REG - 3M Company - Annual Financial Report - Updated by Form 8-K <Origin Href="QuoteRef">MMM.N</Origin> - Part 3
05/05/2017 07:07
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Total
Sales Change Analysis currency sales
By Business Segment sales Acquisitions Divestitures Translation change
Industrial (0.1) % 1.6 % (0.3) % (1.1) % 0.1 %
Safety and Graphics 2.1 % 3.9 % (1.8) % (1.7) % 2.5 %
Health Care 3.6 % 0.2 % - % (1.7) % 2.1 %
Electronics and Energy (7.8) % - % - % (0.6) % (8.4) %
Consumer 1.8 % - % - % (0.6) % 1.2 %
Total Company (0.1) % 1.2 % (0.4) % (1.2) % (0.5) %
Sales in 2016 decreased 0.5 percent, impacted by foreign currency translation, which reduced sales by 1.2 percent. Organic
local-currency sales growth (which includes organic volume and selling price impacts) declined 0.1 percent, acquisitions
added 1.2 percent, and divestitures reduced sales by 0.4 percent. Sales in U.S. dollars increased in Safety and Graphics by
2.5 percent, Health Care by 2.1 percent, Consumer by 1.2 percent, and Industrial by 0.1 percent, while sales in Electronics
and Energy declined 8.4 percent. All of 3M's five business segments posted operating income margins of more than 22 percent
in 2016. Worldwide operating income margins for 2016 were 24.0 percent, compared to 22.9 percent for 2015.
Sales in 2015 decreased 4.9 percent, substantially impacted by foreign currency translation, which reduced sales by 6.8
percent. Organic local-currency sales growth (which includes organic volume and selling price impacts) was 1.3 percent,
acquisitions added 0.8 percent, and divestitures reduced sales by 0.2 percent. Sales in U.S. dollars declined in Consumer
by 2.3 percent, Health Care by 2.7 percent, Safety and Graphics by 4.3 percent, Electronics and Energy by 5.9 percent, and
Industrial by 6.3 percent. All of 3M's five business segments posted operating income margins of more than 21 percent in
2015. Worldwide operating income margins for 2015 were 22.9 percent, compared to 22.4 percent for 2014.
Financial condition:
3M generated $6.7 billion of operating cash flow in 2016, an increase of $242 million when compared to 2015. This followed
a decrease of $206 million when comparing 2015 to 2014. Refer to the section entitled "Financial Condition and Liquidity"
later in MD&A for a discussion of items impacting cash flows. In February 2016, 3M's Board of Directors authorized the
repurchase of up to $10 billion of 3M's outstanding common stock, which replaced the Company's February 2014 repurchase
program. This new program has no pre-established end date. In 2016, the Company purchased $3.75 billion of its own stock,
compared to purchases of more than $5 billion of its own stock each year in 2015 and 2014. The Company expects to purchase
$2.5 billion to $4.5 billion of its own stock in 2017. In February 2017, 3M's Board of Directors declared a first-quarter
2017 dividend of $1.175 per share, an increase of 6 percent. This marked the 59th consecutive year of dividend increases
for 3M. 3M's debt to total capital ratio (total capital defined as debt plus equity) was 53 percent at December 31, 2016,
48 percent at December 31, 2015, and 35 percent at December 31, 2014. The Company has an AA- credit rating, with a stable
outlook, from Standard & Poor's and an A1 credit rating, with a stable outlook, from Moody's Investors Service. The Company
generates significant ongoing cash flow and has proven access to capital markets funding throughout business cycles.
Raw materials:
In 2016, the Company experienced declining costs for most raw material categories and transportation fuel, due largely to
price decreases in crude oil and the derivative chemical feedstock markets. This in turn drove year-on-year cost decreases
in many feedstock categories, including petroleum based materials, minerals, metals and wood pulp based products. To date
the Company is receiving sufficient quantities of all raw materials to meet its reasonably foreseeable production
requirements. It is impossible to predict future shortages of raw materials or the impact any such shortages would have. 3M
has avoided disruption to its manufacturing operations through careful management of existing raw material inventories and
development and qualification of additional supply sources. 3M manages spend category price risks through negotiated supply
contracts, price protection agreements and commodity price swaps.
Pension and postretirement defined benefit/contribution plans:
On a worldwide basis, 3M's pension and postretirement plans were 84 percent funded at year-end 2016. The primary U.S.
qualified pension plan, which is approximately 68 percent of the worldwide pension obligation, was 90 percent funded and
the international pension plans were 85 percent funded. The U.S. non-qualified pension plan is not funded due to tax
considerations and other factors. Asset returns in 2016 for the primary U.S. qualified pension plan were 5.8%, as 3M
strategically invests in both growth assets and fixed income matching assets to manage its funded status. For the primary
U.S. qualified pension plan, the expected long-term rate of return on an annualized basis for 2017 is 7.25%, down 0.25%
from 2016. The primary U.S. qualified pension plan year-end 2016 discount rate was 4.21%, down 0.26 percentage points from
the year-end 2015 discount rate of 4.47%. The decrease in U.S. discount rates resulted in an increased valuation of the
projected benefit obligation (PBO). The plan's funded status decreased slightly in 2016 as the growth in the PBO increased
at a greater rate than the plan assets returned in 2016. Additional detail and discussion of international plan asset
returns and discount rates is provided in Note 11 (Pension and Postretirement Benefit Plans).
