion at December31, 2017 and 2016, respectively. The accumulated benefit obligation of the international pension plans was $6.870 billion and $6.058 billion at December31, 2017 and 2016, respectively.
The following amounts relate to pension plans with accumulated benefit obligations in excess of plan assets as of December31:
QualifiedandNon-qualifiedPensionPlans
UnitedStates
International
(Millions)
2017
2016
2017
2016
Projected benefit obligation
$
17,350
$
16,202
$
2,687
$
2,590
Accumulated benefit obligation
16,260
15,149
2,449
2,351
Fair value of plan assets
15,671
14,081
1,731
1,635
Components of net periodic cost and other amounts recognized in other comprehensive income
Net periodic benefit cost is recorded in cost of sales, selling, general and administrative expenses, and research, development and related expenses. Components of net periodic benefit cost and other changes in plan assets and benefit obligations recognized in other comprehensive income for the years ended December31 follow:
QualifiedandNon-qualified
PensionBenefits
Postretirement
UnitedStates
International
Benefits
(Millions)
2017
2016
2015
2017
2016
2015
2017
2016
2015
Net periodic benefit cost (benefit)
Service cost
$
268
$
259
$
293
$
142
$
133
$
154
$
52
$
54
$
75
Interest cost
565
575
655
157
171
206
80
79
98
Expected return on plan assets
(1,035)
(1,043)
(1,069)
(293)
(308)
(308)
(86)
(90)
(91)
Amortization of transition asset
-
-
-
-
(1)
(1)
-
-
-
Amortization of prior service benefit
(23)
(24)
(24)
(13)
(13)
(13)
(53)
(55)
(42)
Amortization of net actuarial loss
388
354
409
126
91
144
56
61
73
Settlements, curtailments, special terminationbenefits and other
2
4
2
4
4
(6)
(4)
-
1
Net periodic benefit cost (benefit) after settlements, curtailments, special termination benefits and other
$
165
$
125
$
266
$
123
$
77
$
176
$
45
$
49
$
114
Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss
Amortization of transition asset
-
-
-
-
1
1
-
-
-
Prior service cost (benefit)
-
5
-
6
(5)
10
(1)
-
(212)
Amortization of prior service benefit
23
24
24
13
13
13
53
55
42
Net actuarial (gain) loss
605
692
312
(248)
512
(270)
69
8
(23)
Amortization of net actuarial loss
(388)
(354)
(409)
(126)
(91)
(144)
(56)
(61)
(73)
Foreign currency
-
-
-
167
(93)
(174)
-
-
(1)
Total recognized in other comprehensive (income) loss
$
240
$
367
$
(73)
$
(188)
$
337
$
(564)
$
65
$
2
$
(267)
Total recognized in net periodic benefit cost (benefit) and other comprehensive (income) loss
$
405
$
492
$
193
$
(65)
$
414
$
(388)
$
110
$
51
$
(153)
Amounts expected to be amortized from accumulated other comprehensive income into net periodic benefit costs over the next fiscal year
QualifiedandNon-qualified
PensionBenefits
Postretirement
(Millions)
UnitedStates
International
Benefits
Amortization of transition (asset) obligation
$
-
$
-
$
-
Amortization of prior service cost (benefit)
(23)
(13)
(40)
Amortization of net actuarial (gain) loss
503
116
62
Total amortization expected over the next fiscal year
$
480
$
103
$
22
The Company primarily amortizes amounts recognized as prior service cost (benefit) over the average future service period of active employees at the date of the amendment.
Weighted-average assumptions used to determine benefit obligations as of December 31
QualifiedandNon-qualifiedPensionBenefits
Postretirement
UnitedStates
International
Benefits
2017
2016
2015
2017
2016
2015
2017
2016
2015
Discount rate
3.68
%
4.21
%
4.47
%
2.41
%
2.54
%
3.12
%
3.79
%
4.26
%
4.48
%
Compensation rate increase
4.10
%
4.10
%
4.10
%
2.89
%
2.90
%
2.90
%
N/A
N/A
N/A
Weighted-average assumptions used to determine net cost for years ended December 31
QualifiedandNon-qualifiedPensionBenefits
Postretirement
UnitedStates
International
Benefits
2017
2016
2015
2017
2016
2015
2017
2016
2015
Discount rate - service cost
4.42
%
4.70
%
4.10
%
2.32
%
2.84
%
3.11
%
4.50
%
4.70
%
4.07
%
Discount rate - interest cost
3.61
%
3.73
%
4.10
%
2.25
%
2.72
%
3.11
%
3.80
%
3.80
%
4.07
%
Expected return on assets
7.25
%
7.50
%
7.75
%
5.16
%
5.77
%
5.90
%
6.48
%
6.91
%
6.91
%
Compensation rate increase
4.10
%
4.10
%
4.10
%
2.90
%
2.90
%
3.33
%
N/A
N/A
N/A
The Company provides eligible retirees in the U.S. postretirement health care benefit plans to a savings account benefits-based plan. The contributions provided by the Company to the health savings accounts increase 3 percent per year for employees who retired prior to January 1, 2016 and increase 1.5 percent for employees who retire on or after January 1, 2016. Therefore, the Company no longer has material exposure to health care cost inflation.
