REG - 3M Company - Annual Financial Report - Part 2 <Origin Href="QuoteRef">MMM.N</Origin> - Part 2
13/02/2018 07:15
- Part 2: For the preceding part double click ID:nRSM6597Ea
Gross Amounts not Offset in the
Consolidated Balance Sheet that are Subject
Gross Amount of to Master Netting Agreements
Derivative Liabilities Gross Amount of
Presented in the Eligible Offsetting
December 31, 2017 Consolidated Recognized Cash Collateral Net Amount of
(Millions) Balance Sheet Derivative Assets Pledged Derivative Liabilities
Derivatives subject to master netting agreements $ 197 $ 27 $ - $ 170
Derivatives not subject to master netting agreements - -
Total $ 197 $ 170
December 31, 2016
(Millions)
Derivatives subject to master netting agreements $ 93 $ 39 $ - $ 54
Derivatives not subject to master netting agreements 2 2
Total $ 95 $ 56
Foreign Currency Effects
3M estimates that year-on-year foreign currency transaction effects, including
hedging impacts, decreased pre-tax income by approximately $152 million in
2017 and decreased pre-tax income by approximately $69 million in 2016. These
estimates include transaction gains and losses, including derivative
instruments designed to reduce foreign currency exchange rate risks.
NOTE 14. 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.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
For 3M, assets and liabilities that are measured at fair value on a recurring
basis primarily relate to available-for-sale marketable securities and certain
derivative instruments. Derivatives include cash flow hedges, interest rate
swaps and net investment hedges. The information in the following paragraphs
and tables primarily addresses matters relative to these financial assets and
liabilities. Separately, there were no material fair value measurements with
respect to nonfinancial assets or liabilities that are recognized or disclosed
at fair value in the Company's financial statements on a recurring basis for
2017 and 2016.
3M uses various valuation techniques, which are primarily based upon the
market and income approaches, with respect to financial assets and
liabilities. Following is a description of the valuation methodologies used
for the respective financial assets and liabilities measured at fair value.
Available-for-sale marketable securities - except certain U.S. municipal
securities:
Marketable securities, except certain U.S. municipal securities, are valued
utilizing multiple sources. A weighted average price is used for these
securities. Market prices are obtained for these securities from a variety of
industry standard data providers, security master files from large financial
institutions, and other third-party sources. These multiple prices are used as
inputs into a distribution-curve-based algorithm to determine the daily fair
value to be used. 3M classifies U.S. treasury securities as level 1, while all
other marketable securities (excluding certain U.S. municipal securities) are
classified as level 2. Marketable securities are discussed further in Note 10.
Available-for-sale marketable securities -certain U.S. municipal securities
only:
3M holds municipal bonds with the City of Nevada, Missouri, which represent
3M's only U.S. municipal securities holding as of December 31, 2017. Due to
the nature of this security, the valuation method utilized will include the
financial health of the City of Nevada, any recent municipal bond issuances by
Nevada, and macroeconomic considerations related to the direction of interest
rates and the health of the overall municipal bond market, and as such will be
classified as a level 3 security.
Derivative instruments:
The Company's derivative assets and liabilities within the scope of ASC 815,
Derivatives and Hedging, are required to be recorded at fair value. The
Company's derivatives that are recorded at fair value include foreign currency
forward and option contracts, commodity price swaps, interest rate swaps, and
net investment hedges where the hedging instrument is recorded at fair value.
Net investment hedges that use foreign currency denominated debt to hedge 3M's
net investment are not impacted by the fair value measurement standard under
ASC 820, as the debt used as the hedging instrument is marked to a value with
respect to changes in spot foreign currency exchange rates and not with
respect to other factors that may impact fair value.
3M has determined that foreign currency forwards, commodity price swaps,
currency swaps, foreign currency options, interest rate swaps and
cross-currency swaps will be considered level 2 measurements. 3M uses inputs
other than quoted prices that are observable for the asset. These inputs
include foreign currency exchange rates, volatilities, and interest rates.
Derivative positions are primarily valued using standard calculations/models
that use as their basis readily observable market parameters. Industry
standard data providers are 3M's primary source for forward and spot rate
information for both interest rates and currency rates, with resulting
valuations periodically validated through third-party or counterparty quotes
and a net present value stream of cash flows model.
The following tables provide information by level for assets and liabilities
that are measured at fair value on a recurring basis.
Fair Value Measurements
Description Fair Value at Using Inputs Considered as
(Millions) December 31, 2017 Level 1 Level 2 Level 3
Assets:
Available-for-sale:
Marketable securities:
Corporate debt securities $ 14 $ - $ 14 $ -
Commercial paper 899 - 899 -
Certificates of deposit/time deposits 76 - 76 -
Asset-backed securities:
Automobile loan related 16 - 16 -
Credit card related 68 - 68 -
U.S. municipal securities 30 - - 30
Derivative instruments - assets:
Foreign currency forward/option contracts 57 - 57 -
Interest rate swap contracts 21 - 21 -
Liabilities:
Derivative instruments - liabilities:
Foreign currency forward/option contracts 190 - 190 -
Interest rate swap contracts 7 - 7 -
Fair Value Measurements
Description Fair Value at Using Inputs Considered as
(Millions) December 31, 2016 Level 1 Level 2 Level 3
Assets:
Available-for-sale:
Marketable securities:
Corporate debt securities $ 10 $ - $ 10 $ -
Commercial paper 14 - 14 -
Certificates of deposit/time deposits 197 - 197 -
Asset-backed securities:
Automobile loan related 31 - 31 -
Credit card related 18 - 18 -
Other 7 - 7 -
U.S. municipal securities 20 - - 20
Derivative instruments - assets:
Foreign currency forward/option contracts 234 - 234 -
Interest rate swap contracts 25 - 25 -
Liabilities:
Derivative instruments - liabilities:
Foreign currency forward/option contracts 94 - 94 -
Interest rate swap contracts 1 - 1 -
The following table provides a reconciliation of the beginning and ending
balances of items measured at fair value on a recurring basis in the table
above that used significant unobservable inputs (level 3).
Marketable securities - certain U.S. municipal securities only
(Millions) 2017 2016 2015
Beginning balance $ 20 $ 12 $ 15
Total gains or losses:
Included in earnings - - -
Included in other comprehensive income - - -
Purchases and issuances 13 12 -
Sales and settlements (3) (4) (3)
Transfers in and/or out of level 3 - - -
Ending balance 30 20 12
Change in unrealized gains or losses for the period included in earnings for - - -
securities held at the end of the reporting period
In addition, the plan assets of 3M's pension and postretirement benefit plans
are measured at fair value on a recurring basis (at least annually). Refer to
Note 12.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring
Basis:
Disclosures are required for certain assets and liabilities that are measured
at fair value, but are recognized and disclosed at fair value on a
nonrecurring basis in periods subsequent to initial recognition. For 3M, such
measurements of fair value relate primarily to long-lived asset impairments.
During 2017, the Company recognized approximately $61 million in long-lived
asset impairments within its Electronics and Energy and Industrial business
segments, with the complete carrying amount of such assets written off and
included in operating income results. There were no material long-lived asset
impairments for 2016 and 2015.
Fair Value of Financial Instruments:
The Company's financial instruments include cash and cash equivalents,
marketable securities, accounts receivable, certain investments, accounts
payable, borrowings, and derivative contracts. The fair values of cash
equivalents, accounts receivable, accounts payable, and short-term borrowings
and current portion of long-term debt approximated carrying values because of
the short-term nature of these instruments. Available-for-sale marketable
securities, in addition to certain derivative instruments, are recorded at
fair values as indicated in the preceding disclosures. To estimate fair values
(classified as level 2) for its long-term debt, the Company utilized
third-party quotes, which are derived all or in part from model prices,
external sources, market prices, or the third-party's internal records.
Information with respect to the carrying amounts and estimated fair values of
these financial instruments follow:
December 31, 2017 December 31, 2016
Carrying Fair Carrying Fair
(Millions) Value Value Value Value
Long-term debt, excluding current portion $ 12,096 $ 12,535 $ 10,678 $ 11,168
The fair values reflected above consider the terms of the related debt absent
the impacts of derivative/hedging activity. The carrying amount of long-term
debt referenced above is impacted by certain fixed-to-floating interest rate
swaps that are designated as fair value hedges and by the designation of fixed
rate Eurobond securities issued by the Company as hedging instruments of the
Company's net investment in its European subsidiaries. Many of 3M's fixed-rate
bonds were trading at a premium at December 31, 2017 and 2016 due to the low
interest rates and tightening of 3M's credit spreads.
NOTE 15. Commitments and Contingencies
Capital and Operating Leases:
Rental expense under operating leases was $343 million in 2017, $318 million
in 2016 and $316 million in 2015. It is 3M's practice to secure renewal rights
for leases, thereby giving 3M the right, but not the obligation, to maintain a
presence in a leased facility. 3M has two primary capital leases. The first,
which became effective in April 2003, involves a building in the United
Kingdom (with a lease term of 22 years). During the second quarter of 2003, 3M
recorded a capital lease asset and obligation of approximately 33.5 million
British Pound (GBP), or approximately $27 million at December 31, 2017,
exchange rates. For the second, 3M sold and leased-back certain recently
constructed machinery and equipment in return for municipal bonds with the
City of Nevada, Missouri. 3M recorded a capital lease asset and obligation of
approximately $13 million in 2017, $12 million in 2016, and $15 million in
earlier years, with a lease term of 15 years.