3M expects to contribute approximately $300 million to $500 million of cash to its global defined benefit pension and
postretirement plans in 2017. The Company does not have a required minimum cash pension contribution obligation for its
U.S. plans in 2017. 3M expects global defined benefit pension and postretirement expense in 2017 (before settlements,
curtailments, special termination benefits and other) to increase by approximately $74 million pre-tax when compared to
2016. Refer to "Critical Accounting Estimates" within MD&A and Note 11 (Pension and Postretirement Benefit Plans) for
additional information concerning 3M's pension and post-retirement plans.
Beginning on January 1, 2016, with respect to defined contribution plans, the Company reduced its match on employee 401(k)
contributions for U.S. employees. Previously, based on the date the employee was hired, up to 6% of eligible compensation
was matched in cash at rates of 60%, 75% or 100%. Beginning in 2016, 5% of eligible compensation is matched at rates of
45%, 60% or 100%, respectively. The reduction in the company's match reduced 2016 defined contribution pension expense by
approximately $30 million.
Year 2017 announced divestitures:
In December 2016, 3M (Safety and Graphics Business) announced that it agreed to sell its identity management business. The
transaction is expected to close during the first half of 2017. In January 2017, 3M (Safety and Graphics Business) sold the
assets of its safety prescription eyewear business. The Company expects a pre-tax gain of approximately $500 million in
2017 as a result of these two divestitures. Refer to Note 2 for additional discussion.
RESULTS OF OPERATIONS
Net Sales:
2016 2015
U.S. Intl. Worldwide U.S. Intl. Worldwide
Net sales (millions) $ 12,188 $ 17,921 $ 30,109 $ 12,049 $ 18,225 $ 30,274
% of worldwide sales 40.5 % 59.5 % 39.8 % 60.2 %
Components of net sales change:
Volume - organic 0.7 % (1.6) % (0.8) % 1.7 % (0.5) % 0.2 %
Price (0.2) 1.2 0.7 0.4 1.4 1.1
Organic local-currency sales 0.5 (0.4) (0.1) 2.1 0.9 1.3
Acquisitions 1.3 1.1 1.2 1.2 0.5 0.8
Divestitures (0.6) (0.4) (0.4) (0.4) (0.1) (0.2)
Translation - (2.0) (1.2) - (10.7) (6.8)
Total sales change 1.2 % (1.7) % (0.5) % 2.9 % (9.4) % (4.9) %
In 2016, total sales decreased 0.5 percent, with increases of 1.2 percent in the United States, and decreases of 1.1
percent in EMEA, 2.1 percent in Asia Pacific, and 2.7 percent in Latin America/Canada. Organic local-currency sales
declined 0.1 percent, with increases of 3.7 percent in Latin America/Canada, 0.5 percent in the United States, and 0.4
percent in EMEA, while Asia Pacific declined 2.8 percent. Organic local-currency sales growth was 0.2 percent across
developing markets, and declined 0.3 percent in developed markets. Worldwide organic local-currency sales grew 3.6 percent
in Health Care, 2.1 percent in Safety and Graphics, and 1.8 percent in Consumer, while sales declined 0.1 percent in
Industrial and 7.8 percent in Electronics and Energy. Acquisitions added 1.2 percent to worldwide growth, while
divestitures reduced worldwide growth by 0.4 percent. Foreign currency translation reduced worldwide sales growth by 1.2
percent.
In 2015, total sales decreased 4.9 percent, with increases of 2.9 percent in the United States, and decreases of 4.0 in
Asia Pacific, 13.5 percent in EMEA, and 14.9 percent in Latin America/Canada. Organic local-currency sales grew 1.3
percent, with increases of 2.1 percent in the United States, 1.5 percent in Latin America/Canada, 0.9 percent in Asia
Pacific, and 0.8 percent in EMEA. Organic local-currency sales growth was 1.6 percent across developing markets, and 1.2
percent in developed markets. Worldwide organic local-currency sales grew 3.6 percent in Health Care, 3.3 percent in
Consumer, 1.8 percent in Safety and Graphics, and 0.3 percent in Industrial, while sales declined 1.2 percent in
Electronics and Energy. Acquisitions added 0.8 percent to worldwide growth, while divestitures reduced worldwide growth by
0.2 percent. Foreign currency translation reduced worldwide sales growth by 6.8 percent.
Worldwide selling prices rose by 0.7 percent in 2016, and 1.1 percent in 2015. Selling prices continue to be supported by
technology innovation, which is a key fundamental strength of the Company, helping to drive unique customer solutions and
an increasing flow of new products.
Refer to the sections entitled "Performance by Business Segment" and "Performance by Geographic Area" later in MD&A for
additional discussion of sales change.
Operating Expenses:
2016 versus 2015 versus
(Percent of net sales) 2016 2015 2014 2015 2014
Cost of sales 49.9 % 50.9 % 51.7 % (1.0) % (0.8) %
Selling, general and administrative expenses 20.3 20.4 20.3 (0.1) 0.1
Research, development and related expenses 5.8 5.8 5.6 - 0.2
Operating income 24.0 % 22.9 % 22.4 % 1.1 % 0.5 %
Defined benefit pension and postretirement expense decreased $305 million in 2016 compared to 2015, compared to an increase
of $165 million in 2015 compared to 2014. Year 2015 includes the impact of a first-quarter 2015 Japan pension curtailment
gain of $17 million. Defined benefit pension and postretirement expense is recorded in cost of sales; selling, general and
administrative expenses (SG&A); and research, development and related expenses (R&D). Refer to Note 11 (Pension and
Postretirement Plans) for components of net periodic benefit cost and the assumptions used to determine net cost.
