REG - 3M Company - Annual Financial Report - Part 2 <Origin Href="QuoteRef">MMM.N</Origin> - Part 3
13/02/2018 07:05
- Part 3: For the preceding part double click ID:nRSM6597Eb
PFCs in the
groundwater, surface water, fish or other aquatic life, and sediments (the
"NRD Lawsuit"). The State also seeks declarations under MERLA that 3M is
responsible for all damages the State may suffer in the future for injuries to
natural resources from releases of PFCs into the environment, and under MWPCA
that 3M is responsible for compensation for future loss or destruction of
fish, aquatic life, and other damages. In September 2017, the State's damages
expert submitted a report that contends the State incurred $5 billion in
damages. In November 2017, the State of Minnesota filed a motion for leave to
amend its complaint to seek punitive damages from 3M, and 3M filed a motion
for summary judgment contending, among other things, that the State's claims
are barred by the applicable statute of limitations. A hearing on those
motions was held in December 2017. In December 2017, the court urged the
parties to attempt to resolve the litigation before trial, and in January
2018, the court appointed a mediator to facilitate that process. If the
parties are not able to resolve the matter, the trial is scheduled to begin in
February 2018. An adverse ruling or judgment, settlement, or unfavorable
development in the NRD Lawsuit 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 and on the consolidated financial
position of the Company. No liability has been recorded because the Company
believes any such liability is not probable and estimable.
In November 2011, the Metropolitan Council filed a motion to intervene and a
complaint in the NRD Lawsuit seeking compensatory damages and other legal,
declaratory and equitable relief, including reasonable attorneys' fees, for
costs and fees that the Metropolitan Council alleges it will be required to
assess at some time in the future if the MPCA imposes restrictions on
Metropolitan Council's PFOS discharges to the Mississippi River, including the
installation and maintenance of a water treatment system. The Metropolitan
Council's intervention motion was based on several theories, including common
law negligence, and statutory claims under MERLA for response costs, and under
the Minnesota Environmental Rights Act (MERA) for declaratory and equitable
relief against 3M for PFOS and other PFC pollution of the waters and sediments
of the Mississippi River. 3M did not object to the motion to intervene. In
January 2012, 3M answered the Metropolitan Council's complaint and filed a
counterclaim alleging that the Metropolitan Council discharges PFCs to the
Mississippi River and discharges PFC-containing sludge and bio solids from one
or more of its wastewater treatment plants onto agricultural lands and local
area landfills. Accordingly, 3M's complaint against the Metropolitan Council
asked that if the court finds that the State is entitled to any of the damages
it sought, 3M be awarded contribution and apportionment from the Metropolitan
Council, including attorneys' fees, under MERLA, and contribution from and
liability for the Metropolitan Council's proportional share of damages awarded
to the State under the MWPCA, as well as under statutory nuisance and common
law theories of trespass, nuisance, and negligence. 3M also sought declaratory
relief under MERA. In May 2017, the Metropolitan Council paid 3M approximately
$1 million and agreed to dismiss its claims against 3M. As part of the
settlement agreement, 3M agreed to dismiss its claims against the Metropolitan
Council.
In April 2012, 3M filed a motion to disqualify the State of Minnesota's
counsel, Covington & Burling, LLP (Covington). In October 2012, the
court granted 3M's motion to disqualify Covington as counsel to the State, and
the State and Covington appealed the court's disqualification to the Minnesota
Court of Appeals. In July 2013, the Minnesota Court of Appeals affirmed the
district court's disqualification order. In October 2013, the Minnesota
Supreme Court granted both the State's and Covington's petition for review of
the decision of the Minnesota Court of Appeals. In April 2014, the Minnesota
Supreme Court affirmed in part, reversed in part, and remanded the case to the
district court for further proceedings. The district court took evidence on
the disqualification issues at a hearing in October 2015. In February 2016,
the district court ruled that Covington violated the professional ethics rule
against representing a client (here the State of Minnesota) in the same or
substantially related matter where that person's interests are materially
adverse to the interests of a former client (3M). The district court, however,
denied 3M's motion to disqualify Covington because it further found that 3M
impliedly waived by delaying to assert the conflict. Other activity in the
case, which had been stayed pending the outcome of the disqualification issue,
has resumed. Trial of the NRD Lawsuit is scheduled to begin in February 2018.
In a separate but related action, the Company filed suit in the Ramsey County
District Court against Covington for breach of its fiduciary duties to the
Company and for breach of contract arising out of Covington's representation
of the State of Minnesota in the NRD Lawsuit. In September 2016, the court
granted 3M's motion for leave to amend the complaint to plead punitive
damages. In February 2017, Covington settled this lawsuit with a payment by
Covington or its insurer to 3M that is not material to 3M's results of
operations or financial condition.
In July 2016, the City of Lake Elmo filed a lawsuit in the U.S. District Court
for the District of Minnesota against 3M alleging that the City suffered
damages from drinking water supplies contaminated with PFCs, including costs
to construct alternative sources of drinking water. Trial is scheduled to
begin in September 2019.
Aqueous Film Forming Foam (AFFF) Litigation
3M manufactured and marketed Aqueous Film Forming Foam (AFFF) for use in
firefighting at airports and military bases from approximately 1963 to 2000.
As of December 31, 2017, twelve purported class actions have been filed
against 3M and other defendants in various state and federal courts in
Pennsylvania, Colorado, and New York alleging that certain PFCs used in AFFF
contaminated the soil and groundwater where AFFF was used at current or former
airports and air force military bases located in Colorado, Pennsylvania, and
New York. An individual complaint also has been filed in federal court
Pennsylvania. The plaintiffs in these cases generally allege that contaminated
groundwater has caused various injuries, including loss of use and enjoyment
of their properties, diminished property values, investigation costs, and
remediation costs. Some cases seek funds for medical monitoring. Several
companies have been sued along with 3M, including Ansul Co. (acquired by Tyco,
Inc.), Angus Fire, Buckeye Fire Protection Co., Chemguard, National Foam,
Inc., United Technologies Corp.
In November 2016, the Town of Barnstable, MA filed an individual action in the
U.S. District Court for the District of Massachusetts seeking unstated
compensatory and punitive damages and other relief against 3M and other
suppliers of AFFF for alleged contamination of the aquifer supplying drinking
water to the Hyannis water system. The town seeks to recover costs associated
with the investigation, treatment, remediation, and monitoring of drinking
water supplies allegedly contaminated with certain PFCs used in AFFF. In
January 2017, the County of Barnstable, MA, filed an individual action in the
U.S. District Court for the District of Massachusetts seeking unstated
compensatory and punitive damages and other relief (including indemnification
and contribution in connection with claims asserted against the County by the
Town of Barnstable) against 3M and other suppliers of AFFF for alleged
contamination of the aquifer supplying drinking water to the Hyannis water
system.
In February 2017, husband and wife plaintiffs sued 3M and other defendants in
federal court in Pennsylvania, alleging personal injury, loss of consortium
and companionship, and associated damages.
In March 2017, plaintiff residents of Suffolk County, Long Island filed a
class action complaint in state court in Suffolk County New York, naming the
County and 3M and other alleged manufacturers of AFFF products. The action was
removed to the Eastern District of New York.
In August 2017, three class action complaints were filed in state court in New
York against 3M and other defendants including the Port Authority of New York
and New Jersey. Plaintiffs allege PFC contamination of the local water supply
linked to AFFF at Stewart Air National Guard Base and Stewart International
Airport. The Port Authority is the leaseholder of the airport. All three cases
have classes for diminution of property and medical monitoring. In September
2017, co-defendant Tyco removed all three cases to the U.S. District Court for
the Southern District of New York.
In October 2017, a class action complaint was filed in Suffolk County, New
York against 3M and others regarding PFCs allegedly released at the Suffolk
County Firematics Training Facility. In November 2017, co-defendant National
Foam removed the case to the U.S. District Court for the Eastern District of
New York.
In December 2017, a complaint was filed by a group of 26 plaintiffs in Suffolk
County, New York against 3M and others regarding PFCs allegedly released at
Gabreski Airport.
In December 2017, a complaint was filed by the Suffolk County Water District
in December 2017 in the U.S. District Court for the Eastern District of New
York against 3M and others regarding PFCs allegedly released at Gabreski
Airport and Suffolk County Firematics Training Facility.
Other Environmental Litigation
In September 2017, three complaints were filed in the U.S. District Court for
the Northern District of New York against 3M, Saint-Gobain Performance
Plastics Corp. ("Saint-Gobain"), Honeywell International Inc. ("Honeywell")
and E.I. DuPont De Nemours and Company. Plaintiffs allege that 3M manufactured
and sold PFOA that was used for manufacturing purposes at Saint-Gobain's and
Honeywell's facilities located in the Village of Hoosick Falls and the Town of
Hoosick. Plaintiffs claim that the drinking water around Hoosick Falls became
contaminated with unsafe levels of PFOA due to the activities of the
defendants, and allege that they suffered bodily injury due to the ingestion
and inhalation of PFOA. Plaintiffs seek unstated compensatory, consequential,
and punitive damages, as well as attorneys' fees and costs.
