REG - 3M Company - Half-year Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 5
03/08/2017 07:06
- Part 5: For the preceding part double click ID:nRSC9629Md
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. The DOL has not provided
a timeline for the completion of its investigation.
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 June 30, 2017, the Company is a named defendant in lawsuits involving approximately 2,600 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. 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 June 30, 2017, there are two
lawsuits pending that were brought by dentists and dental practices against 3M. The complaints allege 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. One lawsuit, pending in
the U.S. District Court for the District of Minnesota, is a class action that names 39 plaintiffs and seeks certification
of a class of dentists in the United States and its territories, and alternatively seeks subclasses in 13 states. The other
lawsuit is an individual complaint against 3M in Madison County, Illinois.
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 13. Stock-Based Compensation
The 3M 2016 Long-Term Incentive Plan (LTIP), as discussed in 3M's Current Report on Form 8-K dated May 4, 2017 (which
updated 3M's 2016 Annual Report on Form 10-K), 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. The remaining total shares available for grant under the
LTIP Program are 30,069,336 as of June 30, 2017.
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 grant 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 by the Company.
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 for the three
and six months ended June 30, 2017 and 2016.
Stock-Based Compensation Expense
Three months ended Six months ended
June 30, June 30,
(Millions) 2017 2016 2017 2016
Cost of sales $ 9 $ 8 $ 32 $ 31
Selling, general and administrative expenses 43 34 141 130
Research, development and related expenses 7 7 33 32
Stock-based compensation expenses $ 59 $ 49 $ 206 $ 193
Income tax benefits $ (74) $ (72) $ (222) $ (199)
Stock-based compensation expenses (benefits), net of tax $ (15) $ (23) $ (16) $ (6)
Stock Option Program
The following table summarizes stock option activity during the six months ended June 30, 2017:
Weighted
Average
Weighted Remaining Aggregate
Number of Average Contractual Intrinsic Value
Options Exercise Price Life (months) (millions)
Under option -
January 1 36,196,232 $ 112.07
Granted:
Annual 5,409,628 175.93
Exercised (4,667,165) 89.38
Canceled (122,880) 161.12
June 30 36,815,815 $ 124.16 75 $ 3,093
Options exercisable
June 30 26,069,052 $ 107.43 61 $ 2,627
Stock options vest over a period from one year to three years with the expiration date at 10 years from date of grant. As
of June 30, 2017, there was $104 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 23
months. The total intrinsic values of stock options exercised were $465 million and $469 million during the six months
ended June 30, 2017 and 2016, respectively. Cash received from options exercised was $416 million and $534 million for the
six months ended June 30, 2017 and 2016, respectively. The Company's actual tax benefits realized for the tax deductions
related to the exercise of employee stock options were $158 million and $173 million for the six months ended June 30, 2017
and 2016, respectively.
For the primary 2017 annual stock option grant, 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
Exercise price $ 175.76
Risk-free interest rate 2.1 %
Dividend yield 2.5 %
Expected volatility 17.3 %
Expected life (months) 78
Black-Scholes fair value $ 23.51
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 life 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 during the six months ended June 30,
2017:
Weighted
Average
Number of Grant Date
Awards Fair Value
Nonvested balance -
As of January 1 2,185,046 $ 145.64
Granted
Annual 604,256 176.10
Other 1,547 184.98
Vested (758,403) 126.75
Forfeited (31,511) 157.36
As of June 30 2,000,935 $ 161.84
As of June 30, 2017, there was $112 million of compensation expense that has yet to be recognized related to non-vested
restricted stock units and restricted stock. This expense is expected to be recognized over the remaining weighted-average
vesting period of 24 months. The total fair value of restricted stock units and restricted stock that vested during the six
months ended June 30, 2017 and 2016 was $134 million and $136 million, respectively. The Company's actual tax benefits
realized for the tax deductions related to the vesting of restricted stock units and restricted stock was $44 million and
$51 million for the six months ended June 30, 2017 and 2016, 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. 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 earning 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. The 2017
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 during the six months ended June 30, 2017:
Weighted
Average
Number of Grant Date
Awards Fair Value
Undistributed balance -
As of January 1 656,278 $ 142.98
Granted 187,480 189.81
Distributed (312,173) 124.63
Performance change 65,216 173.25
Forfeited (9,275) 168.09
As of June 30 587,526 $ 170.63
As of June 30, 2017, there was $42 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 values of performance shares that were distributed were $55 million and $54 million for the six months ended
June 30, 2017 and 2016, respectively. The Company's actual tax benefits realized for the tax deductions related to the
distribution of performance shares were $15 million for both the six months ended June 30, 2017 and 2016.