Minimum lease payments under capital and operating leases with non-cancelable
terms in excess of one year as of December 31, 2017, were as follows:
Operating
(Millions) Capital Leases Leases
2018 $ 12 $ 258
2019 10 212
2020 9 160
2021 6 106
2022 5 88
After 2022 34 274
Total $ 76 $ 1,098
Less: Amounts representing interest 3
Present value of future minimum lease payments 73
Less: Current obligations under capital leases 13
Long-term obligations under capital leases $ 60
Unconditional Purchase Obligations:
Unconditional purchase obligations are defined as an agreement to purchase
goods or services that is enforceable and legally binding (non-cancelable, or
cancelable only in certain circumstances). The Company estimates its total
unconditional purchase obligation commitment (for those contracts with terms
in excess of one year) as of December 31, 2017, at $800 million. Payments by
year are estimated as follows: 2018 ($271 million), 2019 ($211 million), 2020
($150 million), 2021 ($99 million), 2022 ($56 million) and after 2022 ($13
million). 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. 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 an indication of the Company's expected future cash outflows related
to purchases.
Warranties/Guarantees:
3M's accrued product warranty liabilities, recorded on the Consolidated
Balance Sheet as part of current and long-term liabilities, are estimated at
approximately $50 million at December 31, 2017, and $47 million at
December 31, 2016. 3M does not consider this amount to be material. The fair
value of 3M guarantees of loans with third parties and other guarantee
arrangements are not material.
Related Party Activity:
3M does not have any material related party activity.
Legal Proceedings:
The Company and some of its subsidiaries are involved in numerous claims and
lawsuits, principally in the United States, and regulatory proceedings
worldwide. These include various products liability (involving products that
the Company now or formerly manufactured and sold), intellectual property, and
commercial claims and lawsuits, including those brought under the antitrust
laws, and environmental proceedings. Unless otherwise stated, the Company is
vigorously defending all such litigation.
Process for Disclosure and Recording of Liabilities and Insurance Receivables
Related to Legal Proceedings
Many lawsuits and claims involve highly complex issues relating to causation,
scientific evidence, and whether there are actual damages and are otherwise
subject to substantial uncertainties. Assessments of lawsuits and claims can
involve a series of complex judgments about future events and can rely heavily
on estimates and assumptions. The Company complies with the requirements of
ASC 450, Contingencies, and related guidance, and records liabilities for
legal proceedings in those instances where it can reasonably estimate the
amount of the loss and where liability is probable. Where the reasonable
estimate of the probable loss is a range, the Company records the most likely
estimate of the loss, or the low end of the range if there is no one best
estimate. The Company either discloses the amount of a possible loss or range
of loss in excess of established accruals if estimable, or states that such an
estimate cannot be made. The Company discloses significant legal proceedings
even where liability is not probable or the amount of the liability is not
estimable, or both, if the Company believes there is at least a reasonable
possibility that a loss may be incurred.
The Company estimates insurance receivables based on an analysis of its
numerous policies, including their exclusions, pertinent case law interpreting
comparable policies, its experience with similar claims, and assessment of the
nature of the claim and remaining coverage, and records an amount it has
concluded is likely to be recovered. For those insured matters where the
Company has taken an accrual, the Company also records receivables for the
amount of insurance that it expects to recover under the Company's insurance
program. For those insured matters where the Company has not taken an accrual
because the liability is not probable or the amount of the liability is not
estimable, or both, but where the Company has incurred an expense in defending
itself, the Company records receivables for the amount of insurance that it
expects to recover for the expense incurred.
Because litigation is subject to inherent uncertainties, and unfavorable
rulings or developments could occur, there can be no certainty that the
Company may not ultimately incur charges in excess of presently recorded
liabilities. 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 the period in which they
are recorded. Although the Company cannot estimate its exposure to all legal
proceedings, it currently believes, except as described below, that such
future charges, if any, would not have a material adverse effect on the
consolidated financial position of the Company. Based on experience and
developments, the Company reexamines its estimates of probable liabilities and
associated expenses and receivables each period, and whether it is able to
estimate a liability previously determined to be not estimable and/or not
probable. Where appropriate, the Company makes additions to or adjustments of
its estimated liabilities. As a result, the current estimates of the potential
impact on the Company's consolidated financial position, results of operations
and cash flows for the legal proceedings and claims pending against the
Company could change in the future.
The following sections first describe the significant legal proceedings in
which the Company is involved, and then describe the liabilities and
associated insurance receivables the Company has accrued relating to its
significant legal proceedings.
Respirator Mask/Asbestos Litigation
As of December 31, 2017, the Company is a named defendant, with multiple
co-defendants, in numerous lawsuits in various courts that purport to
represent approximately 2,230 individual claimants, compared to approximately
2,660 individual claimants with actions pending at December 31, 2016.
The vast majority of the lawsuits and claims resolved by and currently pending
against the Company allege use of some of the Company's mask and respirator
products and seek damages from the Company and other defendants for alleged
personal injury from workplace exposures to asbestos, silica, coal mine dust
or other occupational dusts found in products manufactured by other defendants
or generally in the workplace. A minority of the lawsuits and claims resolved
by and currently pending against the Company generally allege personal injury
from occupational exposure to asbestos from products previously manufactured
by the Company, which are often unspecified, as well as products manufactured
by other defendants, or occasionally at Company premises.
The Company's current volume of new and pending matters is substantially lower
than it experienced at the peak of filings in 2003. The Company expects that
filing of claims by unimpaired claimants in the future will continue to be at
much lower levels than in the past. Accordingly, the number of claims alleging
more serious injuries, including mesothelioma and other malignancies, will
represent a greater percentage of total claims than in the past. The Company
has prevailed in all twelve cases taken to trial, including ten of the eleven
cases tried to verdict (such trials occurred in 1999, 2000, 2001, 2003, 2004,
2007, 2015, and the cases tried in 2016 and 2017-described below), and an
appellate reversal in 2005 of the 2001 jury verdict adverse to the Company.
The remaining case, tried in 2009, was dismissed by the court at the close of
plaintiff's evidence, based on the court's legal finding that the plaintiff
had not presented sufficient evidence to support a jury verdict. In August
2016, 3M received a unanimous verdict in its favor from a jury in state court
in Kentucky, in 3M's first respirator trial involving coal mine dust. The
estate of the plaintiff alleged that the 3M 8710 respirator is defective and
caused his death because it did not protect him from harmful coal mine dust.
The jury rejected plaintiff's claim and returned a verdict finding no
liability against 3M. The verdict is final as the plaintiff did not file an
appeal. In September 2017, 3M received a unanimous verdict in its favor from a
jury in state court in Kentucky in 3M's second respirator trial involving coal
mine dust. The jury ultimately determined that the plaintiff's claims were
barred by the statute of limitations. In November 2017, the court denied the
plaintiff's motion for a new trial. The plaintiff did not file an appeal,
thereby ending the litigation.
The Company has demonstrated in these past trial proceedings that its
respiratory protection products are effective as claimed when used in the
intended manner and in the intended circumstances. Consequently the Company
believes that claimants are unable to establish that their medical conditions,
even if significant, are attributable to the Company's respiratory protection
products. Nonetheless the Company's litigation experience indicates that
claims of persons with malignant conditions are costlier to resolve than the
claims of unimpaired persons, and it therefore believes the average cost of
resolving pending and future claims on a per-claim basis will continue to be
higher than it experienced in prior periods when the vast majority of claims
were asserted by medically unimpaired claimants.
As previously reported, the State of West Virginia, through its Attorney
General, filed a complaint in 2003 against the Company and two other
manufacturers of respiratory protection products in the Circuit Court of
Lincoln County, West Virginia, and amended its complaint in 2005. The amended
complaint seeks substantial, but unspecified, compensatory damages primarily
for reimbursement of the costs allegedly incurred by the State for worker's
compensation and healthcare benefits provided to all workers with occupational
pneumoconiosis and unspecified punitive damages. The case was inactive from
the fourth quarter of 2007 until late 2013, other than a case management
conference in March 2011. In November 2013, the State filed a motion to
bifurcate the lawsuit into separate liability and damages proceedings. At the
hearing on the motion, the court declined to bifurcate the lawsuit. No
liability has been recorded for this matter because the Company believes that
liability is not probable and estimable at this time. In addition, the Company
is not able to estimate a possible loss or range of loss given the lack of any
meaningful discovery responses by the State of West Virginia, the otherwise
minimal activity in this case and the fact that the complaint asserts claims
against two other manufacturers where a defendant's share of liability may
turn on the law of joint and several liability and by the amount of fault, if
any, a jury might allocate to each defendant if the case is ultimately tried.