The Company is investing in business transformation. Business transformation is defined as changes in processes and
internal/external service delivery across 3M to move to more efficient business models to improve operational efficiency
and productivity, while allowing 3M to serve customers with greater speed and efficiency. This is enabled by the ongoing
multi-year phased implementation of an enterprise resource planning (ERP) system on a worldwide basis.
In the fourth quarter of 2015, as discussed within the Overview section above, 3M incurred restructuring charges impacting
operating expenses as follows:
(Millions) 2015
Cost of sales 40
Selling, general and administrative expenses 62
Research, development and related expenses 12
Total $ 114
Cost of Sales:
Cost of sales includes manufacturing, engineering and freight costs.
Cost of sales, measured as a percent of net sales, was 49.9 percent in 2016, a decrease of 1.0 percentage point from 2015.
Cost of sales as a percent of sales decreased due to the combination of selling price increases and raw material cost
decreases, as selling prices increased net sales by 0.7 percent and raw material cost deflation was favorable by
approximately 3.5 percent year-on-year. In addition, cost of sales as a percent of sales benefited from lower defined
benefit pension and postretirement costs (of which a portion impacts cost of sales). Fourth quarter 2015 restructuring
charges also provided a favorable year-on-year comparison.
Cost of sales, measured as a percent of net sales, was 50.9 percent in 2015, a decrease of 0.8 percentage points from 2014.
Cost of sales as a percent of sales decreased due to the combination of selling price increases and raw material cost
decreases, as selling prices increased net sales by 1.1 percent and raw material cost deflation was favorable by
approximately 3.5 percent year-on-year. In addition, higher defined benefit pension and postretirement costs (of which a
portion impacts cost of sales) and fourth quarter 2015 restructuring charges, increased cost of sales as a percent of
sales.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses (SG&A) decreased $71 million, or 1.2 percent, in 2016 when compared to 2015,
with 2016 results benefiting from year-on-year divestiture gains (as discussed in Note 2), foreign currency translation,
and productivity benefits related to the fourth quarter 2015 restructuring. In addition, SG&A benefited from lower defined
benefit pension and postretirement expense. Fourth quarter 2015 restructuring charges also provided a favorable
year-on-year comparison. SG&A, measured as a percent of sales, decreased 0.1 percentage points to 20.3 percent in 2016,
compared to 20.4 percent in 2015, and 20.3 percent of sales in 2014.
Selling, general and administrative expenses (SG&A) decreased $287 million, or 4.4 percent, in 2015 when compared to 2014.
The translation of foreign currencies into U.S. dollars reduced SG&A expense, as evidenced by our foreign currency
translation impact which reduced worldwide sales by 6.8 percent. This foreign currency translation benefit was partially
offset by higher defined benefit pension and postretirement expense and fourth quarter 2015 restructuring charges. SG&A,
measured as a percent of sales, increased 0.1 percentage points to 20.4 percent in 2015, compared to 20.3 percent of sales
in 2014.
Research, Development and Related Expenses:
Research, development and related expenses (R&D) decreased $28 million, or 1.6 percent, in 2016 compared to 2015, and
decreased $7 million, or 0.4 percent, in 2015 compared to 2014. 3M continued to support its key growth initiatives,
including more R&D aimed at disruptive innovation programs with the potential to create entirely new markets and disrupt
existing markets. In addition, 2016 benefited from lower defined benefit pension and postretirement expense, while 2015,
when compared to 2014, had higher defined benefit pension and postretirement expense. R&D, measured as a percent of sales,
was 5.8 percent in both 2016 and 2015, and 5.6 percent in 2014.
Operating Income:
3M uses operating income as one of its primary business segment performance measurement tools. Refer to the table below for
a reconciliation of operating income margins for 2016 versus 2015, and 2015 versus 2014.
Operating income margin:
Year ended
December 31,
(Percent of net sales) 2016 2015
Same period last year 22.9 % 22.4 %
Increase/(decrease) in operating income margin, due to:
Selling price and raw material impact 1.0 1.6
Pension and postretirement benefit costs 1.0 (0.5)
2015 restructuring charges 0.4 (0.4)
Productivity from restructuring 0.4 -
Strategic investments (0.3) (0.3)
Foreign exchange impacts (0.2) -
Acquisitions and divestitures 0.2 (0.2)
Organic volume and utilization (1.0) -
Legal and other (0.4) 0.3
Current period 24.0 % 22.9 %
Year 2016 versus Year 2015:
Operating income margins were 24.0 percent in 2016 compared to 22.9 percent in 2015, an increase of 1.1 percentage points.
3M benefited from the combination of higher selling prices and lower raw material costs, plus lower year-on-year defined
benefit pension and postretirement expense. The 2015 restructuring charges provided a favorable year-on-year comparison, in
addition to productivity benefits in 2016 related to the 2015 restructuring actions. Acquisitions and divestitures, which
are measured for the first twelve months post-transaction, had a favorable impact on operating margins. This included solid
performances from both the Capital Safety and Membrana acquisitions (third quarter 2015). Divestiture impacts are related
to the Polyfoam business (first quarter 2016), the library systems business (fourth quarter 2015/first quarter 2016), and
the license plate converting business in France (fourth quarter 2015). In addition, in the fourth quarter of 2016, 3M sold
the assets of its protective films business and its cathode battery technology out-licensing business. Items that reduced
operating income margins included 2016 strategic investments, as 3M took actions to better optimize its manufacturing
footprint and accelerated growth investments across its businesses. Foreign currency impacts (net of hedging) also reduced
operating income margins. Organic volume declines and related utilization impacts included the impact of lower asset
utilization, primarily in the Industrial, and Electronics and Energy businesses. The "legal and other" item in the
preceding table related to an unfavorable second quarter 2016 arbitration ruling on an insurance claim, commercial
litigation settlements related to Andover Healthcare and TransWeb, and accruals for respirator mask/asbestos liabilities
(all of which are discussed in Note 14).