On December 1, 2017, eight plaintiffs filed a 12-count class action against
3M, Wolverine World Wide and Waste Management, Inc., alleging negligence,
trespass, intentional and negligent infliction of emotional distress, battery,
products liability, public and private nuisance, fraudulent concealment, and
unjust enrichment. Each count was filed against each defendant. The action
arises from Wolverine's allegedly improper disposal of materials and wastes
related to their shoe manufacturing operations. Plaintiffs allege Wolverine
used 3M Scotchgard in its manufacturing process and that chemicals from 3M's
product have contaminated the environment after being disposed of near
drinking water sources.
For environmental litigation matters described in this section for which a
liability, if any, has been recorded, the Company believes the amount
recorded, as well as the possible loss or range of loss in excess of the
established accrual is not material to the Company's consolidated results of
operations or financial condition. For those matters for which a liability has
not been recorded, the Company believes any such liability is not probable and
estimable and the Company is not able to estimate a possible loss or range of
loss at this time.
Environmental Liabilities and Insurance Receivables
As of December 31, 2017, the Company had recorded liabilities of $28 million
for estimated "environmental remediation" costs based upon an evaluation of
currently available facts with respect to each individual site and also
recorded related insurance receivables of $8 million. The Company records
liabilities for remediation costs on an undiscounted basis when they are
probable and reasonably estimable, generally no later than the completion of
feasibility studies or the Company's commitment to a plan of action.
Liabilities for estimated costs of environmental remediation, depending on the
site, are based primarily upon internal or third-party environmental studies,
and estimates as to the number, participation level and financial viability of
any other potentially responsible parties, the extent of the contamination and
the nature of required remedial actions. The Company adjusts recorded
liabilities as further information develops or circumstances change. The
Company expects that it will pay the amounts recorded over the periods of
remediation for the applicable sites, currently ranging up to 20 years.
As of December 31, 2017, the Company had recorded liabilities of $25 million
for "other environmental liabilities" based upon an evaluation of currently
available facts to implement the Settlement Agreement and Consent Order with
the MPCA, the remedial action agreement with ADEM, and to address trace
amounts of perfluorinated compounds in drinking water sources in the City of
Oakdale, Minnesota, as well as presence in the soil and groundwater at the
Company's manufacturing facilities in Decatur, Alabama, and Cottage Grove,
Minnesota, and at two former disposal sites in Washington County, Minnesota
(Oakdale and Woodbury). The Company expects that most of the spending will
occur over the next four years. During the first quarter of 2017, the Company
collected from its insurer the outstanding receivable of $15 million related
to "other environmental liabilities."
It is difficult to estimate the cost of environmental compliance and
remediation given the uncertainties regarding the interpretation and
enforcement of applicable environmental laws and regulations, the extent of
environmental contamination and the existence of alternative cleanup methods.
Developments may occur that could affect the Company's current assessment,
including, but not limited to: (i) changes in the information available
regarding the environmental impact of the Company's operations and products;
(ii) changes in environmental regulations, changes in permissible levels of
specific compounds in drinking water sources, or changes in enforcement
theories and policies, including efforts to recover natural resource damages;
(iii) new and evolving analytical and remediation techniques; (iv) success
in allocating liability to other potentially responsible parties; and (v) the
financial viability of other potentially responsible parties and third-party
indemnitors. For sites included in both "environmental remediation
liabilities" and "other environmental liabilities," at which remediation
activity is largely complete and remaining activity relates primarily to
operation and maintenance of the remedy, including required post-remediation
monitoring, the Company believes the exposure to loss in excess of the amount
accrued would not be material to the Company's consolidated results of
operations or financial condition. However, for locations at which remediation
activity is largely ongoing, the Company cannot estimate a possible loss or
range of loss in excess of the associated established accruals for the reasons
described above.
Other Matters
Department of Labor Investigation
The U.S. Department of Labor (DOL) notified 3M in April 2015 that it had
commenced an investigation of 3M's pension plan pursuant to the federal
Employee Retirement Income Security Act of 1974, as amended (ERISA). The DOL
has stated its investigation relates to certain private equity investments,
plan expenses, securities lending, and distributions of plan benefits. In
response to certain DOL requests, 3M produced documents and made employees
available for interviews. In December 2016, the DOL issued certain subpoenas
to 3M and 3M Investment Management Corp. relating to this investigation. 3M
has produced additional responsive documents and is cooperating with the DOL
in its investigation. 3M anticipates that the DOL will conclude its
investigation in the first half of 2018.
Product Liability Litigation
One customer obtained an order in the French courts against 3M Purification
SAS (a French subsidiary) in October 2011 appointing an expert to determine
the amount of commercial loss and property damage allegedly caused by
allegedly defective 3M filters used in the customer's manufacturing process.
An Austrian subsidiary of this same customer also filed a claim against 3M
Austria GmbH (an Austrian subsidiary) and 3M Purification SAS in the
Austrian courts in September 2012 seeking damages for the same issue. The
Company reached an agreement in principle to settle those two cases and
finalized the settlement during the second quarter of 2017. The amounts agreed
to in each of these settlements were not material to the Company's
consolidated results of operations or financial condition.
As of December 31, 2017, the Company is a named defendant in lawsuits
involving approximately 4,270 plaintiffs (compared to approximately 1,260
plaintiffs at December 31, 2016), most of which are pending in federal or
state court in Minnesota, in which the plaintiffs claim they underwent various
joint arthroplasty, cardiovascular, and other surgeries and later developed
surgical site infections due to the use of the Bair Hugger™ patient warming
system. The complaints seek damages and other relief based on theories of
strict liability, negligence, breach of express and implied warranties,
failure to warn, design and manufacturing defect, fraudulent and/or negligent
misrepresentation/concealment, unjust enrichment, and violations of various
state consumer fraud, deceptive or unlawful trade practices and/or false
advertising acts. One case, from the U.S. District Court for the Western
District of Tennessee is a putative nationwide class action. The U.S. Judicial
Panel on Multidistrict Litigation (MDL) granted the plaintiffs' motion to
transfer and consolidate all cases pending in federal courts to the U.S.
District Court for the District of Minnesota to be managed in a multi-district
proceeding during the pre-trial phase of the litigation. The federal court has
set a trial-ready date in May 2018 in one of the two federal court bellwether
cases. At a joint hearing before the U.S. District Court and the Minnesota
State court, on the parties' motion to exclude each other's experts, and 3M's
motion for summary judgment with respect to general causation, the federal
court did not exclude the plaintiffs' experts and denied 3M's motion for
summary judgment on general causation. In January 2018, the state court, in
hearing the same arguments, excluded plaintiffs' experts and granted 3M's
motion for summary judgment on general causation, dismissing all 61 cases
pending before the state court in Minnesota.
In June 2016, the Company was served with a putative class action filed in the
Ontario Superior Court of Justice for all Canadian residents who underwent
various joint arthroplasty, cardiovascular, and other surgeries and later
developed surgical site infections due to the use of the Bair Hugger™
patient warming system. The representative plaintiff seeks relief (including
punitive damages) under Canadian law based on theories similar to those
asserted in the MDL. The Bair Hugger™ product line was acquired by 3M as
part of the 2010 acquisition of Arizant, Inc., a leading manufacturer of
patient warming solutions designed to prevent hypothermia and maintain normal
body temperature in surgical settings. No liability has been recorded for this
matter because the Company believes that any such liability is not probable
and estimable at this time.
In September 2011, 3M Oral Care launched Lava Ultimate CAD/CAM dental
restorative material. The product was originally indicated for inlay, onlay,
veneer, and crown applications. In June 2015, 3M Oral Care voluntarily removed
crown applications from the product's instructions for use, following reports
from dentists of patients' crowns debonding, requiring additional treatment.
The product remains on the market for other applications. 3M communicated with
the U.S. Food and Drug Administration, as well as regulators outside the
United States. 3M also informed customers and distributors of its action,
offered to accept return of unused materials and provide refunds. As of
December 31, 2017, there is one lawsuit pending in the U.S. District Court for
the District of Minnesota that names 29 plaintiffs and seeks certification of
a class of dentists in the United States and its territories, and
alternatively seeks subclasses in 13 states. The complaint alleges 3M marketed
and sold defective Lava Ultimate material used for dental crowns to dentists
and, under various theories, seek monetary damages (replacement costs and
business reputation loss), punitive damages, disgorgement of profits,
injunction from marketing and selling Lava Ultimate for use in dental crowns,
statutory penalties, and attorneys' fees and costs.
For product liability litigation matters described in this section for which a
liability has been recorded, the Company believes the amount recorded is not
material to the Company's consolidated results of operations or financial
condition. In addition, the Company is not able to estimate a possible loss or
range of loss in excess of the established accruals at this time.