Respirator Mask/Asbestos Liabilities and Insurance Receivables
The Company regularly conducts a comprehensive legal review of its respirator
mask/asbestos liabilities. The Company reviews recent and historical claims
data, including without limitation, (i) the number of pending claims filed
against the Company, (ii) the nature and mix of those claims (i.e., the
proportion of claims asserting usage of the Company's mask or respirator
products and alleging exposure to each of asbestos, silica, coal or other
occupational dusts, and claims pleading use of asbestos-containing products
allegedly manufactured by the Company), (iii) the costs to defend and resolve
pending claims, and (iv) trends in filing rates and in costs to defend and
resolve claims, (collectively, the "Claims Data"). As part of its
comprehensive legal review, the Company regularly provides the Claims Data to
a third party with expertise in determining the impact of Claims Data on
future filing trends and costs. The third party assists the Company in
estimating the costs to defend and resolve pending and future claims. The
Company uses these estimates to develop its best estimate of probable
liability.
Developments may occur that could affect the Company's estimate of its
liabilities. These developments include, but are not limited to, significant
changes in (i) the key assumptions underlying the Company's accrual,
including, the number of future claims, the nature and mix of those claims,
the average cost of defending and resolving claims, and in maintaining trial
readiness (ii) trial and appellate outcomes, (iii) the law and procedure
applicable to these claims, and (iv) the financial viability of other
co-defendants and insurers.
As a result of the Company's review of its respirator mask/asbestos
liabilities and as a result of the cost of resolving claims of persons who
claim more serious injuries, including mesothelioma and other malignancies,
the Company increased its accruals in 2017 for respirator mask/asbestos
liabilities by $71 million. In 2017, the Company made payments for legal fees
and settlements of $58 million related to the respirator mask/asbestos
litigation. As of December 31, 2017 and 2016, the Company had an accrual for
respirator mask/asbestos liabilities (excluding Aearo accruals) of $608
million and $595 million, respectively. This accrual represents the Company's
best estimate of probable loss and reflects an estimation period for future
claims that may be filed against the Company approaching the year 2050. The
Company cannot estimate the amount or upper end of the range of amounts by
which the liability may exceed the accrual the Company has established because
of the (i) inherent difficulty in projecting the number of claims that have
not yet been asserted or the time period in which future claims may be
asserted, (ii) the complaints nearly always assert claims against multiple
defendants where the damages alleged are typically not attributed to
individual defendants so that a defendant's share of liability may turn on the
law of joint and several liability, which can vary by state, (iii) the
multiple factors described above that the Company considers in estimating its
liabilities, and (iv) the several possible developments described above that
may occur that could affect the Company's estimate of liabilities.
As of December 31, 2017, the Company's receivable for insurance recoveries
related to the respirator mask/asbestos litigation was $4 million. The Company
is seeking coverage under the policies of certain insolvent and other
insurers. Once those claims for coverage are resolved, the Company will have
collected substantially all of its remaining insurance coverage for respirator
mask/asbestos claims.
Respirator Mask/Asbestos Litigation - Aearo Technologies
On April 1, 2008, a subsidiary of the Company purchased the stock of Aearo
Holding Corp., the parent of Aearo Technologies ("Aearo"). Aearo manufactured
and sold various products, including personal protection equipment, such as
eye, ear, head, face, fall and certain respiratory protection products.
As of December 31, 2017, Aearo and/or other companies that previously owned
and operated Aearo's respirator business (American Optical Corporation,
Warner-Lambert LLC, AO Corp. and Cabot Corporation ("Cabot")) are named
defendants, with multiple co-defendants, including the Company, in numerous
lawsuits in various courts in which plaintiffs allege use of mask and
respirator products and seek damages from Aearo and other defendants for
alleged personal injury from workplace exposures to asbestos, silica-related,
or other occupational dusts found in products manufactured by other defendants
or generally in the workplace.
As a result of the review of Aearo's respirator mask/asbestos liabilities, the
Company increased Aearo's accruals in 2017 for respirator mask/asbestos
liabilities by $13 million. As of December 31, 2017, the Company, through its
Aearo subsidiary, had accruals of $30 million for product liabilities and
defense costs related to current and future Aearo-related asbestos and
silica-related claims. This accrual represents the Company's best estimate of
Aearo's probable loss and reflects an estimation period for future claims that
may be filed against the Aearo approaching the year 2050. Responsibility for
legal costs, as well as for settlements and judgments, is currently shared in
an informal arrangement among Aearo, Cabot, American Optical Corporation and a
subsidiary of Warner Lambert and their respective insurers (the "Payor
Group"). Liability is allocated among the parties based on the number of years
each company sold respiratory products under the "AO Safety" brand and/or
owned the AO Safety Division of American Optical Corporation and the alleged
years of exposure of the individual plaintiff. Aearo's share of the contingent
liability is further limited by an agreement entered into between Aearo and
Cabot on July 11, 1995. This agreement provides that, so long as Aearo pays
to Cabot a quarterly fee of $100,000, Cabot will retain responsibility and
liability for, and indemnify Aearo against, any product liability claims
involving exposure to asbestos, silica, or silica products for respirators
sold prior to July 11, 1995. Because of the difficulty in determining how
long a particular respirator remains in the stream of commerce after being
sold, Aearo and Cabot have applied the agreement to claims arising out of the
alleged use of respirators involving exposure to asbestos, silica or silica
products prior to January 1, 1997. With these arrangements in place, Aearo's
potential liability is limited to exposures alleged to have arisen from the
use of respirators involving exposure to asbestos, silica, or silica products
on or after January 1, 1997. To date, Aearo has elected to pay the quarterly
fee. Aearo could potentially be exposed to additional claims for some part of
the pre-July 11, 1995 period covered by its agreement with Cabot if Aearo
elects to discontinue its participation in this arrangement, or if Cabot is no
longer able to meet its obligations in these matters.
In March 2012, Cabot CSC Corporation and Cabot Corporation filed a lawsuit
against Aearo in the Superior Court of Suffolk County, Massachusetts seeking
declaratory relief as to the scope of Cabot's indemnity obligations under the
July 11, 1995 agreement, including whether Cabot has retained liability for
coal workers' pneumoconiosis claims, and seeking damages for breach of
contract. In 2014, the court granted Aearo's motion for summary judgment on
two claims, but declined to rule on two issues: the specific liability for
certain known coal mine dust lawsuits; and Cabot's claim for allocation of
liability between injuries allegedly caused by exposure to coal mine dust and
injuries allegedly caused by exposure to silica dust. Following additional
discovery, the parties filed new motions for summary judgment. In February
2016, the court ruled in favor of Aearo on these two remaining issues, and
ordered that Cabot, and not Aearo, is solely responsible for all liability for
the coal mine dust lawsuits under the 1995 agreement. In May 2017, the
Massachusetts Court of Appeals affirmed the trial court order in favor of
Aearo.
Developments may occur that could affect the estimate of Aearo's liabilities.
These developments include, but are not limited to: (i) significant changes
in the number of future claims, (ii) significant changes in the average cost
of resolving claims, (iii) significant changes in the legal costs of
defending these claims, (iv) significant changes in the mix and nature of
claims received, (v) trial and appellate outcomes, (vi) significant changes
in the law and procedure applicable to these claims, (vii) significant
changes in the liability allocation among the co-defendants, (viii) the
financial viability of members of the Payor Group including exhaustion of
available insurance coverage limits, and/or (ix) a determination that the
interpretation of the contractual obligations on which Aearo has estimated its
share of liability is inaccurate. The Company cannot determine the impact of
these potential developments on its current estimate of Aearo's share of
liability for these existing and future claims. If any of the developments
described above were to occur, the actual amount of these liabilities for
existing and future claims could be significantly larger than the amount
accrued.
Because of the inherent difficulty in projecting the number of claims that
have not yet been asserted, the complexity of allocating responsibility for
future claims among the Payor Group, and the several possible developments
that may occur that could affect the estimate of Aearo's liabilities, the
Company cannot estimate the amount or range of amounts by which Aearo's
liability may exceed the accrual the Company has established.
Environmental Matters and Litigation
The Company's operations are subject to environmental laws and regulations
including those pertaining to air emissions, wastewater discharges, toxic
substances, and the handling and disposal of solid and hazardous wastes
enforceable by national, state, and local authorities around the world, and
private parties in the United States and abroad. These laws and regulations
provide, under certain circumstances, a basis for the remediation of
contamination, for restoration of or compensation for damages to natural
resources, and for personal injury and property damage claims. The Company has
incurred, and will continue to incur, costs and capital expenditures in
complying with these laws and regulations, defending personal injury and
property damage claims, and modifying its business operations in light of its
environmental responsibilities. In its effort to satisfy its environmental
responsibilities and comply with environmental laws and regulations, the
Company has established, and periodically updates, policies relating to
environmental standards of performance for its operations worldwide.
Under certain environmental laws, including the United States Comprehensive
Environmental Response, Compensation and Liability Act of 1980 and similar
state laws, the Company may be jointly and severally liable, typically with
other companies, for the costs of remediation of environmental contamination
at current or former facilities and at off-site locations. The Company has
identified numerous locations, most of which are in the United States, at
which it may have some liability. Please refer to the section entitled
"Environmental Liabilities and Insurance Receivables" that follows for
information on the amount of the accrual.