Year 2015 versus Year 2014:
Operating income margins were 22.9 percent in 2015 compared to 22.4 percent in 2014, an increase of 0.5 percentage points.
These results included a significant benefit from the combination of higher selling prices and lower raw material costs,
and a benefit from productivity and other items. These benefits were partially offset by higher defined benefit pension and
postretirement benefit costs, 2015 restructuring charges, higher strategic investments, and acquisition and divestiture
impacts. Strategic investments include incremental programs around disruptive R&D and business transformation. Acquisition
and divestiture impacts primarily relate to the Capital Safety and Membrana acquisitions, and the divestitures of
substantially all of the library systems business, along with the license plate converting business in France.
Interest Expense and Income:
(Millions) 2016 2015 2014
Interest expense $ 199 $ 149 $ 142
Interest income (29) (26) (33)
Total $ 170 $ 123 $ 109
Interest Expense: Interest expense increased in 2016 due to higher average debt balances and higher U.S. borrowing costs.
Interest expense increased slightly in 2015 compared to 2014, despite significantly higher debt levels, helped by lower
average interest rates.
Capitalized interest related to property, plant and equipment construction in progress is recorded as a reduction to
interest expense. The amounts shown in the table above for interest expense are net of capitalized interest amounts of $10
million, $13 million, and $15 million, in 2016, 2015 and 2014, respectively.
Interest Income: Interest income was higher in 2016 when compared to 2015 due to higher average interest rates. Interest
income in 2015 was lower when compared to 2014 due to lower average cash/marketable securities balances.
Provision for Income Taxes:
(Percent of pre-tax income) 2016 2015 2014
Effective tax rate 28.3 % 29.1 % 28.9 %
The effective tax rate for 2016 was 28.3 percent, compared to 29.1 percent in 2015, a decrease of 0.8 percentage points.
The effective tax rate for 2015 was 29.1 percent, compared to 28.9 percent in 2014, an increase of 0.2 percentage points.
The changes in the tax rates between years are impacted by many factors, as described further in Note 8, including the 2016
adoption of ASU No. 2016-09 (discussed in Note 1).
The Company currently expects that its effective tax rate for 2017 will be approximately 28 to 29 percent. The rate can
vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, changes in tax laws and
employee share-based payment accounting; as well as recurring factors, such as the geographic mix of income before taxes.
Refer to Note 8 for further discussion of income taxes.
Net Income Attributable to Noncontrolling Interest:
(Millions) 2016 2015 2014
Net income attributable to noncontrolling interest $ 8 $ 8 $ 42
Net income attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M
ownership interests in 3M consolidated entities. The changes in noncontrolling interest amounts have largely related to
Sumitomo 3M Limited (Japan), which was 3M's most significant consolidated entity with non-3M ownership interests. As
discussed in Note 6, on September 1, 2014, 3M purchased the remaining 25 percent ownership in Sumitomo 3M Limited, bringing
3M's ownership to 100 percent. Thus, effective September 1, 2014, net income attributable to noncontrolling interest was
significantly reduced. The primary remaining noncontrolling interest relates to 3M India Limited, of which 3M's effective
ownership is 75 percent.
Currency Effects:
3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by $127 million and
$390 million in 2016 and 2015, respectively. These estimates include the effect of translating profits from local
currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the
United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign
currency exchange rate risks. 3M estimates that year-on-year derivative and other transaction gains and losses decreased
pre-tax income by approximately $69 million in 2016 and increased pre-tax income by approximately $180 million in 2015.
Refer to Note 12 in the Consolidated Financial Statements for additional information concerning 3M's hedging activities.
PERFORMANCE BY BUSINESS SEGMENT
Disclosures relating to 3M's business segments are provided in Item 1, Business Segments. Financial information and other
disclosures are provided in the Notes to the Consolidated Financial Statements. As described in Note 16, effective in the
first quarter of 2017, as part of 3M's continuing effort to improve the alignment of its businesses around markets and
customers the Company made the following changes:
Integration of former Renewable Energy Division
· 3M's former Renewable Energy Division (RED) has been integrated into existing divisions within the Electronics and
Energy business segment and Safety and Graphics business segment. 3M is committed to leadership in sustainability and to
enabling the advancement of energy solutions into the future. Integrating RED's offerings into larger divisions already
serving these segments will provide increased scale and build on strength by leveraging 3M's existing brands, go-to-market
capabilities, and relationships to support growth objectives.
Creation of Automotive and Aerospace Solutions Division
· 3M created the Automotive and Aerospace Solutions Division, which combines the former Automotive Division and
Aerospace and Commercial Transportation Division. Combining the strengths along with the deep industry knowledge of each
business will enable this new division to utilize shared technology platforms and processes to deliver a broader set of
innovative solutions, along with world-class quality and service to 3M's customers. This combination will help accelerate
the Company's profitable growth and market relevance across the automotive, aerospace and commercial transportation
industries.
Consolidation of U.S. customer account activity - impacting dual credit reporting
· The Company consolidated its customer account activity in the U.S. into more centralized sales districts. This
improved alignment reduces the complexity for customers when interacting with multiple businesses within 3M, creating a
better customer experience. 3M business segment reporting measures include dual credit to business segments for certain
U.S. sales and related operating income. This dual credit is based on which business segment provides customer account
activity with respect to a particular product sold in the U.S. The alignment of U.S. customer accounts to fewer, more
focused sales districts changed the attribution of dual credit across 3M's business segments.
