REG - 3M Company - Annual Financial Report - Updated by Form 8-K <Origin Href="QuoteRef">MMM.N</Origin> - Part 12
05/05/2017 07:07
- Part 12: For the preceding part double click ID:nRSE2625Ek
stock units for 2016, 2015 and 2014 was $56
million, $62 million and $54 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 2016 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 2016 performance share grant accrues 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:
2016 2015 2014
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 1 871,192 $ 120.89 1,099,752 $ 102.65 895,635 $ 88.12
Granted 219,431 160.17 227,798 158.88 305,225 124.89
Distributed (367,428) 99.06 (323,938) 83.08 (277,358) 84.74
Performance change (37,534) 155.98 (106,760) 127.70 212,461 109.74
Forfeited (29,383) 149.08 (25,660) 125.33 (36,212) 109.44
As of December 31 656,278 $ 142.98 871,192 $ 120.89 1,099,752 $ 102.65
As of December 31, 2016, there was $16 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. During
2016, 2015 and 2014, the total fair value of performance shares that were distributed were $54 million, $54 million and $35
million, respectively. The Company's actual tax benefits realized for the tax deductions related to the distribution of
performance shares for 2016, 2015 and 2014 was $15 million, $15 million and $11 million, respectively.
General Employees' Stock Purchase Plan (GESPP):
As of December 31, 2016, 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
2016 2015 2014
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Options granted 987,478 $ 140.06 1,007,669 $ 133.52 1,073,956 $ 118.73
Options exercised (987,478) 140.06 (1,007,669) 133.52 (1,073,956) 118.73
Shares available for grant - December 31 27,116,857 28,104,335 29,112,004
The weighted-average fair value per option granted during 2016, 2015 and 2014 was $24.72, $23.56 and $20.95, respectively.
The fair value of GESPP options was based on the 15% purchase price discount. The Company recognized compensation expense
for GESSP options of $24 million in 2016, $24 million in 2015 and $22 million in 2014.
NOTE 16. 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 (a) solar and wind and (b) 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 and 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 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 as well
as the updated alignment of certain assets (largely inventory) to respective producing divisions 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, traffic safety and security products, commercial graphics systems, window films, 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) 2016 2015 2014 2016 2015 2014
Industrial $ 10,399 $ 10,388 $ 11,090 $ 2,395 $ 2,277 $ 2,404
Safety and Graphics 5,881 5,736 5,994 1,423 1,332 1,342
Health Care 5,566 5,449 5,602 1,763 1,730 1,731
Electronics and Energy 4,643 5,069 5,389 1,041 1,083 1,077
Consumer 4,484 4,429 4,533 1,065 1,048 997
Corporate and Unallocated 7 (2) 5 (272) (349) (242)
Elimination of Dual Credit (871) (795) (792) (192) (175) (174)
Total Company $ 30,109 $ 30,274 $ 31,821 $ 7,223 $ 6,946 $ 7,135
Assets Depreciation & Amortization Capital Expenditures
(Millions) 2016 2015 2014 2016 2015 2014 2016 2015 2014
Industrial $ 9,140 $ 9,205 $ 8,509 $ 407 $ 374 $ 383 $ 360 $ 317 $ 395
Safety and Graphics 7,626 7,709 5,096 277 258 246 228 207 229
Health Care 4,293 4,391 4,329 175 179 181 136 168 169
Electronics and Energy 4,418 4,645 4,922 229 279 258 200 203 225
Consumer 2,497 2,386 2,424 114 108 108 109 124 111
Corporate and Unallocated 4,932 4,547 6,094 272 237 232 387 442 364
Total Company $ 32,906 $ 32,883 $ 31,374 $ 1,474 $ 1,435 $ 1,408 $ 1,420 $ 1,461 $ 1,493
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 17. 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 Operating Income Equipment - net
(Millions) 2016 2015 2014 2016 2015 2014 2016 2015
United States $ 12,188 $ 12,049 $ 11,714 $ 2,948 $ 2,647 $ 2,540 $ 4,914 $ 4,838
Asia Pacific 8,847 9,041 9,418 2,560 2,580 2,487 1,573 1,647
Europe, Middle East and Africa 6,163 6,228 7,198 1,046 1,017 1,234 1,512 1,531
Latin America and Canada 2,901 2,982 3,504 705 706 867 517 499
Other Unallocated 10 (26) (13) (36) (4) 7 - -
Total Company $ 30,109 $ 30,274 $ 31,821 $ 7,223 $ 6,946 $ 7,135 $ 8,516 $ 8,515
Asia Pacific included China/Hong Kong net sales to customers of $2.799 billion in 2016, which approached 10 percent of
consolidated worldwide sales. China/Hong Kong net property, plant and equipment (PP&E) was $520 million at December 31,
2016.
NOTE 18. Quarterly Data (Unaudited)
(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
(Millions, except per-share amounts) First Second Third Fourth Year
2015 Quarter Quarter Quarter Quarter 2015
Net sales $ 7,578 $ 7,686 $ 7,712 $ 7,298 $ 30,274
Cost of sales 3,821 3,858 3,877 3,827 15,383
Net income including noncontrolling interest 1,201 1,303 1,298 1,039 4,841
Net income attributable to 3M 1,199 1,300 1,296 1,038 4,833
Earnings per share attributable to 3M common shareholders - basic 1.88 2.06 2.09 1.69 7.72
Earnings per share attributable to 3M common shareholders - diluted 1.85 2.02 2.05 1.66 7.58
Gross profit is calculated as net sales minus cost of sales.
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, 2016, the Company's internal control over financial reporting is effective. The Company's internal
control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which is included herein, which expresses an unqualified
opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2016.
c. There was no change in the Company's internal control over financial reporting that occurred during the Company's most
recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
The Company is implementing an enterprise resource planning ("ERP") system on a worldwide basis, which is expected to
improve the efficiency of certain financial and related transaction processes. The gradual implementation is expected to
occur in phases over the next several years. The implementation of a worldwide ERP system will likely affect the processes
that constitute our internal control over financial reporting and will require testing for effectiveness.
The Company completed implementation with respect to elements of certain processes/sub-processes in limited
subsidiaries/locations and will continue to roll-out the ERP system over the next several years. As with any new
information technology application we implement, this application, along with the internal controls over financial
reporting included in this process, was appropriately considered within the testing for effectiveness with respect to the
implementation in these instances. We concluded, as part of our evaluation described in the above paragraphs, that the
implementation of ERP in these circumstances has not materially affected our internal control over financial reporting.
Item 9B. Other Information.
None.
PART IV
Item 16. Form 10-K Summary (updated by this Current Report on Form 8-K).
A Form 10-K summary (updated by this Current Report on Form 8-K) is provided at the beginning of this document, with
hyperlinked cross-references. This allows users to easily locate the corresponding items in this document, where the
disclosure is fully presented. The summary does not include certain Part III information that is incorporated by reference
from a proxy statement filing.
This information is provided by RNS
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