Environmental Matters
As previously reported, the Company has been voluntarily cooperating with
ongoing reviews by local, state, federal (primarily the U.S. Environmental
Protection Agency (EPA)), and international agencies of possible environmental
and health effects of various perfluorinated compounds, including
perfluorooctanyl compounds such as perfluorooctanoate ("PFOA"),
perfluorooctane sulfonate ("PFOS"), or similar compounds ("PFCs"). As a result
of its phase-out decision in May 2000, the Company no longer manufactures
perfluorooctanyl compounds. The company ceased manufacturing and using the
vast majority of these compounds within approximately two years of the
phase-out announcement, and ceased all manufacturing and the last significant
use of this chemistry by the end of 2008. Through its ongoing life cycle
management and its raw material composition identification processes
associated with the Company's policies covering the use of all persistent and
bio-accumulative materials, the Company continues to control or eliminate the
presence of certain PFCs in purchased materials or as byproducts in some of
3M's fluorochemical manufacturing processes, products, and waste streams.
Regulatory activities concerning PFOA and/or PFOS continue in the United
States, Europe and elsewhere, and before certain international bodies. These
activities include gathering of exposure and use information, risk assessment,
and consideration of regulatory approaches. As the database of studies of
both PFOA and PFOS has expanded, the EPA has developed human health effects
documents summarizing the available data from these studies. In
February 2014, the EPA initiated external peer review of its draft human
health effects documents for PFOA and PFOS. The peer review panel met in
August 2014. In May 2016, the EPA announced lifetime health advisory levels
for PFOA and PFOS at 70 parts per trillion (ppt) (superseding the provisional
levels established by the EPA in 2009 of 400 ppt for PFOA and 200 ppt for
PFOS). Where PFOA and PFOS are found together, EPA recommends that the
concentrations be added together, and the lifetime health advisory for PFOA
and PFOS combined is also 70 ppt. Lifetime health advisories, while not
enforceable, serve as guidance and are benchmarks for determining if
concentrations of chemicals in tap water from public utilities are safe for
public consumption. In an effort to collect exposure information under the
Safe Drinking Water Act, the EPA published on May 2, 2012 a list of
unregulated substances, including six PFCs, required to be monitored during
the period 2013-2015 by public water system suppliers to determine the extent
of their occurrence. Through January 2017, the EPA reported results for 4,920
public water supplies nationwide. Based on the 2016 lifetime health advisory,
13 public water supplies exceed the level for PFOA and 46 exceed the level for
PFOS (unchanged from the July 2016 EPA summary). A technical advisory issued
by EPA in September 2016 on laboratory analysis of drinking water samples
stated that 65 public water supplies had exceeded the combined level for PFOA
and PFOS. These results are based on one or more samples collected during the
period 2012-2015 and do not necessarily reflect current conditions of these
public water supplies. EPA reporting does not identify the sources of the PFOA
and PFOS in the public water supplies.
The Company is continuing to make progress in its work, under the supervision
of state regulators, to address its historic disposal of PFC-containing waste
associated with manufacturing operations at the Decatur, Alabama, Cottage
Grove, Minnesota, and Cordova, Illinois plants. As previously reported, the
Company entered into a voluntary remedial action agreement with the Alabama
Department of Environmental Management (ADEM) to address the presence of PFCs
in the soil at the Company's manufacturing facility in Decatur, Alabama.
Pursuant to a permit issued by ADEM, for approximately twenty years, the
Company incorporated its wastewater treatment plant sludge containing PFCs in
fields at its Decatur facility. After a review of the available options to
address the presence of PFCs in the soil, ADEM agreed that the preferred
remediation option is to use a multilayer cap over the former sludge
incorporation areas on the manufacturing site with subsequent groundwater
migration controls and treatment. Implementation of that plan continues and is
expected to be completed in 2018.
The Company continues to work with the Minnesota Pollution Control Agency
(MPCA) pursuant to the terms of the previously disclosed May 2007 Settlement
Agreement and Consent Order to address the presence of certain PFCs in the
soil and groundwater at former disposal sites in Washington County, Minnesota
(Oakdale and Woodbury) and at the Company's manufacturing facility at Cottage
Grove, Minnesota. Under this agreement, the Company's principal obligations
include (i) evaluating releases of certain PFCs from these sites and
proposing response actions; (ii) providing treatment or alternative drinking
water upon identifying any level exceeding a Health Based Value ("HBV") or
Health Risk Limit ("HRL") (i.e., the amount of a chemical in drinking water
determined by the Minnesota Department of Health (MDH) to be safe for human
consumption over a lifetime) for certain PFCs for which a HBV and/or HRL
exists as a result of contamination from these sites; (iii) remediating
identified sources of other PFCs at these sites that are not controlled by
actions to remediate PFOA and PFOS; and (iv) sharing information with the
MPCA about certain perfluorinated compounds. During 2008, the MPCA issued
formal decisions adopting remedial options for the former disposal sites in
Washington County, Minnesota (Oakdale and Woodbury). In August 2009, the MPCA
issued a formal decision adopting remedial options for the Company's Cottage
Grove manufacturing facility. During the spring and summer of 2010, 3M began
implementing the agreed upon remedial options at the Cottage Grove and
Woodbury sites. 3M commenced the remedial option at the Oakdale site in late
2010. At each location the remedial options were recommended by the Company
and approved by the MPCA. Remediation work has been completed at the Oakdale
and Woodbury sites, and they are in an operational maintenance mode.
Remediation will continue at the Cottage Grove site during 2018.
In August 2014, the Illinois EPA approved a request by the Company to
establish a groundwater management zone at its manufacturing facility in
Cordova, Illinois, which includes ongoing pumping of impacted site
groundwater, groundwater monitoring and routine reporting of results.
In May 2017, the MDH issued new HBVs for PFOS and PFOA. The new HBVs are 35
ppt for PFOA and 27 ppt for PFOS. In connection with its announcement, the MDH
stated that "Drinking water with PFOA and PFOS, even at the levels above the
updated values, does not represent an immediate health risk. These values are
designed to reduce long-term health risks across the population and are based
on multiple safety factors to protect the most vulnerable citizens, which
makes them overprotective for most of the residents in our state." In December
2017, the MDH issued a new HBV for perfluorobutane sulfonate (PFBS) of 2 ppb.
The Company cannot predict what additional regulatory actions arising from the
foregoing proceedings and activities, if any, may be taken regarding such
compounds or the consequences of any such actions.
Alabama Environmental Litigation
As previously reported, a former employee filed a purported class action
lawsuit in 2002 in the Circuit Court of Morgan County, Alabama (the "St. John
case"), seeking unstated damages and alleging that the plaintiffs suffered
fear, increased risk, subclinical injuries, and property damage from exposure
to certain perfluorochemicals at or near the Company's Decatur, Alabama,
manufacturing facility. The court in 2005 granted the Company's motion to
dismiss the named plaintiff's personal injury-related claims on the basis that
such claims are barred by the exclusivity provisions of the state's Workers
Compensation Act. The plaintiffs' counsel filed an amended complaint in
November 2006, limiting the case to property damage claims on behalf of a
purported class of residents and property owners in the vicinity of the
Decatur plant. In June 2015, the plaintiffs filed an amended complaint adding
additional defendants, including BFI Waste Management Systems of Alabama, LLC;
BFI Waste Management of North America, LLC; the City of Decatur, Alabama;
Morgan County, Alabama; Municipal Utilities Board of Decatur; and Morgan
County, Alabama, d/b/a Decatur Utilities.
In 2005, the judge -- in a second purported class action lawsuit filed by
three residents of Morgan County, Alabama, seeking unstated compensatory and
punitive damages involving alleged damage to their property from emissions of
certain perfluorochemical compounds from the Company's Decatur, Alabama,
manufacturing facility that formerly manufactured those compounds (the
"Chandler case") -- granted the Company's motion to abate the case,
effectively putting the case on hold pending the resolution of class
certification issues in the St. John case. Despite the stay, plaintiffs filed
an amended complaint seeking damages for alleged personal injuries and
property damage on behalf of the named plaintiffs and the members of a
purported class. No further action in the case is expected unless and until
the stay is lifted.
In February 2009, a resident of Franklin County, Alabama, filed a purported
class action lawsuit in the Circuit Court of Franklin County (the "Stover
case") seeking compensatory damages and injunctive relief based on the
application by the Decatur utility's wastewater treatment plant of wastewater
treatment sludge to farmland and grasslands in the state that allegedly
contain PFOA, PFOS and other perfluorochemicals. The named plaintiff seeks to
represent a class of all persons within the State of Alabama who have had
PFOA, PFOS, and other perfluorochemicals released or deposited on their
property. In March 2010, the Alabama Supreme Court ordered the case
transferred from Franklin County to Morgan County. In May 2010, consistent
with its handling of the other matters, the Morgan County Circuit Court abated
this case, putting it on hold pending the resolution of the class
certification issues in the St. John case.