Business segment information presented herein reflects the impact of these changes for all periods presented. 3M manages
its operations in five business segments. The reportable segments are Industrial; Safety and Graphics; Electronics and
Energy; Health Care; and Consumer.
Corporate and Unallocated:
In addition to these five business segments, 3M assigns certain costs to "Corporate and Unallocated," which is presented
separately in the preceding business segments table and in Note 16. Corporate and Unallocated includes a variety of
miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain
insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and
certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the Company determines not to allocate
directly to its business segments. Because this category includes a variety of miscellaneous items, it is subject to
fluctuation on a quarterly and annual basis.
Corporate and Unallocated operating expenses decreased by $77 million in 2016 when compared to 2015. 3M's defined benefit
pension and postretirement expense allocation to Corporate and Unallocated decreased by $223 million in 2016 when compared
to 2015. In addition, the portion of the 2015 restructuring actions charged to corporate ($37 million) provided a favorable
year-on-year comparison. These decreases were partially offset by an increase in legal expenses related to an unfavorable
second quarter 2016 arbitration ruling on an insurance claim, commercial litigation settlements related to Andover
Healthcare and TransWeb, and accruals for respirator mask/asbestos liabilities (all of which are discussed in Note 14).
Corporate and Unallocated operating expenses increased by $107 million in 2015 when compared to 2014. This increase was
driven by higher defined benefit pension and postretirement benefit expenses, which increased in total by $165 million. Of
this increase, $153 million was allocated to Corporate and Unallocated. Increases were also driven by fourth quarter 2015
restructuring charges of $37 million, as indicated in the below table. Items which partially offset these increases within
Corporate and Unallocated included higher administrative and R&D cost absorption by the five business segments, resulting
in less under-absorbed expense being allocated to Corporate.
Operating Business Segments:
Each of 3M's business segments incurred restructuring charges in the fourth quarter of 2015, as indicated in the following
table.
Restructuring Pre-Tax Charge by Business Segment:
(Millions) Fourth Quarter 2015
Industrial 42
Safety and Graphics 11
Health Care 9
Electronics and Energy 12
Consumer 3
Corporate and Unallocated 37
Total $ 114
Information related to 3M's business segments is presented in the tables that follow. Organic local-currency sales include
both organic volume impacts plus selling price impacts. Acquisition and divestiture impacts, if any, are measured
separately for the first twelve months post-transaction. Foreign currency translation impacts and total sales change are
also provided for each business segment. Any references to EMEA relate to Europe, Middle East and Africa on a combined
basis. Any references to "Membrana" refer to the former Separations Media business acquired by 3M from Polypore in 2015.
The following discusses total year results for 2016 compared to 2015, and also discusses 2015 compared to 2014, for each
business segment.
Industrial Business (34.5% of consolidated sales):
2016 2015 2014
Sales (millions) $ 10,399 $ 10,388 $ 11,090
Sales change analysis:
Organic local-currency (0.1) % 0.3 %
Acquisitions 1.6 0.6
Divestitures (0.3) -
Translation (1.1) (7.2)
Total sales change 0.1 % (6.3) %
Operating income (millions) $ 2,395 $ 2,277 $ 2,404
Percent change 5.2 % (5.3) %
Percent of sales 23.0 % 21.9 % 21.7 %
The Industrial segment serves a broad range of markets, such as automotive original equipment manufacturer (OEM) and
automotive aftermarket (auto body shops and retail), electronics, appliance, paper and printing, packaging, food and
beverage, and construction. Industrial products include tapes, a wide variety of coated, non-woven and bonded abrasives,
adhesives, advanced ceramics, sealants, specialty materials, separation and purification products, closure systems for
personal hygiene products, acoustic systems products, and components and products that are used in the manufacture, repair
and maintenance of automotive, marine, aircraft and specialty vehicles. 3M is also a leading global supplier of precision
grinding technology serving customers in the area of hard-to-grind precision applications in industrial, automotive,
aircraft and cutting tools. 3M develops and produces advanced technical ceramics for demanding applications in the
automotive, oil and gas, solar, industrial, electronics and defense industries.
Year 2016 results:
Sales in Industrial totaled $10.4 billion, up 0.1 percent in U.S. dollars. Organic local-currency sales decreased 0.1
percent, acquisitions added 1.6 percent, divestitures reduced sales by 0.3 percent, and foreign currency translation
reduced sales by 1.1 percent. The decrease in organic local-currency sales reflected the continued economic challenges in
the global industrial sector. Industrial did rebound in the fourth quarter of 2016, when it reflected 4.5 percent organic
local-currency sales growth.
On an organic local-currency sales basis:
· Sales grew in automotive and aerospace solutions, automotive aftermarket, and separation and purification.
· Sales declined in abrasives and industrial adhesives and tapes.
· Sales also declined in advanced materials, primarily due to persistent weakness in the oil and gas end markets.
· Geographically, sales increased 5 percent in Latin America/Canada and 2 percent in EMEA, while Asia Pacific declined
1 percent and the United States declined 2 percent.
Acquisitions and divestitures (also discussed in Note 2):
· Acquisition sales growth primarily related to the August 2015 acquisition of Membrana, a leading provider of
microporous membranes and modules for filtration in the life sciences, industrial, and specialty segments.
· 3M completed its sale of the assets of 3M's pressurized polyurethane foam adhesives business (formerly known as
Polyfoam) in January 2016.