NOTE 16. Stock-Based Compensation
The 3M 2016 Long-Term Incentive Plan (LTIP) provides for the issuance or
delivery of up to 123,965,000 shares of 3M common stock pursuant to awards
granted under the plan. Awards may be issued in the form of incentive stock
options, nonqualified stock options, progressive stock options, stock
appreciation rights, restricted stock, restricted stock units, other stock
awards, and performance units and performance shares. As of December 31, 2017,
the remaining total shares available for grant under the LTIP Program are
30,125,144, and there were approximately 7,500 participants with outstanding
options, restricted stock, or restricted stock units.
The Company's annual stock option and restricted stock unit grant is made in
February to provide a strong and immediate link between the performance of
individuals during the preceding year and the size of their annual stock
compensation grants. The grant to eligible employees uses the closing stock
price on the grant date. Accounting rules require recognition of expense
under a non-substantive vesting period approach, requiring compensation
expense recognition when an employee is eligible to retire. Employees are
considered eligible to retire at age 55 and after having completed ten years
of service. This retiree-eligible population represents 35 percent of the 2017
annual stock-based compensation award expense dollars; therefore, higher
stock-based compensation expense is recognized in the first quarter.
In addition to the annual grants, the Company makes other minor grants of
stock options, restricted stock units and other stock-based grants. The
Company issues cash settled restricted stock units and stock appreciation
rights in certain countries. These grants do not result in the issuance of
common stock and are considered immaterial for disclosure purposes by the
Company.
Beginning in 2016, as a result of the Company's application of ASU No.
2016-09, Improvements to Employee Share-Based Payment Accounting, certain
excess tax benefits at the time of exercise (for an option) or upon vesting
(for restricted stock units) are recognized as income tax benefits in the
statement of income. These amounts totaled $228 million and $184 million for
2017 and 2016, respectively, and are reflected in the "income tax benefits"
line within the stock-based compensation table below.
Amounts recognized in the financial statements with respect to stock-based
compensation programs, which include stock options, restricted stock,
restricted stock units, performance shares, and the General Employees' Stock
Purchase Plan (GESPP), are provided in the following table. Capitalized
stock-based compensation amounts were not material.
Stock-Based Compensation Expense
Years ended December 31
(Millions) 2017 2016 2015
Cost of sales $ 49 $ 47 $ 46
Selling, general and administrative expenses 229 206 185
Research, development and related expenses 46 45 45
Stock-based compensation expenses $ 324 $ 298 $ 276
Income tax benefits $ (327) $ (272) $ (87)
Stock-based compensation expenses (benefits), net of tax $ (3) $ 26 $ 189
Stock Option Program
The following table summarizes stock option activity for the years ended
December 31:
2017 2016 2015
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Options Exercise Price Options Exercise Price Options Exercise Price
Under option -
January 1 36,196,232 $ 112.07 38,552,445 $ 102.01 39,235,557 $ 90.38
Granted:
Annual 5,409,628 175.93 5,591,727 147.99 5,529,544 165.91
Exercised (6,474,117) 90.37 (7,716,141) 86.76 (5,978,382) 83.74
Forfeited (166,579) 162.36 (231,799) 148.43 (234,274) 128.99
December 31 34,965,164 $ 125.73 36,196,232 $ 112.07 38,552,445 $ 102.01
Options exercisable
December 31 24,281,464 $ 108.50 25,240,759 $ 95.65 27,262,062 $ 85.97
Stock options vest over a period from one to three years with the expiration
date at 10 years from date of grant. As of December 31, 2017, there was $67
million of compensation expense that has yet to be recognized related to
non-vested stock option based awards. This expense is expected to be
recognized over the remaining weighted-average vesting period of 20 months.
For options outstanding at December 31, 2017, the weighted-average remaining
contractual life was 70 months and the aggregate intrinsic value was $3.834
billion. For options exercisable at December 31, 2017, the weighted-average
remaining contractual life was 56 months and the aggregate intrinsic value was
$3.080 billion.
The total intrinsic values of stock options exercised during 2017, 2016 and
2015 was $703 million, $608 million and $465 million, respectively. Cash
received from options exercised during 2017, 2016 and 2015 was $585 million,
$665 million and $501 million, respectively. The Company's actual tax benefits
realized for the tax deductions related to the exercise of employee stock
options for 2017, 2016 and 2015 was $238 million, $224 million and $172
million, respectively.
The Company does not have a specific policy to repurchase common shares to
mitigate the dilutive impact of options; however, the Company has historically
made adequate discretionary purchases, based on cash availability, market
trends, and other factors, to satisfy stock option exercise activity.
For annual options, the weighted average fair value at the date of grant was
calculated using the Black-Scholes option-pricing model and the assumptions
that follow.
Stock Option Assumptions
Annual
2017 2016 2015
Exercise price $ 175.76 $ 147.87 $ 165.94
Risk-free interest rate 2.1 % 1.5 % 1.5 %
Dividend yield 2.5 % 2.5 % 2.5 %
Expected volatility 17.3 % 20.8 % 20.1 %
Expected life (months) 78 77 76
Black-Scholes fair value $ 23.51 $ 22.47 $ 23.98
Expected volatility is a statistical measure of the amount by which a stock
price is expected to fluctuate during a period. For the 2017 annual grant
date, the Company estimated the expected volatility based upon the average of
the most recent one year volatility, the median of the term of the expected
life rolling volatility, the median of the most recent term of the expected
life volatility of 3M stock, and the implied volatility on the grant date. The
expected term assumption is based on the weighted average of historical
grants.
Restricted Stock and Restricted Stock Units
The following table summarizes restricted stock and restricted stock unit
activity for the years ended December 31:
2017 2016 2015
Weighted Weighted Weighted
Average Average Average
Number of Grant Date Number of Grant Date Number of Grant Date
Awards Fair Value Awards Fair Value Awards Fair Value
Nonvested balance -
As of January 1 2,185,046 $ 145.64 2,441,088 $ 127.47 2,817,786 $ 104.41
Granted
Annual 604,256 176.10 749,068 148.20 671,204 165.86
Other 20,692 233.77 8,115 169.00 26,886 156.94
Vested (769,598) 127.21 (960,345) 101.64 (1,010,612) 89.99
Forfeited (46,590) 158.25 (52,880) 145.95 (64,176) 118.99
As of December 31 1,993,806 $ 162.60 2,185,046 $ 145.64 2,441,088 $ 127.47
As of December 31, 2017, there was $78 million of compensation expense that
has yet to be recognized related to non-vested restricted stock and restricted
stock units. This expense is expected to be recognized over the remaining
weighted-average vesting period of 22 months. The total fair value of
restricted stock and restricted stock units that vested during 2017, 2016 and
2015 was $136 million, $149 million and $166 million, respectively. The
Company's actual tax benefits realized for the tax deductions related to the
vesting of restricted stock and restricted stock units for 2017, 2016 and 2015
was $45 million, $56 million and $62 million, respectively.
Restricted stock units granted generally vest three years following the grant
date assuming continued employment. Dividend equivalents equal to the
dividends payable on the same number of shares of 3M common stock accrue on
these restricted stock units during the vesting period, although no dividend
equivalents are paid on any of these restricted stock units that are forfeited
prior to the vesting date. Dividends are paid out in cash at the vest date on
restricted stock units, except for performance shares which do not earn
dividends. Since the rights to dividends are forfeitable, there is no impact
on basic earnings per share calculations. Weighted average restricted stock
unit shares outstanding are included in the computation of diluted earnings
per share.
Performance Shares
Instead of restricted stock units, the Company makes annual grants of
performance shares to members of its executive management. The 2017
performance criteria for these performance shares (organic volume growth,
return on invested capital, free cash flow conversion, and earnings per share
growth) were selected because the Company believes that they are important
drivers of long-term stockholder value. The number of shares of 3M common
stock that could actually be delivered at the end of the three-year
performance period may be anywhere from 0% to 200% of each performance share
granted, depending on the performance of the Company during such performance
period. Non-substantive vesting requires that expense for the performance
shares be recognized over one or three years depending on when each individual
became a 3M executive. Prior to the 2016 performance share grant, performance
shares did not accrue dividends during the performance period. Therefore, the
grant date fair value was determined by reducing the closing stock price on
the date of grant by the net present value of dividends during the performance
period. The 2017 and 2016 performance share grants accrue dividends, therefore
the grant date fair value is equal to the closing stock price on the date of
grant. Since the rights to dividends are forfeitable, there is no impact on
basic earnings per share calculations. Weighted average performance shares
whose performance period is complete are included in computation of diluted
earnings per share.