In October 2015, West Morgan-East Lawrence Water & Sewer Authority (Water
Authority) filed an individual complaint against 3M Company, Dyneon, L.L.C,
and Daikin America, Inc., in the U.S. District Court for the Northern District
of Alabama. The complaint also includes representative plaintiffs who brought
the complaint on behalf of themselves, and a class of all owners and
possessors of property who use water provided by the Water Authority and five
local water works to which the Water Authority supplies water (collectively,
the "Water Utilities"). The complaint seeks compensatory and punitive damages
and injunctive relief based on allegations that the defendants' chemicals,
including PFOA and PFOS from their manufacturing processes in Decatur, have
contaminated the water in the Tennessee River at the water intake, and that
the chemicals cannot be removed by the water treatment processes utilized by
the Water Authority. In September 2016, the court granted 3M's motion to
dismiss plaintiffs' trespass claims with prejudice, negligence claims for
personal injuries, and private nuisance claims, and denied the motion to
dismiss the plaintiffs' negligence claims for property damage, public
nuisance, abatement of nuisance, battery and wantonness.
In June 2016, the Tennessee Riverkeeper, Inc. (Riverkeeper), a non-profit
corporation, filed a lawsuit in the U.S. District Court for the Northern
District of Alabama against 3M; BFI Waste Systems of Alabama; the City of
Decatur, Alabama; and the Municipal Utilities Board of Decatur, Morgan County,
Alabama. The complaint alleges that the defendants violated the Resource
Conservation and Recovery Act in connection with the disposal of certain PFCs
through their ownership and operation of their respective sites. The complaint
further alleges such practices may present an imminent and substantial
endangerment to health and/or the environment and that Riverkeeper has
suffered and will continue to suffer irreparable harm caused by defendants'
failure to abate the endangerment unless the court grants the requested
relief, including declaratory and injunctive relief.
In August 2016, a group of over 200 plaintiffs filed a class action against
West Morgan-East Lawrence Water and Sewer Authority (Water Authority), 3M,
Dyneon, Daikin, BFI, and the City of Decatur in state court in Lawrence
County, Alabama. Plaintiffs are residents of Lawrence, Morgan and other
counties who are or have been customers of the Water Authority. They contend
defendants have released PFCs that contaminate the Tennessee River and, in
turn, their drinking water, causing damage to their health and properties. In
January 2017, the court in the St. John case, discussed above, stayed this
litigation pending resolution of the St. John case.
In September 2016, the Water Works and Sewer Board of the City of Gadsden,
Alabama filed a lawsuit in the Circuit Court of Etowah County Alabama against
3M and various carpet manufacturers. The complaint alleges that PFCs from the
defendants' facilities contaminated the Coosa River as its raw water source
for drinking water and seeks unstated damages for the installation and
operation of a filtration system, expenses to monitor PFC levels, and lost
profits and sales.
In January 2017, several hundred plaintiffs sued 3M, its subsidiary Dyneon,
and Daikin America in Lawrence and Morgan Counties, Alabama. The plaintiffs
are owners of property, residents, and holders of property interests who
receive their water from the West Morgan-East Lawrence Water and Sewer
Authority (Water Authority). They assert common law claims for negligence,
nuisance, trespass, wantonness, and battery, and they seek injunctive relief
and punitive damages. The plaintiffs contend that the defendants own and
operate manufacturing and disposal facilities in Decatur that have released
and continue to release PFOA, PFOS and related chemicals into the groundwater
and surface water of their sites, resulting in discharge into the Tennessee
River. The plaintiffs also contend that the defendants have discharged into
Bakers Creek and the Decatur Utilities Dry Creek Wastewater Treatment Plant,
which, in turn, discharges wastewater containing these chemicals into the
Tennessee River. The plaintiffs contend that, as a result the alleged
discharges, the water supplied by the Water Authority to the plaintiffs was,
and is, contaminated with PFOA, PFOS, and related chemicals at a level
dangerous to humans.
In May 2017, the Water Works and Sewer Board of the Town of Centre, Alabama
filed a lawsuit in the Circuit Court of Cherokee County Alabama against 3M,
DuPont, and various carpet and textile manufacturers. The complaint alleges
that PFCs from the defendants' facilities contaminated the town's raw water
source for drinking water and seeks unstated damages for the installation and
operation of a filtration system, expenses to monitor PFC levels, lost profits
and sales, and injunctive relief.
In November 2017, a purported class action was filed against 3M, its
subsidiary Dyneon, Daikin America, and the West Morgan-East Lawrence Water and
Sewer Authority (Water Authority) in the U.S. District Court for the Northern
District of Alabama. The plaintiffs are residents of Lawrence and Morgan
County, Alabama who receive their water from the Water Authority. They assert
various common law claims, including negligence, nuisance, wantonness, and
fraudulent concealment, and they seek injunctive relief, attorneys' fees,
compensatory and punitive damages for their alleged personal injuries. The
plaintiffs contend that the defendants own and operate manufacturing and
disposal facilities in Decatur that have released and continue to release
PFOA, PFOS and related chemicals into the groundwater and surface water of
their sites, resulting in discharge into the Tennessee River. The plaintiffs
also contend that the defendants have discharged into the Decatur Utilities
Dry Creek Wastewater Treatment Plant, which, in turn, discharges wastewater
containing these chemicals into the Tennessee River. The plaintiffs contend
that, as a result the alleged discharges, the water supplied by the Water
Authority to the plaintiffs was, and is, contaminated with PFOA, PFOS, and
related chemicals at a level dangerous to humans.
Minnesota Environmental Litigation
In December 2010, the State of Minnesota, by its Attorney General Lori
Swanson, acting in its capacity as trustee of the natural resources of the
State of Minnesota, filed a lawsuit in Hennepin County District Court against
3M to recover damages (including unspecified assessment costs and reasonable
attorney's fees) for alleged injury to, destruction of, and loss of use of
certain of the State's natural resources under the Minnesota Environmental
Response and Liability Act (MERLA) and the Minnesota Water Pollution Control
Act (MWPCA), as well as statutory nuisance and common law claims of trespass,
nuisance, and negligence with respect to the presence of
- More to follow, for following part double click ID:nRSM6597Ec
December 31, 2017 Consolidated Recognized Cash Collateral Net Amount of
(Millions) Balance Sheet Derivative Assets Pledged Derivative Liabilities
Derivatives subject to master netting agreements $ 197 $ 27 $ - $ 170
Derivatives not subject to master netting agreements - -
Total $ 197 $ 170
December 31, 2016
(Millions)
Derivatives subject to master netting agreements $ 93 $ 39 $ - $ 54
Derivatives not subject to master netting agreements 2 2
Total $ 95 $ 56
Foreign Currency Effects
3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, decreased pre-tax income by
approximately $152 million in 2017 and decreased pre-tax income by approximately $69 million in 2016. These estimates
include transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate
risks.
NOTE 14. 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.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
For 3M, assets and liabilities that are measured at fair value on a recurring basis primarily relate to available-for-sale
marketable securities and certain derivative instruments. Derivatives include cash flow hedges, interest rate swaps and net
investment hedges. The information in the following paragraphs and tables primarily addresses matters relative to these
financial assets and liabilities. Separately, there were no material fair value measurements with respect to nonfinancial
assets or liabilities that are recognized or disclosed at fair value in the Company's financial statements on a recurring
basis for 2017 and 2016.
3M uses various valuation techniques, which are primarily based upon the market and income approaches, with respect to
financial assets and liabilities. Following is a description of the valuation methodologies used for the respective
financial assets and liabilities measured at fair value.
Available-for-sale marketable securities - except certain U.S. municipal securities:
Marketable securities, except certain U.S. municipal securities, are valued utilizing multiple sources. A weighted average
price is used for these securities. Market prices are obtained for these securities from a variety of industry standard
data providers, security master files from large financial institutions, and other third-party sources. These multiple
prices are used as inputs into a distribution-curve-based algorithm to determine the daily fair value to be used. 3M
classifies U.S. treasury securities as level 1, while all other marketable securities (excluding certain U.S. municipal
securities) are classified as level 2. Marketable securities are discussed further in Note 10.
Available-for-sale marketable securities -certain U.S. municipal securities only:
3M holds municipal bonds with the City of Nevada, Missouri, which represent 3M's only U.S. municipal securities holding as
of December 31, 2017. Due to the nature of this security, the valuation method utilized will include the financial health
of the City of Nevada, any recent municipal bond issuances by Nevada, and macroeconomic considerations related to the
direction of interest rates and the health of the overall municipal bond market, and as such will be classified as a level
3 security.
Derivative instruments:
The Company's derivative assets and liabilities within the scope of ASC 815, Derivatives and Hedging, are required to be
recorded at fair value. The Company's derivatives that are recorded at fair value include foreign currency forward and
option contracts, commodity price swaps, interest rate swaps, and net investment hedges where the hedging instrument is
recorded at fair value. Net investment hedges that use foreign currency denominated debt to hedge 3M's net investment are
not impacted by the fair value measurement standard under ASC 820, as the debt used as the hedging instrument is marked to
a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may
impact fair value.
3M has determined that foreign currency forwards, commodity price swaps, currency swaps, foreign currency options, interest
rate swaps and cross-currency swaps will be considered level 2 measurements. 3M uses inputs other than quoted prices that
are observable for the asset. These inputs include foreign currency exchange rates, volatilities, and interest rates.