· In October 2016, 3M sold the assets of its temporary protective films business. This business is a provider of
adhesive-backed temporary protective films used in a broad range of industries.
Operating income:
· Operating income margins increased by 1.1 percentage points to 23.0 percent, helped by the gain on sale of Polyfoam
and its temporary protective films business, productivity benefits from fourth quarter 2015 restructuring actions, and
lower raw material costs.
· The Membrana acquisition had a minimal impact on operating income margins.
Year 2015 results:
Sales in Industrial totaled $10.4 billion, down 6.3 percent in U.S. dollars. Organic local-currency sales increased 0.3
percent, acquisitions added 0.6 percent, and foreign currency translation reduced sales by 7.2 percent.
On an organic local-currency sales basis:
· Sales growth was led by separation and purification along with automotive and aerospace solutions, while automotive
aftermarket and industrial adhesives and tapes were flat.
· Sales in advanced materials declined, primarily due to weakness in the oil and gas market. Sales in abrasive systems
also declined.
· Geographically, sales increased 4 percent in Latin America/Canada, 1 percent in Asia Pacific, and was flat in EMEA.
Sales decreased 1 percent in the United States.
Acquisitions:
· Acquisition sales growth related to the August 2015 acquisition of Membrana.
· This business is a provider of microporous membranes and modules for filtration in the life sciences, industrial,
and specialty segments. This acquisition enhances 3M's core filtration platform and will help generate new growth
opportunities across the company.
Operating income:
· Operating income margins increased by 0.2 percentage points to 21.9 percent, helped by the combination of lower raw
material costs and selective selling price increases.
· Operating income margins were negatively impacted by 0.4 percentage points due to the $42 million restructuring
charge, plus an additional 0.3 percentage points penalty due to the Membrana acquisition.
Safety and Graphics Business (19.5% of consolidated sales):
2016 2015 2014
Sales (millions) $ 5,881 $ 5,736 $ 5,994
Sales change analysis:
Organic local-currency 2.1 % 1.8 %
Acquisitions 3.9 2.5
Divestitures (1.8) (0.4)
Translation (1.7) (8.2)
Total sales change 2.5 % (4.3) %
Operating income (millions) $ 1,423 $ 1,332 $ 1,342
Percent change 6.8 % (0.7) %
Percent of sales 24.2 % 23.2 % 22.4 %
The Safety and Graphics segment serves a broad range of markets that increase the safety, security and productivity of
people, facilities and systems. Major product offerings include personal protection products, such as respiratory, hearing,
eye and fall protection equipment; traffic safety and security products, including border and civil security solutions;
commercial solutions, including commercial graphics sheeting and systems, architectural design solutions for surfaces,
window films, and cleaning and protection products for commercial establishments; and roofing granules for asphalt
shingles.
Year 2016 results:
Sales in Safety and Graphics totaled $5.9 billion, an increase of 2.5 percent in U.S. dollars. Organic local-currency sales
increased 2.1 percent, and foreign currency translation reduced sales by 1.7 percent. Acquisitions added 3.9 percent, while
divestitures reduced sales by 1.8 percent.
On an organic local-currency sales basis:
· Sales growth was led by roofing granules, which had a consistently strong year.
· Commercial solutions and personal safety also showed positive growth.
· Sales declined in traffic safety and security.
· Sales increased 4 percent in Latin America/Canada, 3 percent in the United States and 1 percent in Asia Pacific,
while sales in EMEA were flat.
Acquisitions and divestitures (also discussed in Note 2):
· Acquisition sales growth reflects the acquisition of Capital Safety in August 2015. Capital Safety is a leading
global provider of fall protection equipment.
· In the fourth quarter of 2015, 3M divested its license plate converting business in France and substantially all of
its library systems business. In the first quarter of 2016, 3M divested the remainder of the library systems business.
Operating income:
· Operating income totaled $1.4 billion, up 6.8 percent.
· Operating income margins were 24.2 percent of sales, compared to 23.2 percent in 2015, benefiting from higher
selling prices and lower raw material costs, plus productivity benefits related to fourth quarter 2015 restructuring
actions.
· Operating income margins were negatively impacted by margin dilution related to the Capital Safety acquisition, and
divestiture impacts on margins.
Year 2015 results:
Sales in Safety and Graphics totaled $5.7 billion, down 4.3 percent in U.S. dollars. Organic local-currency sales increased
1.8 percent, and foreign currency translation reduced sales by 8.2 percent. Acquisitions added 2.5 percent, while
divestitures reduced sales by 0.4 percent.
On an organic local-currency sales basis:
· Sales growth was led by roofing granules, commercial solutions, and personal safety, while sales were flat in
traffic safety and security.
· Sales increased 4 percent in Asia Pacific and 2 percent in both the United States and EMEA. Sales declined 1 percent
in Latin America/Canada.
Acquisitions and divestitures:
· Acquisition sales growth reflects the acquisition of Capital Safety in August 2015. Capital Safety is a leading
global provider of fall protection equipment.
· In the fourth quarter of 2015, 3M divested its license plate converting business in France and substantially all of
its library systems business.
Operating income:
· Operating income in 2015 totaled $1.3 billion, down 0.7 percent.
· Operating income margins were 23.2 percent of sales, compared to 22.4 percent in 2014.
· Operating income margin improvements were driven by higher selling prices and lower raw material costs, along with
productivity.
· Operating income margins penalty from acquisitions was partially offset by a benefit from divestitures, which
resulted in a net margin penalty of 0.2 percentage points.