The Company determines the discount rate used to measure plan liabilities as of the December31 measurement date for the pension and postretirement benefit plans, which is also the date used for the related annual measurement assumptions. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield 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. Using this methodology, the Company determined a discount rate of 3.68% for pension and 3.79% for postretirement benefits to be appropriate for its U.S. plans as of December31, 2017, which is a decrease of 0.53 percentage points and 0.47 percentage points, respectively, from the rates used as of December31, 2016. For the international pension and postretirement plans the discount rates also reflect the current rate at which the associated liabilities could be effectively settled at the end of the year. If the country has a deep market in corporate bonds the Company matches the expected cash flows from the plan either to a portfolio of bonds that generate sufficient cash flow or a notional yield curve generated from available bond information. In countries that do not have a deep market in corporate bonds, government bonds are considered with a risk premium to approximate corporate bond yields.
Beginning in 2016, 3M changed the method used to estimate the service and interest cost components of the net periodic pension and other postretirement benefit costs. The new method measures service cost and interest cost separately using the spot yield curve approach applied to each corresponding obligation. Service costs are determined based on duration-specific spot rates applied to the service cost cash flows. The interest cost calculation is determined by applying duration-specific spot rates to the year-by-year projected benefit payments. The spot yield curve approach does not affect the measurement of the total benefit obligations as the change in service and interest costs offset in the actuarial gains and losses recorded in other comprehensive income. The Company changed to the new method to provide a more precise measure of service and interest costs by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates. The Company accounted for this change as a change in estimate prospectively beginning in the first quarter of 2016. As a result of the change to the spot yield curve approach, 2016 annual defined benefit pension and postretirement net periodic benefit cost decreased approximately $180 million.
For the primary U.S. qualified pension plan, the Company's assumption for the expected return on plan assets was 7.25% in 2017. Projected returns are based primarily on broad, publicly traded equity and fixed-income indices and forward-looking estimates of active portfolio and investment management. As of December31, 2017, the Company's 2018 expected long-term rate of return on U.S. plan assets is 7.25%, consistent with 2017. The expected return assumption is based on the strategic asset allocation of the plan, long term capital market return expectations and expected performance from active investment management. The 2017 expected long-term rate of return is based on an asset allocation assumption of 25% global equities, 16% private equities, 41% fixed-income securities, and 18% absolute return investments independent of traditional performance benchmarks, along with positive returns from active investment management. The actual net rate of return on plan assets in 2017 was 12.4%. In 2016 the plan earned a rate of return of 5.8% and in 2015 earned a return of 0.7%. The average annual actual return on the plan assets over the past 10 and 25 years has been 7.0% and 9.4%, respectively. Return on assets assumptions for international pension and other post-retirement benefit plans are calculated on a plan-by-plan basis using plan asset allocations and expected long-term rate of return assumptions.
As of December31, 2014, the Company converted to the "RP 2014 Mortality Tables" and updated the mortality improvement scale it used for calculating the year-end 2014 U.S. defined benefit pension annuitant and postretirement obligations and 2015 expense. The impact of this change increased the year-end 2014 U.S. pension projected benefit obligation (PBO) by approximately $820 million and the U.S. accumulated postretirement benefit obligation by approximately $100 million. As of December 31, 2016, the Company updated the mortality improvement scale to Scale MP-2016, which was released by the Society of Actuaries in October 2016. The impact of this change decreased the year-end 2016 U.S. pension PBO by approximately $440 million and the U.S. accumulated postretirement benefit obligation by approximately $60 million. As of December 31, 2017, the Company updated the mortality improvement scale to Scale MP-2017. The update resulted in a small decrease to the U.S. pension PBO and U.S. accumulated postretirement benefit obligations.
During 2017, the Company contributed $964 million to its U.S. and international pension plans and $3 million to its postretirement plans. During 2016, the Company contributed $380 million to its U.S. and international pension plans and $3 million to its postretirement plans. In 2018, the Company expects to contribute an amount in the range of $300 million to $500 million of cash to its U.S. and international retirement plans. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2018. Future contributions will depend on market conditions, interest rates and other factors.
Future Pension and Postretirement Benefit Payments
The following table provides the estimated pension and postretirement benefit payments that are payable from the plans to participants.
QualifiedandNon-qualified
PensionBenefits
Postretirement
(Millions)
UnitedStates
International
Benefits
2018 Benefit Payments
$
1,074
$
237
$
139
2019 Benefit Payments
1,090
251
148
2020 Benefit Payments
1,102
260
157
2021 Benefit Payments
1,110
278
166
2022 Benefit Payments
1,126
285
174
Next five years
5,724
1,640
843
Plan Asset Management
3M's investment strategy for its pension and postretirement plans is to manage the funds on a going-concern basis. The primary goal of the trust funds is to meet the obligations as required. The secondary goal is to earn the highest rate of return possible, without jeopardizing its primary goal, and without subjecting the Company to an undue amount of contribution risk. Fund returns are used to help finance present and future obligations to the extent possible within actuarially determined funding limits and tax-determined asset limits, thus reducing the potential need for additional contributions from 3M. The investment strategy has used long duration cash bonds and derivative instruments to offset a significant portion of the interest rate sensitivity of U.S. pension liabilities.
Normally, 3M does not buy or sell any of its own securities as a direct investment for its pension and other postretirement benefit funds. However, due to external investment management of the funds, the plans may indirectly buy, sell or hold 3M securities. The aggregate amount of 3M securities are not considered to be material relative to the aggregate fund percentages.
The discussion that follows references the fair value measurements of certain assets in terms of levels 1, 2 and 3. See Note 14 for descriptions of these levels. While the company believes the valuation methods 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.
This information is provided by RNSThe company news service from the London Stock ExchangeENDACSFKBDQNBKBFBD
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