The following table summarizes performance share activity for the years ended
December 31:
2017 2016 2015
Weighted Weighted Weighted
Average Average Average
Number of Grant Date Number of Grant Date Number of Grant Date
Awards Fair Value Awards Fair Value Awards Fair Value
Undistributed balance -
As of January 1 656,278 $ 142.98 871,192 $ 120.89 1,099,752 $ 102.65
Granted 201,261 191.28 219,431 160.17 227,798 158.88
Distributed (313,942) 124.88 (367,428) 99.06 (323,938) 83.08
Performance change 154,774 173.91 (37,534) 155.98 (106,760) 127.70
Forfeited (12,498) 171.36 (29,383) 149.08 (25,660) 125.33
As of December 31 685,873 $ 171.90 656,278 $ 142.98 871,192 $ 120.89
As of December 31, 2017, there was $25 million of compensation expense that
has yet to be recognized related to performance shares. This expense is
expected to be recognized over the remaining weighted-average earnings period
of 11 months. The total fair value of performance shares that were distributed
were $55 million for 2017 and $54 million for both 2016 and 2015. The
Company's actual tax benefits realized for the tax deductions related to the
distribution of performance shares was $15 million per year for 2017, 2016 and
2015.
General Employees' Stock Purchase Plan (GESPP):
As of December 31, 2017, shareholders have approved 60 million shares for
issuance under the Company's GESPP. Substantially all employees are eligible
to participate in the plan. Participants are granted options at 85% of market
value at the date of grant. There are no GESPP shares under option at the
beginning or end of each year because options are granted on the first
business day and exercised on the last business day of the same month.
General Employees' Stock Purchase Plan
2017 2016 2015
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Options granted 877,705 $ 170.42 987,478 $ 140.06 1,007,669 $ 133.52
Options exercised (877,705) 170.42 (987,478) 140.06 (1,007,669) 133.52
Shares available for grant - December 31 26,239,152 27,116,857 28,104,335
The weighted-average fair value per option granted during 2017, 2016 and 2015
was $30.07, $24.72 and $23.56, respectively. The fair value of GESPP options
was based on the 15% purchase price discount. The Company recognized
compensation expense for GESSP options of $26 million in 2017, $24 million in
2016 and $24 million in 2015.
NOTE 17. Business Segments
3M's businesses are organized, managed and internally grouped into segments
based on differences in markets, products, technologies and services. 3M
manages its operations in five business segments: Industrial; Safety and
Graphics; Health Care; Electronics and Energy; and Consumer. 3M's five
business segments bring together common or related 3M technologies, enhancing
the development of innovative products and services and providing for
efficient sharing of business resources. Transactions among reportable
segments are recorded at cost. 3M is an integrated enterprise characterized by
substantial intersegment cooperation, cost allocations and inventory
transfers. Therefore, management does not represent that these segments, if
operated independently, would report the operating income information shown.
The difference between operating income and pre-tax income relates to interest
income and interest expense, which are not allocated to business segments.
Effective in the first quarter of 2017, as part of 3M's continuing effort to
improve the alignment of its businesses around markets and customers the
Company made the following changes:
1. Integrated the former Renewable Energy Division into existing
divisions;
2. Combined two divisions to form the Automotive and Aerospace
Solutions Division; and
3. Consolidated U.S. customer account activity - impacting dual credit
reporting
Integration of former Renewable Energy Division
· The (i) solar and wind and (ii) energy product lines (along with
certain technology previously included in Corporate and Unallocated) of the
former Renewable Energy Division (RED) were integrated into the existing
Electrical Markets Division and Electronics Materials Solutions Division,
respectively, within the Electronics and Energy business segment. In addition,
the former RED's window film product lines were moved into the Commercial
Solutions Division within the Safety and Graphics business segment. This
change resulted in a decrease in previously reported net sales and operating
income for total year 2016 of $203 million and $38 million, respectively, in
the Electronics and Energy segment. These decreases were offset by a $207
million and $29 million increase in previously reported total year 2016 net
sales and operating income, respectively, in the Safety and Graphics business
segment and a $4 million decrease and $9 million increase in previously
reported net sales and operating income, respectively, in Corporate and
Unallocated.
Creation of Automotive and Aerospace Solutions Division
· The former Automotive Division and Aerospace and Commercial
Transportation Division (both within the Industrial business segment) were
combined to create the Automotive and Aerospace Solutions Division. Because
this realignment was within the Industrial business segment, it had no impact
on business segment reporting.
Consolidation of U.S. customer account activity - impacting dual credit
reporting
· The Company consolidated its customer account activity in the
U.S. into more centralized sales districts to better serve customers. As
discussed further below, 3M business segment reporting measures include dual
credit to business segments for certain U.S. sales and related operating
income. This dual credit is based on which business segment provides customer
account activity ("sales district") with respect to a particular product sold
in the U.S. Previously, a customer in the U.S. may have been aligned to
several sales districts associated with multiple divisions or segments based
on the individual products the customer purchased across 3M's portfolio. The
alignment of U.S. customer accounts to fewer, more focused sales districts
therefore changed the attribution of dual credit across 3M's business
segments. As a result, previously reported aggregate business segment net
sales and operating income for total year 2016 increased $163 million and $36
million, respectively, offset by similar increases in the elimination of dual
credit net sales and operating income amounts.
The financial information presented herein reflects the impact of the
preceding business segment reporting changes for all periods presented.
Business Segment Products
Business Segment Major Products
Industrial Tapes, coated, nonwoven and bonded abrasives, adhesives, advanced ceramics,
sealants, specialty materials, filtration products, closure systems for
personal hygiene products, acoustic systems products, automotive components,
abrasion-resistant films, structural adhesives and paint finishing and
detailing products
Safety and Graphics Personal protection products, transportation safety products, commercial
graphics systems, commercial cleaning and protection products, floor matting,
roofing granules for asphalt shingles, and fall protection products
Health Care Medical and surgical supplies, skin health and infection prevention products,
drug delivery systems, dental and orthodontic products, health information
systems and food safety products
Electronics and Energy Optical films solutions for electronic displays, packaging and interconnection
devices, insulating and splicing solutions for the electronics,
telecommunications and electrical industries, touch screens and touch
monitors, renewable energy component solutions, and infrastructure protection
products
Consumer Sponges, scouring pads, high-performance cloths, consumer and office tapes,
repositionable notes, indexing systems, home improvement products, home care
products, protective material products, and consumer and office tapes and
adhesives
Business Segment Information
Net Sales Operating Income
(Millions) 2017 2016 2015 2017 2016 2015
Industrial $ 10,911 $ 10,399 $ 10,388 $ 2,289 $ 2,395 $ 2,277
Safety and Graphics 6,148 5,881 5,736 2,067 1,423 1,332
Health Care 5,813 5,566 5,449 1,781 1,763 1,730
Electronics and Energy 5,159 4,643 5,069 1,254 1,041 1,083
Consumer 4,589 4,484 4,429 993 1,065 1,048
Corporate and Unallocated 1 7 (2) (352) (272) (349)
Elimination of Dual Credit (964) (871) (795) (212) (192) (175)
Total Company $ 31,657 $ 30,109 $ 30,274 $ 7,820 $ 7,223 $ 6,946
Assets Depreciation & Amortization Capital Expenditures
(Millions) 2017 2016 2015 2017 2016 2015 2017 2016 2015
Industrial $ 9,895 $ 9,140 $ 9,205 $ 432 $ 407 $ 374 $ 435 $ 360 $ 317
Safety and Graphics 9,874 7,626 7,709 275 277 258 184 228 207
Health Care 4,757 4,293 4,391 246 175 179 83 136 168
Electronics and Energy 4,395 4,418 4,645 175 229 279 165 200 203
Consumer 2,706 2,497 2,386 112 114 108 109 109 124
Corporate and Unallocated 6,360 4,932 4,547 304 272 237 397 387 442
Total Company $ 37,987 $ 32,906 $ 32,883 $ 1,544 $ 1,474 $ 1,435 $ 1,373 $ 1,420 $ 1,461
Corporate and unallocated operating income includes a variety of miscellaneous
items, such as corporate investment gains and losses, certain derivative gains
and losses, certain insurance-related gains and losses, certain litigation and
environmental expenses, corporate restructuring charges and certain under- or
over-absorbed costs (e.g. pension, stock-based compensation) that the Company
may choose not to allocate directly to its business segments. Because this
category includes a variety of miscellaneous items, it is subject to
fluctuation on a quarterly and annual basis.
3M business segment reporting measures include dual credit to business
segments for certain U.S. sales and related operating income. Management
evaluates each of its five business segments based on net sales and operating
income performance, including dual credit U.S. reporting to further
incentivize U.S. sales growth. As a result, 3M reflects additional ("dual")
credit to another business segment when the customer account activity ("sales
district") with respect to the particular product sold to the external
customer in the U.S. is provided by a different business segment. This
additional dual credit is largely reflected at the division level. For
example, certain respirators are primarily sold by the Personal Safety
Division within the Safety and Graphics business segment; however, a sales
district within the Industrial business segment provides the contact for sales
of the product to particular customers in the U.S. market. In this example,
the non-primary selling segment (Industrial) would also receive credit for the
associated net sales initiated though its sales district and the related
approximate operating income. The assigned operating income related to dual
credit activity may differ from operating income that would result from actual
costs associated with such sales. The offset to the dual credit business
segment reporting is reflected as a reconciling item entitled "Elimination of
Dual Credit," such that sales and operating income for the U.S. in total are
unchanged.