Health Care Business (18.5% of consolidated sales):
2016 2015 2014
Sales (millions) $ 5,566 $ 5,449 $ 5,602
Sales change analysis:
Organic local-currency 3.6 % 3.6 %
Acquisitions 0.2 0.8
Translation (1.7) (7.1)
Total sales change 2.1 % (2.7) %
Operating income (millions) $ 1,763 $ 1,730 $ 1,731
Percent change 1.9 % - %
Percent of sales 31.7 % 31.7 % 30.9 %
The Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, dental and orthodontic
practitioners, health information systems, and food manufacturing and testing. Products and services provided to these and
other markets include medical and surgical supplies, skin health and infection prevention products, inhalation and
transdermal drug delivery systems, oral care solutions (dental and orthodontic products), health information systems, and
food safety products.
Year 2016 results:
Health Care sales totaled $5.6 billion, an increase of 2.1 percent in U.S. dollars. Organic local-currency sales increased
3.6 percent, acquisitions added 0.2 percent, and foreign currency translation reduced sales by 1.7 percent.
On an organic local-currency sales basis:
· Sales growth was broad-based across the entire Health Care portfolio, led by food safety, critical and chronic care,
and drug delivery systems.
· On a geographic basis, sales increased 8 percent in Asia Pacific, 7 percent in Latin America/Canada, 3 percent in
the United States, and 1 percent in EMEA.
· In developing markets, Health Care organic local-currency sales grew 7 percent.
· 3M continues to increase investments across the businesses to drive efficient growth into the future.
Acquisitions:
· Acquisition sales growth related to the March 2015 purchase of Ivera Medical Corp, a manufacturer of health care
products that disinfect and protect devices used for access into a patient's bloodstream.
Operating income:
· Operating income increased 1.9 percent to $1.8 billion.
· Operating income margins were 31.7 percent for both 2016 and 2015.
· Acquisitions had a minimal impact on operating income margins.
Year 2015 results:
Health Care sales totaled $5.4 billion, a decrease of 2.7 percent in U.S. dollars. Organic local-currency sales increased
3.6 percent, acquisitions added 0.8 percent, and foreign currency translation reduced sales by 7.1 percent.
On an organic local-currency sales basis:
· Sales growth was broad-based across much of the Health Care portfolio, including food safety, health information
systems, critical and chronic care, oral care solutions, and infection prevention.
· Sales declined in drug delivery systems.
· On a geographic basis, sales increased 8 percent in Asia Pacific, 6 percent in Latin America/Canada, 4 percent in
the United States, and 1 percent in EMEA.
· In developing markets, Health Care organic local-currency sales grew 8 percent.
Acquisitions:
· Acquisition sales growth related to the March 2015 purchase of Ivera Medical Corp. Ivera is a manufacturer of health
care products that disinfect and protect devices used for access into a patient's bloodstream.
· In addition, Treo Solutions LLC, acquired in April 2014, provided a year-on-year sales growth benefit. Treo is a
provider of data analytics and business intelligence to healthcare payers and providers.
Operating income:
· Operating income was flat in dollars at $1.7 billion.
· Operating income margins were 31.7 percent in 2015, compared to 30.9 percent in 2014, helped by portfolio management
actions that contributed to higher productivity and margins.
· Acquisition impacts reduced operating income margins by 0.2 percentage points.
Electronics and Energy Business (15.4% of consolidated sales):
2016 2015 2014
Sales (millions) $ 4,643 $ 5,069 $ 5,389
Sales change analysis:
Organic local-currency (7.8) % (1.2) %
Divestitures - (0.8)
Translation (0.6) (3.9)
Total sales change (8.4) % (5.9) %
Operating income (millions) $ 1,041 $ 1,083 $ 1,077
Percent change (3.9) % 0.5 %
Percent of sales 22.4 % 21.4 % 20.0 %
The Electronics and Energy segment serves customers in electronics and energy markets, including solutions that improve the
dependability, cost-effectiveness, and performance of electronic devices; electrical products, including infrastructure
protection; telecommunications networks; and power generation and distribution. This segment's electronics solutions
include optical film solutions for the electronic display industry; high-performance fluids and abrasives; high-temperature
and display tapes; flexible circuits, which use electronic packaging and interconnection technology; and touch systems
products. This segment's energy solutions include pressure sensitive tapes and resins; electrical insulation;
infrastructure products that provide both protection and detection solutions; a wide array of fiber-optic and copper-based
telecommunications systems; and renewable energy component solutions for the solar and wind power industries.
The display materials and systems business provides films that serve numerous market segments of the electronic display
industry. 3M provides distinct products for five market segments, including products for: 1) LCD computer monitors 2) LCD
televisions 3) handheld devices such as cellular phones and tablets 4) notebook PCs and 5) automotive displays. The display
materials and systems business includes a number of different products that are protected by various patents and groups of
patents. These patents provide varying levels of exclusivity to 3M for a number of such products. As some of 3M's
multi-layer optical film patents expired at the end of 2013 and will expire over several years thereafter, 3M is seeing
more competition in these products. 3M continues to innovate in the area of optical films and files patents on its new
technology and products. 3M's proprietary manufacturing technology and know-how also provide a competitive advantage to 3M
independent of its patents.
Year 2016 results:
Electronics and Energy sales totaled $4.6 billion, down 8.4 percent in U.S. dollars. Organic local-currency sales declined
7.8 percent, and foreign currency translation reduced sales by 0.6 percent.
Total sales within the electronics-related and energy-related businesses decreased 10 percent and 4 percent, respectively.