Derivative positions are primarily valued using standard calculations/models that use as their basis readily observable
market parameters. Industry standard data providers are 3M's primary source for forward and spot rate information for both
interest rates and currency rates, with resulting valuations periodically validated through third-party or counterparty
quotes and a net present value stream of cash flows model.
The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring
basis.
Fair Value Measurements
Description Fair Value at Using Inputs Considered as
(Millions) December 31, 2017 Level 1 Level 2 Level 3
Assets:
Available-for-sale:
Marketable securities:
Corporate debt securities $ 14 $ - $ 14 $ -
Commercial paper 899 - 899 -
Certificates of deposit/time deposits 76 - 76 -
Asset-backed securities:
Automobile loan related 16 - 16 -
Credit card related 68 - 68 -
U.S. municipal securities 30 - - 30
Derivative instruments - assets:
Foreign currency forward/option contracts 57 - 57 -
Interest rate swap contracts 21 - 21 -
Liabilities:
Derivative instruments - liabilities:
Foreign currency forward/option contracts 190 - 190 -
Interest rate swap contracts 7 - 7 -
Fair Value Measurements
Description Fair Value at Using Inputs Considered as
(Millions) December 31, 2016 Level 1 Level 2 Level 3
Assets:
Available-for-sale:
Marketable securities:
Corporate debt securities $ 10 $ - $ 10 $ -
Commercial paper 14 - 14 -
Certificates of deposit/time deposits 197 - 197 -
Asset-backed securities:
Automobile loan related 31 - 31 -
Credit card related 18 - 18 -
Other 7 - 7 -
U.S. municipal securities 20 - - 20
Derivative instruments - assets:
Foreign currency forward/option contracts 234 - 234 -
Interest rate swap contracts 25 - 25 -
Liabilities:
Derivative instruments - liabilities:
Foreign currency forward/option contracts 94 - 94 -
Interest rate swap contracts 1 - 1 -
The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a
recurring basis in the table above that used significant unobservable inputs (level 3).
Marketable securities - certain U.S. municipal securities only
(Millions) 2017 2016 2015
Beginning balance $ 20 $ 12 $ 15
Total gains or losses:
Included in earnings - - -
Included in other comprehensive income - - -
Purchases and issuances 13 12 -
Sales and settlements (3) (4) (3)
Transfers in and/or out of level 3 - - -
Ending balance 30 20 12
Change in unrealized gains or losses for the period included in earnings for securities held at the end of the reporting period - - -
In addition, the plan assets of 3M's pension and postretirement benefit plans are measured at fair value on a recurring
basis (at least annually). Refer to Note 12.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:
Disclosures are required for certain assets and liabilities that are measured at fair value, but are recognized and
disclosed at fair value on a nonrecurring basis in periods subsequent to initial recognition. For 3M, such measurements of
fair value relate primarily to long-lived asset impairments. During 2017, the Company recognized approximately $61 million
in long-lived asset impairments within its Electronics and Energy and Industrial business segments, with the complete
carrying amount of such assets written off and included in operating income results. There were no material long-lived
asset impairments for 2016 and 2015.
Fair Value of Financial Instruments:
The Company's financial instruments include cash and cash equivalents, marketable securities, accounts receivable, certain
investments, accounts payable, borrowings, and derivative contracts. The fair values of cash equivalents, accounts
receivable, accounts payable, and short-term borrowings and current portion of long-term debt approximated carrying values
because of the short-term nature of these instruments. Available-for-sale marketable securities, in addition to certain
derivative instruments, are recorded at fair values as indicated in the preceding disclosures. To estimate fair values
(classified as level 2) for its long-term debt, the Company utilized third-party quotes, which are derived all or in part
from model prices, external sources, market prices, or the third-party's internal records. Information with respect to the
carrying amounts and estimated fair values of these financial instruments follow:
December 31, 2017 December 31, 2016
Carrying Fair Carrying Fair
(Millions) Value Value Value Value
Long-term debt, excluding current portion $ 12,096 $ 12,535 $ 10,678 $ 11,168
The fair values reflected above consider the terms of the related debt absent the impacts of derivative/hedging activity.
The carrying amount of long-term debt referenced above is impacted by certain fixed-to-floating interest rate swaps that
are designated as fair value hedges and by the designation of fixed rate Eurobond securities issued by the Company as
hedging instruments of the Company's net investment in its European subsidiaries. Many of 3M's fixed-rate bonds were
trading at a premium at December 31, 2017 and 2016 due to the low interest rates and tightening of 3M's credit spreads.
NOTE 15. Commitments and Contingencies
Capital and Operating Leases:
Rental expense under operating leases was $343 million in 2017, $318 million in 2016 and $316 million in 2015. It is 3M's
practice to secure renewal rights for leases, thereby giving 3M the right, but not the obligation, to maintain a presence
in a leased facility. 3M has two primary capital leases. The first, which became effective in April 2003, involves a
building in the United Kingdom (with a lease term of 22 years). During the second quarter of 2003, 3M recorded a capital
lease asset and obligation of approximately 33.5 million British Pound (GBP), or approximately $27 million at December 31,
2017, exchange rates. For the second, 3M sold and leased-back certain recently constructed machinery and equipment in
return for municipal bonds with the City of Nevada, Missouri. 3M recorded a capital lease asset and obligation of
approximately $13 million in 2017, $12 million in 2016, and $15 million in earlier years, with a lease term of 15 years.
Minimum lease payments under capital and operating leases with non-cancelable terms in excess of one year as of December
31, 2017, were as follows:
Operating
(Millions) Capital Leases Leases
2018 $ 12 $ 258
2019 10 212
2020 9 160
2021 6 106
2022 5 88
After 2022 34 274
Total $ 76 $ 1,098
Less: Amounts representing interest 3
Present value of future minimum lease payments 73
Less: Current obligations under capital leases 13
Long-term obligations under capital leases $ 60
Unconditional Purchase Obligations:
Unconditional purchase obligations are defined as an agreement to purchase goods or services that is enforceable and
legally binding (non-cancelable, or cancelable only in certain circumstances). The Company estimates its total
unconditional purchase obligation commitment (for those contracts with terms in excess of one year) as of December 31,
2017, at $800 million. Payments by year are estimated as follows: 2018 ($271 million), 2019 ($211 million), 2020 ($150
million), 2021 ($99 million), 2022 ($56 million) and after 2022 ($13 million). 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. 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 an indication of the Company's expected future
cash outflows related to purchases.
Warranties/Guarantees:
3M's accrued product warranty liabilities, recorded on the Consolidated Balance Sheet as part of current and long-term
liabilities, are estimated at approximately $50 million at December 31, 2017, and $47 million at December 31, 2016. 3M does
not consider this amount to be material. The fair value of 3M guarantees of loans with third parties and other guarantee
arrangements are not material.
Related Party Activity:
3M does not have any material related party activity.
Legal Proceedings:
The Company and some of its subsidiaries are involved in numerous claims and lawsuits, principally in the United States,
and regulatory proceedings worldwide. These include various products liability (involving products that the Company now or
formerly manufactured and sold), intellectual property, and commercial claims and lawsuits, including those brought under
the antitrust laws, and environmental proceedings. Unless otherwise stated, the Company is vigorously defending all such
litigation.
Process for Disclosure and Recording of Liabilities and Insurance Receivables Related to Legal Proceedings
Many lawsuits and claims involve highly complex issues relating to causation, scientific evidence, and whether there are
actual damages and are otherwise subject to substantial uncertainties. Assessments of lawsuits and claims can involve a
series of complex judgments about future events and can rely heavily on estimates and assumptions. The Company complies
with the requirements of ASC 450, Contingencies, and related guidance, and records liabilities for legal proceedings in
those instances where it can reasonably estimate the amount of the loss and where liability is probable. Where the
reasonable estimate of the probable loss is a range, the Company records the most likely estimate of the loss, or the low
end of the range if there is no one best estimate. The Company either discloses the amount of a possible loss or range of
loss in excess of established accruals if estimable, or states that such an estimate cannot be made. The Company discloses
significant legal proceedings even where liability is not probable or the amount of the liability is not estimable, or
both, if the Company believes there is at least a reasonable possibility that a loss may be incurred.
The Company estimates insurance receivables based on an analysis of its numerous policies, including their exclusions,
pertinent case law interpreting comparable policies, its experience with similar claims, and assessment of the nature of
the claim and remaining coverage, and records an amount it has concluded is likely to be recovered. For those insured
matters where the Company has taken an accrual, the Company also records receivables for the amount of insurance that it
expects to recover under the Company's insurance program. For those insured matters where the Company has not taken an
accrual because the liability is not probable or the amount of the liability is not estimable, or both, but where the
Company has incurred an expense in defending itself, the Company records receivables for the amount of insurance that it
expects to recover for the expense incurred.