Certain sales and operating income results for electronic bonding product
lines are equally divided between the Electronics and Energy business segment
and the Industrial business segment.
NOTE 18. Geographic Areas
Geographic area information is used by the Company as a secondary performance
measure to manage its businesses. Export sales and certain income and expense
items are generally reported within the geographic area where the final sales
to 3M customers are made.
Property, Plant and
Net Sales Equipment - net
(Millions) 2017 2016 2015 2017 2016
United States $ 12,372 $ 12,188 $ 12,049 $ 4,891 $ 4,914
Asia Pacific 9,809 8,847 9,041 1,672 1,573
Europe, Middle East and Africa 6,456 6,163 6,228 1,798 1,512
Latin America and Canada 3,033 2,901 2,982 505 517
Other Unallocated (13) 10 (26) - -
Total Company $ 31,657 $ 30,109 $ 30,274 $ 8,866 $ 8,516
Asia Pacific included China/Hong Kong net sales to customers of $3.255
billion, $2.799 billion and $2.945 billion in 2017, 2016, and 2015,
respectively. China/Hong Kong net property, plant and equipment (PP&E) was
$541 million and $520 million at December 31, 2017 and 2016, respectively.
NOTE 19. Quarterly Data (Unaudited)
(Millions, except per-share amounts) First Second Third Fourth Year
2017 Quarter Quarter Quarter Quarter 2017
Net sales $ 7,685 $ 7,810 $ 8,172 $ 7,990 $ 31,657
Cost of sales 3,869 4,007 4,045 4,080 16,001
Net income including noncontrolling interest 1,326 1,585 1,433 525 4,869
Net income attributable to 3M 1,323 1,583 1,429 523 4,858
Earnings per share attributable to 3M common shareholders - basic 2.21 2.65 2.39 0.88 8.13
Earnings per share attributable to 3M common shareholders - diluted 2.16 2.58 2.33 0.85 7.93
(Millions, except per-share amounts) First Second Third Fourth Year
2016 Quarter Quarter Quarter Quarter 2016
Net sales $ 7,409 $ 7,662 $ 7,709 $ 7,329 $ 30,109
Cost of sales 3,678 3,799 3,847 3,716 15,040
Net income including noncontrolling interest 1,278 1,293 1,331 1,156 5,058
Net income attributable to 3M 1,275 1,291 1,329 1,155 5,050
Earnings per share attributable to 3M common shareholders - basic 2.10 2.13 2.20 1.93 8.35
Earnings per share attributable to 3M common shareholders - diluted 2.05 2.08 2.15 1.88 8.16
Gross profit is calculated as net sales minus cost of sales. Fourth quarter
and year 2017 were impacted by the enactment of the Tax Cuts and Jobs Act in
December 2017, which reduced net income by $762 million and reduced diluted
earnings per share by $1.25 in the fourth quarter and $1.24 for year 2017.
Refer to Note 9 for additional details.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
a. The Company carried out an evaluation, under the supervision and with the
participation of its management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the Company's "disclosure controls and procedures" (as defined in the Exchange
Act Rule 13a-15(e)) as of the end of the period covered by this report. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
b. The Company's management is responsible for establishing and maintaining an
adequate system of internal control over financial reporting, as defined in
the Exchange Act Rule 13a-15(f). Management conducted an assessment of the
Company's internal control over financial reporting based on the framework
established by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control - Integrated Framework (2013). Based on the
assessment, management concluded that, as of December 31, 2017, the Company's
internal control over financial reporting is effective. Management's
assessment of the effectiveness of the Company's internal control over
financial reporting as of December 31, 2017 excluded Scott Safety, which was
acquired by the Company in October 2017 in a purchase business combination.
Scott Safety is a wholly-owned subsidiary whose total assets and total net
sales represented less than 1 percent of the Company's consolidated financial
- More to follow, for following part double click ID:nRSM6597Ed e 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 PFCs in the groundwater, surface water, fish or other
aquatic life, and sediments (the "NRD Lawsuit"). The State also seeks declarations under MERLA that 3M is responsible for
all damages the State may suffer in the future for injuries to natural resources from releases of PFCs into the
environment, and under MWPCA that 3M is responsible for compensation for future loss or destruction of fish, aquatic life,
and other damages. In September 2017, the State's damages expert submitted a report that contends the State incurred $5
billion in damages. In November 2017, the State of Minnesota filed a motion for leave to amend its complaint to seek
punitive damages from 3M, and 3M filed a motion for summary judgment contending, among other things, that the State's
claims are barred by the applicable statute of limitations. A hearing on those motions was held in December 2017. In
December 2017, the court urged the parties to attempt to resolve the litigation before trial, and in January 2018, the
court appointed a mediator to facilitate that process. If the parties are not able to resolve the matter, the trial is
scheduled to begin in February 2018. An adverse ruling or judgment, settlement, or unfavorable development in the NRD
Lawsuit 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 and on the consolidated financial position of the Company. No liability
has been recorded because the Company believes any such liability is not probable and estimable.
In November 2011, the Metropolitan Council filed a motion to intervene and a complaint in the NRD Lawsuit seeking
compensatory damages and other legal, declaratory and equitable relief, including reasonable attorneys' fees, for costs and
fees that the Metropolitan Council alleges it will be required to assess at some time in the future if the MPCA imposes
restrictions on Metropolitan Council's PFOS discharges to the Mississippi River, including the installation and maintenance
of a water treatment system. The Metropolitan Council's intervention motion was based on several theories, including common
law negligence, and statutory claims under MERLA for response costs, and under the Minnesota Environmental Rights Act
(MERA) for declaratory and equitable relief against 3M for PFOS and other PFC pollution of the waters and sediments of the
Mississippi River. 3M did not object to the motion to intervene. In January 2012, 3M answered the Metropolitan Council's
complaint and filed a counterclaim alleging that the Metropolitan Council discharges PFCs to the Mississippi River and
discharges PFC-containing sludge and bio solids from one or more of its wastewater treatment plants onto agricultural lands
and local area landfills. Accordingly, 3M's complaint against the Metropolitan Council asked that if the court finds that
the State is entitled to any of the damages it sought, 3M be awarded contribution and apportionment from the Metropolitan
Council, including attorneys' fees, under MERLA, and contribution from and liability for the Metropolitan Council's
proportional share of damages awarded to the State under the MWPCA, as well as under statutory nuisance and common law
theories of trespass, nuisance, and negligence. 3M also sought declaratory relief under MERA. In May 2017, the Metropolitan
Council paid 3M approximately $1 million and agreed to dismiss its claims against 3M. As part of the settlement agreement,
3M agreed to dismiss its claims against the Metropolitan Council.
In April 2012, 3M filed a motion to disqualify the State of Minnesota's counsel, Covington & Burling, LLP (Covington). In
October 2012, the court granted 3M's motion to disqualify Covington as counsel to the State, and the State and Covington
appealed the court's disqualification to the Minnesota Court of Appeals. In July 2013, the Minnesota Court of Appeals
affirmed the district court's disqualification order. In October 2013, the Minnesota Supreme Court granted both the State's
and Covington's petition for review of the decision of the Minnesota Court of Appeals. In April 2014, the Minnesota Supreme
Court affirmed in part, reversed in part, and remanded the case to the district court for further proceedings. The district
court took evidence on the disqualification issues at a hearing in October 2015. In February 2016, the district court ruled
that Covington violated the professional ethics rule against representing a client (here the State of Minnesota) in the
same or substantially related matter where that person's interests are materially adverse to the interests of a former
client (3M). The district court, however, denied 3M's motion to disqualify Covington because it further found that 3M
impliedly waived by delaying to assert the conflict. Other activity in the case, which had been stayed pending the outcome
of the disqualification issue, has resumed. Trial of the NRD Lawsuit is scheduled to begin in February 2018. In a separate
but related action, the Company filed suit in the Ramsey County District Court against Covington for breach of its
fiduciary duties to the Company and for breach of contract arising out of Covington's representation of the State of
Minnesota in the NRD Lawsuit. In September 2016, the court granted 3M's motion for leave to amend the complaint to plead
punitive damages. In February 2017, Covington settled this lawsuit with a payment by Covington or its insurer to 3M that is
not material to 3M's results of operations or financial condition.
In July 2016, the City of Lake Elmo filed a lawsuit in the U.S. District Court for the District of Minnesota against 3M
alleging that the City suffered damages from drinking water supplies contaminated with PFCs, including costs to construct
alternative sources of drinking water. Trial is scheduled to begin in September 2019.
Aqueous Film Forming Foam (AFFF) Litigation
3M manufactured and marketed Aqueous Film Forming Foam (AFFF) for use in firefighting at airports and military bases from
approximately 1963 to 2000. As of December 31, 2017, twelve purported class actions have been filed against 3M and other
defendants in various state and federal courts in Pennsylvania, Colorado, and New York alleging that certain PFCs used in
AFFF contaminated the soil and groundwater where AFFF was used at current or former airports and air force military bases
located in Colorado, Pennsylvania, and New York. An individual complaint also has been filed in federal court Pennsylvania.