On an organic local-currency sales basis:
· Sales decreased 10 percent in 3M's electronics-related businesses, with declines in both electronics materials
solutions and display materials and systems. 3M continues to be impacted by weak end market demand across most consumer
electronic applications.
· Sales decreased approximately 3 percent in 3M's energy-related businesses, with an increase in telecommunications
more than offset by a decline in electrical markets. 3M exited its backsheet business in December 2015, which contributed
to the reduction in energy-related sales.
· On a geographic basis, sales declined 1 percent in EMEA, and declined 2 percent in both the United States and Latin
America/Canada. Sales declined 11 percent in Asia Pacific, where 3M's electronics business is concentrated.
Divestitures:
· In December 2016, as discussed in Note 2, 3M sold the assets of its cathode battery technology out-licensing
business.
Operating income:
· Operating income decreased 3.9 percent to $1.0 billion.
· Operating income margins were 22.4 percent compared to 21.4 percent in 2015, as divestiture gains and productivity
benefits from past portfolio and restructuring actions benefited results.
· Expenses related to portfolio management actions in 2016, in addition to lower organic volume, reduced operating
income margins.
Year 2015 results:
Electronics and Energy sales totaled $5.1 billion, down 5.9 percent in U.S. dollars. Organic local-currency sales declined
1.2 percent, divestitures reduced sales by 0.8 percent, and foreign currency translation reduced sales by 3.9 percent.
Total sales within the electronics-related and energy-related businesses decreased 4 percent and 9 percent, respectively.
On an organic local-currency sales basis:
· Sales decreased 1 percent in 3M's electronics-related businesses, with growth in electronics materials solutions
more than offset by a decline in display materials and systems, as 3M experienced softer conditions in the electronics
markets.
· Sales decreased approximately 2 percent in 3M's energy-related businesses, as both electrical markets and
telecommunication declined.
· On a geographic basis, sales increased 1 percent in Europe, were flat in the United States, and declined 2 percent
in Asia Pacific and 3 percent in Latin America/Canada.
Divestitures:
· 3M completed the sale of its static control business in January 2015.
Operating income:
· Operating income increased 0.5 percent to $1.1 billion in 2015.
· Operating income margins were 21.4 percent compared to 20.0 percent in 2014, helped by prior year portfolio
management actions that are contributing to higher productivity.
· Portfolio management actions in 2015 related to renewable energy, plus fourth quarter 2015 restructuring charges,
which combined reduced operating income margins by 0.8 percentage points.
Consumer Business (14.9% of consolidated sales):
2016 2015 2014
Sales (millions) $ 4,484 $ 4,429 $ 4,533
Sales change analysis:
Organic local-currency 1.8 % 3.3 %
Divestitures - -
Translation (0.6) (5.6)
Total sales change 1.2 % (2.3) %
Operating income (millions) $ 1,065 $ 1,048 $ 997
Percent change 1.6 % 5.1 %
Percent of sales 23.7 % 23.7 % 22.0 %
The Consumer segment serves markets that include consumer retail, office retail, office business to business, home
improvement, drug and pharmacy retail, and other markets. Products in this segment include office supply products,
stationery products, home improvement products (do-it-yourself), home care products, protective material products, certain
consumer retail personal safety products, and consumer health care products.
Year 2016 results:
Consumer sales totaled $4.5 billion, up 1.2 percent in U.S. dollars. Organic local-currency sales increased 1.8 percent,
and foreign currency translation reduced sales by 0.6 percent.
On an organic local-currency sales basis:
· Sales growth was led by home improvement, in addition to consumer health care.
· On a geographic basis, sales increased 6 percent in Asia Pacific, and 2 percent in the United States, were flat in
Latin America/Canada, and declined 6 percent in EMEA.
Operating income:
· Operating income was $1.1 billion, up 1.6 percent from 2015.
· Operating income margins were 23.7 percent in both 2016 and 2015, benefiting from ongoing productivity efforts.
Year 2015 results:
Consumer sales totaled $4.4 billion, down 2.3 percent in U.S. dollars. Organic local-currency sales increased 3.3 percent,
and foreign currency translation reduced sales by 5.6 percent.
On an organic local-currency sales basis:
· Sales growth was led by home improvement, stationery and office supplies, and home care. 3M also posted positive
growth in its consumer health care business.
· On a geographic basis, organic local-currency sales increased 5 percent in the United States and 3 percent in Asia
Pacific, while sales in both EMEA and Latin America/Canada were flat.
· In developing markets, sales growth was 3 percent.
Operating income:
· Consumer operating income was $1.0 billion, up 5.1 percent from 2014.
· Operating income margins were 23.7 percent, up from 22.0 percent in 2014.
· The combination of strong organic growth and productivity continued to drive efficiencies across this business.
PERFORMANCE BY GEOGRAPHIC AREA
While 3M manages its businesses globally and believes its business segment results are the most relevant measure of
performance, the Company also utilizes geographic area data as a secondary performance measure. Export sales are generally
reported within the geographic area where the final sales to 3M customers are made. A portion of the products or components
sold by 3M's operations to its customers are exported by these customers to different geographic areas. As customers move
their operations from one geographic area to another, 3M's results will follow. Thus, net sales in a particular geographic
area are not indicative of end-user consumption in that geographic area. Financial information related to 3M operations in
various geographic areas is provided in Note 17.
A summary of key information and discussion related to 3M's geographic areas follow:
2016
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 12,188 $ 8,847 $ 6,163 $ 2,901 $ 10 $ 30,109
% of worldwide sales 40.5 % 29.4 % 20.5 % 9.6 % - 100.0 %
Components of net sales change:
Volume - organic
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