Because litigation is subject to inherent uncertainties, and unfavorable rulings or developments could occur, there can be
no certainty that the Company may not ultimately incur charges in excess of presently recorded liabilities. 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 the period in which they are recorded. Although the Company
cannot estimate its exposure to all legal proceedings, it currently believes, except as described below, that such future
charges, if any, would not have a material adverse effect on the consolidated financial position of the Company. Based on
experience and developments, the Company reexamines its estimates of probable liabilities and associated expenses and
receivables each period, and whether it is able to estimate a liability previously determined to be not estimable and/or
not probable. Where appropriate, the Company makes additions to or adjustments of its estimated liabilities. As a result,
the current estimates of the potential impact on the Company's consolidated financial position, results of operations and
cash flows for the legal proceedings and claims pending against the Company could change in the future.
The following sections first describe the significant legal proceedings in which the Company is involved, and then describe
the liabilities and associated insurance receivables the Company has accrued relating to its significant legal
proceedings.
Respirator Mask/Asbestos Litigation
As of December 31, 2017, the Company is a named defendant, with multiple co-defendants, in numerous lawsuits in various
courts that purport to represent approximately 2,230 individual claimants, compared to approximately 2,660 individual
claimants with actions pending at December 31, 2016.
The vast majority of the lawsuits and claims resolved by and currently pending against the Company allege use of some of
the Company's mask and respirator products and seek damages from the Company and other defendants for alleged personal
injury from workplace exposures to asbestos, silica, coal mine dust or other occupational dusts found in products
manufactured by other defendants or generally in the workplace. A minority of the lawsuits and claims resolved by and
currently pending against the Company generally allege personal injury from occupational exposure to asbestos from products
previously manufactured by the Company, which are often unspecified, as well as products manufactured by other defendants,
or occasionally at Company premises.
The Company's current volume of new and pending matters is substantially lower than it experienced at the peak of filings
in 2003. The Company expects that filing of claims by unimpaired claimants in the future will continue to be at much lower
levels than in the past. Accordingly, the number of claims alleging more serious injuries, including mesothelioma and other
malignancies, will represent a greater percentage of total claims than in the past. The Company has prevailed in all twelve
cases taken to trial, including ten of the eleven cases tried to verdict (such trials occurred in 1999, 2000, 2001, 2003,
2004, 2007, 2015, and the cases tried in 2016 and 2017-described below), and an appellate reversal in 2005 of the 2001 jury
verdict adverse to the Company. The remaining case, tried in 2009, was dismissed by the court at the close of plaintiff's
evidence, based on the court's legal finding that the plaintiff had not presented sufficient evidence to support a jury
verdict. In August 2016, 3M received a unanimous verdict in its favor from a jury in state court in Kentucky, in 3M's first
respirator trial involving coal mine dust. The estate of the plaintiff alleged that the 3M 8710 respirator is defective and
caused his death because it did not protect him from harmful coal mine dust. The jury rejected plaintiff's claim and
returned a verdict finding no liability against 3M. The verdict is final as the plaintiff did not file an appeal. In
September 2017, 3M received a unanimous verdict in its favor from a jury in state court in Kentucky in 3M's second
respirator trial involving coal mine dust. The jury ultimately determined that the plaintiff's claims were barred by the
statute of limitations. In November 2017, the court denied the plaintiff's motion for a new trial. The plaintiff did not
file an appeal, thereby ending the litigation.
The Company has demonstrated in these past trial proceedings that its respiratory protection products are effective as
claimed when used in the intended manner and in the intended circumstances. Consequently the Company believes that
claimants are unable to establish that their medical conditions, even if significant, are attributable to the Company's
respiratory protection products. Nonetheless the Company's litigation experience indicates that claims of persons with
malignant conditions are costlier to resolve than the claims of unimpaired persons, and it therefore believes the average
cost of resolving pending and future claims on a per-claim basis will continue to be higher than it experienced in prior
periods when the vast majority of claims were asserted by medically unimpaired claimants.
As previously reported, the State of West Virginia, through its Attorney General, filed a complaint in 2003 against the
Company and two other manufacturers of respiratory protection products in the Circuit Court of Lincoln County, West
Virginia, and amended its complaint in 2005. The amended complaint seeks substantial, but unspecified, compensatory damages
primarily for reimbursement of the costs allegedly incurred by the State for worker's compensation and healthcare benefits
provided to all workers with occupational pneumoconiosis and unspecified punitive damages. The case was inactive from the
fourth quarter of 2007 until late 2013, other than a case management conference in March 2011. In November 2013, the State
filed a motion to bifurcate the lawsuit into separate liability and damages proceedings. At the hearing on the motion, the
court declined to bifurcate the lawsuit. No liability has been recorded for this matter because the Company believes that
liability is not probable and estimable at this time. In addition, the Company is not able to estimate a possible loss or
range of loss given the lack of any meaningful discovery responses by the State of West Virginia, the otherwise minimal
activity in this case and the fact that the complaint asserts claims against two other manufacturers where a defendant's
share of liability may turn on the law of joint and several liability and by the amount of fault, if any, a jury might
allocate to each defendant if the case is ultimately tried.
Respirator Mask/Asbestos Liabilities and Insurance Receivables
The Company regularly conducts a comprehensive legal review of its respirator mask/asbestos liabilities. The Company
reviews recent and historical claims data, including without limitation, (i) the number of pending claims filed against the
Company, (ii) the nature and mix of those claims (i.e., the proportion of claims asserting usage of the Company's mask or
respirator products and alleging exposure to each of asbestos, silica, coal or other occupational dusts, and claims
pleading use of asbestos-containing products allegedly manufactured by the Company), (iii) the costs to defend and resolve
pending claims, and (iv) trends in filing rates and in costs to defend and resolve claims, (collectively, the "Claims
Data"). As part of its comprehensive legal review, the Company regularly provides the Claims Data to a third party with
expertise in determining the impact of Claims Data on future filing trends and costs. The third party assists the Company
in estimating the costs to defend and resolve pending and future claims. The Company uses these estimates to develop its
best estimate of probable liability.
Developments may occur that could affect the Company's estimate of its liabilities. These developments include, but are not
limited to, significant changes in (i) the key assumptions underlying the Company's accrual, including, the number of
future claims, the nature and mix of those claims, the average cost of defending and resolving claims, and in maintaining
trial readiness (ii) trial and appellate outcomes, (iii) the law and procedure applicable to these claims, and (iv) the
financial viability of other co-defendants and insurers.
As a result of the Company's review of its respirator mask/asbestos liabilities and as a result of the cost of resolving
claims of persons who claim more serious injuries, including mesothelioma and other malignancies, the Company increased its
accruals in 2017 for respirator mask/asbestos liabilities by $71 million. In 2017, the Company made payments for legal fees
and settlements of $58 million related to the respirator mask/asbestos litigation. As of December 31, 2017 and 2016, the
Company had an accrual for respirator mask/asbestos liabilities (excluding Aearo accruals) of $608 million and $595
million, respectively. This accrual represents the Company's best estimate of probable loss and reflects an estimation
period for future claims that may be filed against the Company approaching the year 2050. The Company cannot estimate the
amount or upper end of the range of amounts by which the liability may exceed the accrual the Company has established
because of the (i) inherent difficulty in projecting the number of claims that have not yet been asserted or the time
period in which future claims may be asserted, (ii) the complaints nearly always assert claims against multiple defendants
where the damages alleged are typically not attributed to individual defendants so that a defendant's share of liability
may turn on the law of joint and several liability, which can vary by state, (iii) the multiple factors described above
that the Company considers in estimating its liabilities, and (iv) the several possible developments described above that
may occur that could affect the Company's estimate of liabilities.
As of December 31, 2017, the Company's receivable for insurance recoveries related to the respirator mask/asbestos
litigation was $4 million. The Company is seeking coverage under the policies of certain insolvent and other insurers. Once
those claims for coverage are resolved, the Company will have collected substantially all of its remaining insurance
coverage for respirator mask/asbestos claims.
Respirator Mask/Asbestos Litigation - Aearo Technologies
On April 1, 2008, a subsidiary of the Company purchased the stock of Aearo Holding Corp., the parent of Aearo Technologies
("Aearo"). Aearo manufactured and sold various products, including personal protection equipment, such as eye, ear, head,
face, fall and certain respiratory protection products.
As of December 31, 2017, Aearo and/or other companies that previously owned and operated Aearo's respirator business
(American Optical Corporation, Warner-Lambert LLC, AO Corp. and Cabot Corporation ("Cabot")) are named defendants, with
multiple co-defendants, including the Company, in numerous lawsuits in various courts in which plaintiffs allege use of
mask and respirator products and seek damages from Aearo and other defendants for alleged personal injury from workplace
exposures to asbestos, silica-related, or other occupational dusts found in products manufactured by other defendants or
generally in the workplace.
As a result of the review of Aearo's respirator mask/asbestos liabilities, the Company increased Aearo's accruals in 2017
for respirator mask/asbestos liabilities by $13 million. As of December 31, 2017, the Company, through its Aearo
subsidiary, had accruals of $30 million for product liabilities and defense costs related to current and future
Aearo-related asbestos and silica-related claims. This accrual represents the Company's best estimate of Aearo's probable
loss and reflects an estimation period for future claims that may be filed against the Aearo approaching the year 2050.