The plaintiffs in these cases generally allege that contaminated groundwater has caused various injuries, including loss of
use and enjoyment of their properties, diminished property values, investigation costs, and remediation costs. Some cases
seek funds for medical monitoring. Several companies have been sued along with 3M, including Ansul Co. (acquired by Tyco,
Inc.), Angus Fire, Buckeye Fire Protection Co., Chemguard, National Foam, Inc., United Technologies Corp.
In November 2016, the Town of Barnstable, MA filed an individual action in the U.S. District Court for the District of
Massachusetts seeking unstated compensatory and punitive damages and other relief against 3M and other suppliers of AFFF
for alleged contamination of the aquifer supplying drinking water to the Hyannis water system. The town seeks to recover
costs associated with the investigation, treatment, remediation, and monitoring of drinking water supplies allegedly
contaminated with certain PFCs used in AFFF. In January 2017, the County of Barnstable, MA, filed an individual action in
the U.S. District Court for the District of Massachusetts seeking unstated compensatory and punitive damages and other
relief (including indemnification and contribution in connection with claims asserted against the County by the Town of
Barnstable) against 3M and other suppliers of AFFF for alleged contamination of the aquifer supplying drinking water to the
Hyannis water system.
In February 2017, husband and wife plaintiffs sued 3M and other defendants in federal court in Pennsylvania, alleging
personal injury, loss of consortium and companionship, and associated damages.
In March 2017, plaintiff residents of Suffolk County, Long Island filed a class action complaint in state court in Suffolk
County New York, naming the County and 3M and other alleged manufacturers of AFFF products. The action was removed to the
Eastern District of New York.
In August 2017, three class action complaints were filed in state court in New York against 3M and other defendants
including the Port Authority of New York and New Jersey. Plaintiffs allege PFC contamination of the local water supply
linked to AFFF at Stewart Air National Guard Base and Stewart International Airport. The Port Authority is the leaseholder
of the airport. All three cases have classes for diminution of property and medical monitoring. In September 2017,
co-defendant Tyco removed all three cases to the U.S. District Court for the Southern District of New York.
In October 2017, a class action complaint was filed in Suffolk County, New York against 3M and others regarding PFCs
allegedly released at the Suffolk County Firematics Training Facility. In November 2017, co-defendant National Foam removed
the case to the U.S. District Court for the Eastern District of New York.
In December 2017, a complaint was filed by a group of 26 plaintiffs in Suffolk County, New York against 3M and others
regarding PFCs allegedly released at Gabreski Airport.
In December 2017, a complaint was filed by the Suffolk County Water District in December 2017 in the U.S. District Court
for the Eastern District of New York against 3M and others regarding PFCs allegedly released at Gabreski Airport and
Suffolk County Firematics Training Facility.
Other Environmental Litigation
In September 2017, three complaints were filed in the U.S. District Court for the Northern District of New York against 3M,
Saint-Gobain Performance Plastics Corp. ("Saint-Gobain"), Honeywell International Inc. ("Honeywell") and E.I. DuPont De
Nemours and Company. Plaintiffs allege that 3M manufactured and sold PFOA that was used for manufacturing purposes at
Saint-Gobain's and Honeywell's facilities located in the Village of Hoosick Falls and the Town of Hoosick. Plaintiffs claim
that the drinking water around Hoosick Falls became contaminated with unsafe levels of PFOA due to the activities of the
defendants, and allege that they suffered bodily injury due to the ingestion and inhalation of PFOA. Plaintiffs seek
unstated compensatory, consequential, and punitive damages, as well as attorneys' fees and costs.
On December 1, 2017, eight plaintiffs filed a 12-count class action against 3M, Wolverine World Wide and Waste Management,
Inc., alleging negligence, trespass, intentional and negligent infliction of emotional distress, battery, products
liability, public and private nuisance, fraudulent concealment, and unjust enrichment. Each count was filed against each
defendant. The action arises from Wolverine's allegedly improper disposal of materials and wastes related to their shoe
manufacturing operations. Plaintiffs allege Wolverine used 3M Scotchgard in its manufacturing process and that chemicals
from 3M's product have contaminated the environment after being disposed of near drinking water sources.
For environmental litigation matters described in this section for which a liability, if any, has been recorded, the
Company believes the amount recorded, as well as the possible loss or range of loss in excess of the established accrual is
not material to the Company's consolidated results of operations or financial condition. For those matters for which a
liability has not been recorded, the Company believes any such liability is not probable and estimable and the Company is
not able to estimate a possible loss or range of loss at this time.
Environmental Liabilities and Insurance Receivables
As of December 31, 2017, the Company had recorded liabilities of $28 million for estimated "environmental remediation"
costs based upon an evaluation of currently available facts with respect to each individual site and also recorded related
insurance receivables of $8 million. The Company records liabilities for remediation costs on an undiscounted basis when
they are probable and reasonably estimable, generally no later than the completion of feasibility studies or the Company's
commitment to a plan of action. Liabilities for estimated costs of environmental remediation, depending on the site, are
based primarily upon internal or third-party environmental studies, and estimates as to the number, participation level and
financial viability of any other potentially responsible parties, the extent of the contamination and the nature of
required remedial actions. The Company adjusts recorded liabilities as further information develops or circumstances
change. The Company expects that it will pay the amounts recorded over the periods of remediation for the applicable sites,
currently ranging up to 20 years.
As of December 31, 2017, the Company had recorded liabilities of $25 million for "other environmental liabilities" based
upon an evaluation of currently available facts to implement the Settlement Agreement and Consent Order with the MPCA, the
remedial action agreement with ADEM, and to address trace amounts of perfluorinated compounds in drinking water sources in
the City of Oakdale, Minnesota, as well as presence in the soil and groundwater at the Company's manufacturing facilities
in Decatur, Alabama, and Cottage Grove, Minnesota, and at two former disposal sites in Washington County, Minnesota
(Oakdale and Woodbury). The Company expects that most of the spending will occur over the next four years. During the first
quarter of 2017, the Company collected from its insurer the outstanding receivable of $15 million related to "other
environmental liabilities."
It is difficult to estimate the cost of environmental compliance and remediation given the uncertainties regarding the
interpretation and enforcement of applicable environmental laws and regulations, the extent of environmental contamination
and the existence of alternative cleanup methods. Developments may occur that could affect the Company's current
assessment, including, but not limited to: (i) changes in the information available regarding the environmental impact of
the Company's operations and products; (ii) changes in environmental regulations, changes in permissible levels of specific
compounds in drinking water sources, or changes in enforcement theories and policies, including efforts to recover natural
resource damages; (iii) new and evolving analytical and remediation techniques; (iv) success in allocating liability to
other potentially responsible parties; and (v) the financial viability of other potentially responsible parties and
third-party indemnitors. For sites included in both "environmental remediation liabilities" and "other environmental
liabilities," at which remediation activity is largely complete and remaining activity relates primarily to operation and
maintenance of the remedy, including required post-remediation monitoring, the Company believes the exposure to loss in
excess of the amount accrued would not be material to the Company's consolidated results of operations or financial
condition. However, for locations at which remediation activity is largely ongoing, the Company cannot estimate a possible
loss or range of loss in excess of the associated established accruals for the reasons described above.
Other Matters
Department of Labor Investigation
The U.S. Department of Labor (DOL) notified 3M in April 2015 that it had commenced an investigation of 3M's pension plan
pursuant to the federal Employee Retirement Income Security Act of 1974, as amended (ERISA). The DOL has stated its
investigation relates to certain private equity investments, plan expenses, securities lending, and distributions of plan
benefits. In response to certain DOL requests, 3M produced documents and made employees available for interviews. In
December 2016, the DOL issued certain subpoenas to 3M and 3M Investment Management Corp. relating to this investigation. 3M
has produced additional responsive documents and is cooperating with the DOL in its investigation. 3M anticipates that the
DOL will conclude its investigation in the first half of 2018.
Product Liability Litigation
One customer obtained an order in the French courts against 3M Purification SAS (a French subsidiary) in October 2011
appointing an expert to determine the amount of commercial loss and property damage allegedly caused by allegedly defective
3M filters used in the customer's manufacturing process. An Austrian subsidiary of this same customer also filed a claim
against 3M Austria GmbH (an Austrian subsidiary) and 3M Purification SAS in the Austrian courts in September 2012 seeking
damages for the same issue. The Company reached an agreement in principle to settle those two cases and finalized the
settlement during the second quarter of 2017. The amounts agreed to in each of these settlements were not material to the
Company's consolidated results of operations or financial condition.
As of December 31, 2017, the Company is a named defendant in lawsuits involving approximately 4,270 plaintiffs (compared to
approximately 1,260 plaintiffs at December 31, 2016), most of which are pending in federal or state court in Minnesota, in
which the plaintiffs claim they underwent various joint arthroplasty, cardiovascular, and other surgeries and later
developed surgical site infections due to the use of the Bair Hugger patient warming system. The complaints seek damages
and other relief based on theories of strict liability, negligence, breach of express and implied warranties, failure to
warn, design and manufacturing defect, fraudulent and/or negligent misrepresentation/concealment, unjust enrichment, and
violations of various state consumer fraud, deceptive or unlawful trade practices and/or false advertising acts. One case,
from the U.S. District Court for the Western District of Tennessee is a putative nationwide class action. The U.S. Judicial
Panel on Multidistrict Litigation (MDL) granted the plaintiffs' motion to transfer and consolidate all cases pending in
federal courts to the U.S. District Court for the District of Minnesota to be managed in a multi-district proceeding during
the pre-trial phase of the litigation. The federal court has set a trial-ready date in May 2018 in one of the two federal
court bellwether cases. At a joint hearing before the U.S. District Court and the Minnesota State court, on the parties'
motion to exclude each other's experts, and 3M's motion for summary judgment with respect to general causation, the federal
court did not exclude the plaintiffs' experts and denied 3M's motion for summary judgment on general causation. In January
2018, the state court, in hearing the same arguments, excluded plaintiffs' experts and granted 3M's motion for summary
judgment on general causation, dismissing all 61 cases pending before the state court in Minnesota.
In June 2016, the Company was served with a putative class action filed in the Ontario Superior Court of Justice for all
Canadian residents who underwent various joint arthroplasty, cardiovascular, and other surgeries and later developed
surgical site infections due to the use of the Bair Hugger patient warming system. The representative plaintiff seeks
relief (including punitive damages) under Canadian law based on theories similar to those asserted in the MDL. The Bair
Hugger product line was acquired by 3M as part of the 2010 acquisition of Arizant, Inc., a leading manufacturer of patient
warming solutions designed to prevent hypothermia and maintain normal body temperature in surgical settings. No liability
has been recorded for this matter because the Company believes that any such liability is not probable and estimable at
this time.
In September 2011, 3M Oral Care launched Lava Ultimate CAD/CAM dental restorative material. The product was originally
indicated for inlay, onlay, veneer, and crown applications. In June 2015, 3M Oral Care voluntarily removed crown
applications from the product's instructions for use, following reports from dentists of patients' crowns debonding,
requiring additional treatment. The product remains on the market for other applications. 3M communicated with the U.S.
Food and Drug Administration, as well as regulators outside the United States. 3M also informed customers and distributors
of its action, offered to accept return of unused materials and provide refunds. As of December 31, 2017, there is one
lawsuit pending in the U.S. District Court for the District of Minnesota that names 29 plaintiffs and seeks certification
of a class of dentists in the United States and its territories, and alternatively seeks subclasses in 13 states. The
complaint alleges 3M marketed and sold defective Lava Ultimate material used for dental crowns to dentists and, under
various theories, seek monetary damages (replacement costs and business reputation loss), punitive damages, disgorgement of
profits, injunction from marketing and selling Lava Ultimate for use in dental crowns, statutory penalties, and attorneys'
fees and costs.
For product liability litigation matters described in this section for which a liability has been recorded, the Company
believes the amount recorded is not material to the Company's consolidated results of operations or financial condition. In
addition, the Company is not able to estimate a possible loss or range of loss in excess of the established accruals at
this time.
NOTE 16. Stock-Based Compensation
The 3M 2016 Long-Term Incentive Plan (LTIP) provides for the issuance or delivery of up to 123,965,000 shares of 3M common
stock pursuant to awards granted under the plan. Awards may be issued in the form of incentive stock options, nonqualified
stock options, progressive stock options, stock appreciation rights, restricted stock, restricted stock units, other stock
awards, and performance units and performance shares. As of December 31, 2017, the remaining total shares available for
grant under the LTIP Program are 30,125,144, and there were approximately 7,500 participants with outstanding options,
restricted stock, or restricted stock units.
The Company's annual stock option and restricted stock unit grant is made in February to provide a strong and immediate
link between the performance of individuals during the preceding year and the size of their annual stock compensation
grants. The grant to eligible employees uses the closing stock price on the grant date. Accounting rules require
recognition of expense under a non-substantive vesting period approach, requiring compensation expense recognition when an
employee is eligible to retire. Employees are considered eligible to retire at age 55 and after having completed ten years
of service. This retiree-eligible population represents 35 percent of the 2017 annual stock-based compensation award
expense dollars; therefore, higher stock-based compensation expense is recognized in the first quarter.
In addition to the annual grants, the Company makes other minor grants of stock options, restricted stock units and other
stock-based grants. The Company issues cash settled restricted stock units and stock appreciation rights in certain
countries. These grants do not result in the issuance of common stock and are considered immaterial for disclosure purposes
by the Company.
Beginning in 2016, as a result of the Company's application of ASU No. 2016-09, Improvements to Employee Share-Based
Payment Accounting, certain excess tax benefits at the time of exercise (for an option) or upon vesting (for restricted
stock units) are recognized as income tax benefits in the statement of income. These amounts totaled $228 million and $184
million for 2017 and 2016, respectively, and are reflected in the "income tax benefits" line within the stock-based
compensation table below.
Amounts recognized in the financial statements with respect to stock-based compensation programs, which include stock
options, restricted stock, restricted stock units, performance shares, and the General Employees' Stock Purchase Plan
(GESPP), are provided in the following table. Capitalized stock-based compensation amounts were not material.
Stock-Based Compensation Expense
Years ended December 31
(Millions) 2017 2016 2015
Cost of sales $ 49 $ 47 $ 46
Selling, general and administrative expenses 229 206 185
Research, development and related expenses 46 45 45
Stock-based compensation expenses $ 324 $ 298 $ 276
Income tax benefits $ (327) $ (272) $ (87)
Stock-based compensation expenses (benefits), net of tax $ (3) $ 26 $ 189
Stock Option Program
The following table summarizes stock option activity for the years ended December 31:
2017 2016 2015
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Options Exercise Price Options Exercise Price Options Exercise Price
Under option -
January 1 36,196,232 $ 112.07 38,552,445 $ 102.01 39,235,557 $ 90.38
Granted:
Annual 5,409,628 175.93 5,591,727 147.99 5,529,544 165.91
Exercised (6,474,117) 90.37 (7,716,141) 86.76 (5,978,382) 83.74
Forfeited (166,579) 162.36 (231,799) 148.43 (234,274) 128.99
December 31 34,965,164 $ 125.73 36,196,232 $ 112.07 38,552,445 $ 102.01
Options exercisable
December 31 24,281,464 $ 108.50 25,240,759 $ 95.65 27,262,062 $ 85.97
Stock options vest over a period from one to three years with the expiration date at 10 years from date of grant. As of
December 31, 2017, there was $67 million of compensation expense that has yet to be recognized related to non-vested stock
option based awards. This expense is expected to be recognized over the remaining weighted-average vesting period of 20
months. For options outstanding at December 31, 2017, the weighted-average remaining contractual life was 70 months and the
aggregate intrinsic value was $3.834 billion. For options exercisable at December 31, 2017, the weighted-average remaining
contractual life was 56 months and the aggregate intrinsic value was $3.080 billion.
The total intrinsic values of stock options exercised during 2017, 2016 and 2015 was $703 million, $608 million and $465
million, respectively. Cash received from options exercised during 2017, 2016 and 2015 was $585 million, $665 million and
$501 million, respectively. The Company's actual tax benefits realized for the tax deductions related to the exercise of
employee stock options for 2017, 2016 and 2015 was $238 million, $224 million and $172 million, respectively.
The Company does not have a specific policy to repurchase common shares to mitigate the dilutive impact of options;
however, the Company has historically made adequate discretionary purchases, based on cash availability, market trends, and
other factors, to satisfy stock option exercise activity.
For annual options, the weighted average fair value at the date of grant was calculated using the Black-Scholes
option-pricing model and the assumptions that follow.
Stock Option Assumptions
Annual
2017 2016 2015
Exercise price $ 175.76 $ 147.87 $ 165.94
Risk-free interest rate 2.1 % 1.5 % 1.5 %
Dividend yield 2.5 % 2.5 % 2.5 %
Expected volatility 17.3 % 20.8 % 20.1 %
Expected life (months) 78 77 76
Black-Scholes fair value $ 23.51 $ 22.47 $ 23.98
Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period.
For the 2017 annual grant date, the Company estimated the expected volatility based upon the average of the most recent one
year volatility, the median of the term of the expected life rolling volatility, the median of the most recent term of the
expected life volatility of 3M stock, and the implied volatility on the grant date. The expected term assumption is based
on the weighted average of historical grants.