Responsibility for legal costs, as well as for settlements and judgments, is currently shared in an informal arrangement
among Aearo, Cabot, American Optical Corporation and a subsidiary of Warner Lambert and their respective insurers (the
"Payor Group"). Liability is allocated among the parties based on the number of years each company sold respiratory
products under the "AO Safety" brand and/or owned the AO Safety Division of American Optical Corporation and the alleged
years of exposure of the individual plaintiff. Aearo's share of the contingent liability is further limited by an agreement
entered into between Aearo and Cabot on July 11, 1995. This agreement provides that, so long as Aearo pays to Cabot a
quarterly fee of $100,000, Cabot will retain responsibility and liability for, and indemnify Aearo against, any product
liability claims involving exposure to asbestos, silica, or silica products for respirators sold prior to July 11, 1995.
Because of the difficulty in determining how long a particular respirator remains in the stream of commerce after being
sold, Aearo and Cabot have applied the agreement to claims arising out of the alleged use of respirators involving exposure
to asbestos, silica or silica products prior to January 1, 1997. With these arrangements in place, Aearo's potential
liability is limited to exposures alleged to have arisen from the use of respirators involving exposure to asbestos,
silica, or silica products on or after January 1, 1997. To date, Aearo has elected to pay the quarterly fee. Aearo could
potentially be exposed to additional claims for some part of the pre-July 11, 1995 period covered by its agreement with
Cabot if Aearo elects to discontinue its participation in this arrangement, or if Cabot is no longer able to meet its
obligations in these matters.
In March 2012, Cabot CSC Corporation and Cabot Corporation filed a lawsuit against Aearo in the Superior Court of Suffolk
County, Massachusetts seeking declaratory relief as to the scope of Cabot's indemnity obligations under the July 11, 1995
agreement, including whether Cabot has retained liability for coal workers' pneumoconiosis claims, and seeking damages for
breach of contract. In 2014, the court granted Aearo's motion for summary judgment on two claims, but declined to rule on
two issues: the specific liability for certain known coal mine dust lawsuits; and Cabot's claim for allocation of liability
between injuries allegedly caused by exposure to coal mine dust and injuries allegedly caused by exposure to silica dust.
Following additional discovery, the parties filed new motions for summary judgment. In February 2016, the court ruled in
favor of Aearo on these two remaining issues, and ordered that Cabot, and not Aearo, is solely responsible for all
liability for the coal mine dust lawsuits under the 1995 agreement. In May 2017, the Massachusetts Court of Appeals
affirmed the trial court order in favor of Aearo.
Developments may occur that could affect the estimate of Aearo's liabilities. These developments include, but are not
limited to: (i) significant changes in the number of future claims, (ii) significant changes in the average cost of
resolving claims, (iii) significant changes in the legal costs of defending these claims, (iv) significant changes in the
mix and nature of claims received, (v) trial and appellate outcomes, (vi) significant changes in the law and procedure
applicable to these claims, (vii) significant changes in the liability allocation among the co-defendants, (viii) the
financial viability of members of the Payor Group including exhaustion of available insurance coverage limits, and/or (ix)
a determination that the interpretation of the contractual obligations on which Aearo has estimated its share of liability
is inaccurate. The Company cannot determine the impact of these potential developments on its current estimate of Aearo's
share of liability for these existing and future claims. If any of the developments described above were to occur, the
actual amount of these liabilities for existing and future claims could be significantly larger than the amount accrued.
Because of the inherent difficulty in projecting the number of claims that have not yet been asserted, the complexity of
allocating responsibility for future claims among the Payor Group, and the several possible developments that may occur
that could affect the estimate of Aearo's liabilities, the Company cannot estimate the amount or range of amounts by which
Aearo's liability may exceed the accrual the Company has established.
Environmental Matters and Litigation
The Company's operations are subject to environmental laws and regulations including those pertaining to air emissions,
wastewater discharges, toxic substances, and the handling and disposal of solid and hazardous wastes enforceable by
national, state, and local authorities around the world, and private parties in the United States and abroad. These laws
and regulations provide, under certain circumstances, a basis for the remediation of contamination, for restoration of or
compensation for damages to natural resources, and for personal injury and property damage claims. The Company has
incurred, and will continue to incur, costs and capital expenditures in complying with these laws and regulations,
defending personal injury and property damage claims, and modifying its business operations in light of its environmental
responsibilities. In its effort to satisfy its environmental responsibilities and comply with environmental laws and
regulations, the Company has established, and periodically updates, policies relating to environmental standards of
performance for its operations worldwide.
Under certain environmental laws, including the United States Comprehensive Environmental Response, Compensation and
Liability Act of 1980 and similar state laws, the Company may be jointly and severally liable, typically with other
companies, for the costs of remediation of environmental contamination at current or former facilities and at off-site
locations. The Company has identified numerous locations, most of which are in the United States, at which it may have some
liability. Please refer to the section entitled "Environmental Liabilities and Insurance Receivables" that follows for
information on the amount of the accrual.
Environmental Matters
As previously reported, the Company has been voluntarily cooperating with ongoing reviews by local, state, federal
(primarily the U.S. Environmental Protection Agency (EPA)), and international agencies of possible environmental and health
effects of various perfluorinated compounds, including perfluorooctanyl compounds such as perfluorooctanoate ("PFOA"),
perfluorooctane sulfonate ("PFOS"), or similar compounds ("PFCs"). As a result of its phase-out decision in May 2000, the
Company no longer manufactures perfluorooctanyl compounds. The company ceased manufacturing and using the vast majority of
these compounds within approximately two years of the phase-out announcement, and ceased all manufacturing and the last
significant use of this chemistry by the end of 2008. Through its ongoing life cycle management and its raw material
composition identification processes associated with the Company's policies covering the use of all persistent and
bio-accumulative materials, the Company continues to control or eliminate the presence of certain PFCs in purchased
materials or as byproducts in some of 3M's fluorochemical manufacturing processes, products, and waste streams.
Regulatory activities concerning PFOA and/or PFOS continue in the United States, Europe and elsewhere, and before certain
international bodies. These activities include gathering of exposure and use information, risk assessment, and
consideration of regulatory approaches. As the database of studies of both PFOA and PFOS has expanded, the EPA has
developed human health effects documents summarizing the available data from these studies. In February 2014, the EPA
initiated external peer review of its draft human health effects documents for PFOA and PFOS. The peer review panel met in
August 2014. In May 2016, the EPA announced lifetime health advisory levels for PFOA and PFOS at 70 parts per trillion
(ppt) (superseding the provisional levels established by the EPA in 2009 of 400 ppt for PFOA and 200 ppt for PFOS). Where
PFOA and PFOS are found together, EPA recommends that the concentrations be added together, and the lifetime health
advisory for PFOA and PFOS combined is also 70 ppt. Lifetime health advisories, while not enforceable, serve as guidance
and are benchmarks for determining if concentrations of chemicals in tap water from public utilities are safe for public
consumption. In an effort to collect exposure information under the Safe Drinking Water Act, the EPA published on May 2,
2012 a list of unregulated substances, including six PFCs, required to be monitored during the period 2013-2015 by public
water system suppliers to determine the extent of their occurrence. Through January 2017, the EPA reported results for
4,920 public water supplies nationwide. Based on the 2016 lifetime health advisory, 13 public water supplies exceed the
level for PFOA and 46 exceed the level for PFOS (unchanged from the July 2016 EPA summary). A technical advisory issued by
EPA in September 2016 on laboratory analysis of drinking water samples stated that 65 public water supplies had exceeded
the combined level for PFOA and PFOS. These results are based on one or more samples collected during the period 2012-2015
and do not necessarily reflect current conditions of these public water supplies. EPA reporting does not identify the
sources of the PFOA and PFOS in the public water supplies.
The Company is continuing to make progress in its work, under the supervision of state regulators, to address its historic
disposal of PFC-containing waste associated with manufacturing operations at the Decatur, Alabama, Cottage Grove,
Minnesota, and Cordova, Illinois plants. As previously reported, the Company entered into a voluntary remedial action
agreement with the Alabama Department of Environmental Management (ADEM) to address the presence of PFCs in the soil at the
Company's manufacturing facility in Decatur, Alabama. Pursuant to a permit issued by ADEM, for approximately twenty years,
the Company incorporated its wastewater treatment plant sludge containing PFCs in fields at its Decatur facility. After a
review of the available options to address the presence of PFCs in the soil, ADEM agreed that the preferred remediation
option is to use a multilayer cap over the former sludge incorporation areas on the manufacturing site with subsequent
groundwater migration controls and treatment. Implementation of that plan continues and is expected to be completed in
2018.
The Company continues to work with the Minnesota Pollution Control Agency (MPCA) pursuant to the terms of the previously
disclosed May 2007 Settlement Agreement and Consent Order to address the presence of certain PFCs in the soil and
groundwater at former disposal sites in Washington County, Minnesota (Oakdale and Woodbury) and at the Company's
manufacturing facility at Cottage Grove, Minnesota. Under this agreement, the Company's principal obligations include (i)
evaluating releases of certain PFCs from these sites and proposing response actions; (ii) providing treatment or
alternative drinking water upon identifying any level exceeding a Health Based Value ("HBV") or Health Risk Limit ("HRL")
(i.e., the amount of a chemical in drinking water determined by the Minnesota Department of Health (MDH) to be safe
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