Restricted Stock and Restricted Stock Units
The following table summarizes restricted stock and restricted stock unit activity for the years ended December 31:
2017 2016 2015
Weighted Weighted Weighted
Average Average Average
Number of Grant Date Number of Grant Date Number of Grant Date
Awards Fair Value Awards Fair Value Awards Fair Value
Nonvested balance -
As of January 1 2,185,046 $ 145.64 2,441,088 $ 127.47 2,817,786 $ 104.41
Granted
Annual 604,256 176.10 749,068 148.20 671,204 165.86
Other 20,692 233.77 8,115 169.00 26,886 156.94
Vested (769,598) 127.21 (960,345) 101.64 (1,010,612) 89.99
Forfeited (46,590) 158.25 (52,880) 145.95 (64,176) 118.99
As of December 31 1,993,806 $ 162.60 2,185,046 $ 145.64 2,441,088 $ 127.47
As of December 31, 2017, there was $78 million of compensation expense that has yet to be recognized related to non-vested
restricted stock and restricted stock units. This expense is expected to be recognized over the remaining weighted-average
vesting period of 22 months. The total fair value of restricted stock and restricted stock units that vested during 2017,
2016 and 2015 was $136 million, $149 million and $166 million, respectively. The Company's actual tax benefits realized for
the tax deductions related to the vesting of restricted stock and restricted stock units for 2017, 2016 and 2015 was $45
million, $56 million and $62 million, respectively.
Restricted stock units granted generally vest three years following the grant date assuming continued employment. Dividend
equivalents equal to the dividends payable on the same number of shares of 3M common stock accrue on these restricted stock
units during the vesting period, although no dividend equivalents are paid on any of these restricted stock units that are
forfeited prior to the vesting date. Dividends are paid out in cash at the vest date on restricted stock units, except for
performance shares which do not earn dividends. Since the rights to dividends are forfeitable, there is no impact on basic
earnings per share calculations. Weighted average restricted stock unit shares outstanding are included in the computation
of diluted earnings per share.
Performance Shares
Instead of restricted stock units, the Company makes annual grants of performance shares to members of its executive
management. The 2017 performance criteria for these performance shares (organic volume growth, return on invested capital,
free cash flow conversion, and earnings per share growth) were selected because the Company believes that they are
important drivers of long-term stockholder value. The number of shares of 3M common stock that could actually be delivered
at the end of the three-year performance period may be anywhere from 0% to 200% of each performance share granted,
depending on the performance of the Company during such performance period. Non-substantive vesting requires that expense
for the performance shares be recognized over one or three years depending on when each individual became a 3M executive.
Prior to the 2016 performance share grant, performance shares did not accrue dividends during the performance period.
Therefore, the grant date fair value was determined by reducing the closing stock price on the date of grant by the net
present value of dividends during the performance period. The 2017 and 2016 performance share grants accrue dividends,
therefore the grant date fair value is equal to the closing stock price on the date of grant. Since the rights to dividends
are forfeitable, there is no impact on basic earnings per share calculations. Weighted average performance shares whose
performance period is complete are included in computation of diluted earnings per share.
The following table summarizes performance share activity for the years ended December 31:
2017 2016 2015
Weighted Weighted Weighted
Average Average Average
Number of Grant Date Number of Grant Date Number of Grant Date
Awards Fair Value Awards Fair Value Awards Fair Value
Undistributed balance -
As of January 1 656,278 $ 142.98 871,192 $ 120.89 1,099,752 $ 102.65
Granted 201,261 191.28 219,431 160.17 227,798 158.88
Distributed (313,942) 124.88 (367,428) 99.06 (323,938) 83.08
Performance change 154,774 173.91 (37,534) 155.98 (106,760) 127.70
Forfeited (12,498) 171.36 (29,383) 149.08 (25,660) 125.33
As of December 31 685,873 $ 171.90 656,278 $ 142.98 871,192 $ 120.89
As of December 31, 2017, there was $25 million of compensation expense that has yet to be recognized related to performance
shares. This expense is expected to be recognized over the remaining weighted-average earnings period of 11 months. The
total fair value of performance shares that were distributed were $55 million for 2017 and $54 million for both 2016 and
2015. The Company's actual tax benefits realized for the tax deductions related to the distribution of performance shares
was $15 million per year for 2017, 2016 and 2015.
General Employees' Stock Purchase Plan (GESPP):
As of December 31, 2017, shareholders have approved 60 million shares for issuance under the Company's GESPP. Substantially
all employees are eligible to participate in the plan. Participants are granted options at 85% of market value at the date
of grant. There are no GESPP shares under option at the beginning or end of each year because options are granted on the
first business day and exercised on the last business day of the same month.
General Employees' Stock Purchase Plan
2017 2016 2015
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Options granted 877,705 $ 170.42 987,478 $ 140.06 1,007,669 $ 133.52
Options exercised (877,705) 170.42 (987,478) 140.06 (1,007,669) 133.52
Shares available for grant - December 31 26,239,152 27,116,857 28,104,335
The weighted-average fair value per option granted during 2017, 2016 and 2015 was $30.07, $24.72 and $23.56, respectively.
The fair value of GESPP options was based on the 15% purchase price discount. The Company recognized compensation expense
for GESSP options of $26 million in 2017, $24 million in 2016 and $24 million in 2015.
NOTE 17. Business Segments
3M's businesses are organized, managed and internally grouped into segments based on differences in markets, products,
technologies and services. 3M manages its operations in five business segments: Industrial; Safety and Graphics; Health
Care; Electronics and Energy; and Consumer. 3M's five business segments bring together common or related 3M technologies,
enhancing the development of innovative products and services and providing for efficient sharing of business resources.
Transactions among reportable segments are recorded at cost. 3M is an integrated enterprise characterized by substantial
intersegment cooperation, cost allocations and inventory transfers. Therefore, management does not represent that these
segments, if operated independently, would report the operating income information shown. The difference between operating
income and pre-tax income relates to interest income and interest expense, which are not allocated to business segments.
Effective in the first quarter of 2017, as part of 3M's continuing effort to improve the alignment of its businesses around
markets and customers the Company made the following changes:
1. Integrated the former Renewable Energy Division into existing divisions;
2. Combined two divisions to form the Automotive and Aerospace Solutions Division; and
3. Consolidated U.S. customer account activity - impacting dual credit reporting
Integration of former Renewable Energy Division
· The (i) solar and wind and (ii) energy product lines (along with certain technology previously included in Corporate
and Unallocated) of the former Renewable Energy Division (RED) were integrated into the existing Electrical Markets
Division and Electronics Materials Solutions Division, respectively, within the Electronics and Energy business segment. In
addition, the former RED's window film product lines were moved into the Commercial Solutions Division within the Safety
and Graphics business segment. This change resulted in a decrease in previously reported net sales and operating income for
total year 2016 of $203 million and $38 million, respectively, in the Electronics and Energy segment. These decreases were
offset by a $207 million and $29 million increase in previously reported total year 2016 net sales and operating income,
respectively, in the Safety and Graphics business segment and a $4 million decrease and $9 million increase in previously
reported net sales and operating income, respectively, in Corporate and Unallocated.
Creation of Automotive and Aerospace Solutions Division
· The former Automotive Division and Aerospace and Commercial Transportation Division (both within the Industrial
business segment) were combined to create the Automotive and Aerospace Solutions Division. Because this realignment was
within the Industrial business segment, it had no impact on business segment reporting.
Consolidation of U.S. customer account activity - impacting dual credit reporting
· The Company consolidated its customer account activity in the U.S. into more centralized sales districts to better
serve customers. As discussed further below, 3M business segment reporting measures include dual credit to business
segments for certain U.S. sales and related operating income. This dual credit is based on which business segment provides
customer account activity ("sales district") with respect to a particular product sold in the U.S. Previously, a customer
in the U.S. may have been aligned to several sales districts associated with multiple divisions or segments based on the
individual products the customer purchased across 3M's portfolio. The alignment of U.S. customer accounts to fewer, more
focused sales districts therefore changed the attribution of dual credit across 3M's business segments. As a result,
previously reported aggregate business segment net sales and operating income for total year 2016 increased $163 million
and $36 million, respectively, offset by similar increases in the elimination of dual credit net sales and operating income
amounts.
The financial information presented herein reflects the impact of the preceding business segment reporting changes for all
periods presented.
Business Segment Products
Business Segment Major Products
Industrial Tapes, coated, nonwoven and bonded abrasives, adhesives, advanced ceramics, sealants, specialty materials, filtration products, closure systems for personal hygiene products, acoustic systems products, automotive components, abrasion-resistant films, structural adhesives and paint finishing and detailing products
Safety and Graphics Personal protection products, transportation safety products, commercial graphics systems, commercial cleaning and protection products, floor matting, roofing granules for asphalt shingles, and fall protection products
Health Care Medical and surgical supplies, skin health and infection prevention products, drug delivery systems, dental and orthodontic products, health information systems and food safety products
Electronics and Energy Optical films solutions for electronic displays, packaging and interconnection devices, insulating and splicing solutions for the electronics, telecommunications and electrical industries, touch screens and touch monitors, renewable energy component solutions, and infrastructure protection products
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