NOTE 14. 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 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 Information
Three months ended Six months ended
June 30, June 30,
(Millions) 2017 2016 2017 2016
Net Sales
Industrial $ 2,720 $ 2,654 $ 5,429 $ 5,253
Safety and Graphics 1,547 1,561 3,074 3,038
Health Care 1,440 1,414 2,863 2,805
Electronics and Energy 1,214 1,129 2,424 2,218
Consumer 1,137 1,130 2,179 2,180
Corporate and Unallocated 2 3 4 3
Elimination of Dual Credit (250) (229) (478) (426)
Total Company $ 7,810 $ 7,662 $ 15,495 $ 15,071
Operating Income
Industrial $ 523 $ 620 $ 1,148 $ 1,242
Safety and Graphics 852 421 1,251 780
Health Care 412 462 846 919
Electronics and Energy 301 217 526 412
Consumer 195 281 417 519
Corporate and Unallocated (44) (84) (125) (124)
Elimination of Dual Credit (55) (51) (105) (94)
Total Company $ 2,184 $ 1,866 $ 3,958 $ 3,654
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM*
To the Stockholders and Board of Directors of 3M Company:
We have reviewed the accompanying consolidated balance sheet of 3M Company and its subsidiaries as of June 30, 2017, and
the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June
30, 2017 and 2016 and the consolidated statements of cash flows for the six-month periods ended June 30, 2017 and 2016.
These interim financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).
A review of interim financial information consists principally of applying analytical procedures and making inquiries of
persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is
the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated
interim financial statements for them to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of income, comprehensive
income, changes in equity, and cash flows for the year then ended (not presented herein), and in our report dated February
9, 2017, except with respect to our opinion on the consolidated financial statements insofar as it relates to the business
segment reporting changes discussed in Notes 3 and 16 as to which the date is May 4, 2017, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet information as of December 31, 2016, is fairly stated in all material respects in relation to
the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 1, 2017
* Pursuant to Rule 436(c) of the Securities Act of 1933 ("Act") this should not be considered a "report" within the
meaning of Sections 7 and 11 of the Act and the independent registered public accounting firm liability under Section 11
does not extend to it.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a
reader of 3M's financial statements with a narrative from the perspective of management. 3M's MD&A is presented in the
following sections:
· Overview
· Results of Operations
· Performance by Business Segment
· Financial Condition and Liquidity
· Cautionary Note Concerning Factors That May Affect Future Results
Forward-looking statements in Part I, Item 2 may involve risks and uncertainties that could cause results to differ
materially from those projected (refer to the section entitled "Cautionary Note Concerning Factors That May Affect Future
Results" in Part I, Item 2 and the risk factors provided in Part II, Item 1A for discussion of these risks and
uncertainties).
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services.
As described in 3M's Quarterly Report on Form 10-Q for the period ended March 31, 2017, and also in 3M's Current Report on
Form 8-K dated May 4, 2017 (which updated 3M's 2016 Annual Report on Form 10-K), effective in the first quarter of 2017,
the Company changed its business segment reporting in its continued effort to improve the alignment of businesses around
markets and customers. These changes included the integration of the former Renewable Energy Division into existing
divisions, the combination of two divisions to form the Automotive and Aerospace Solutions Division, and consolidation of
U.S. customer account activity, impacting dual credit reporting. Business segment information presented herein reflects the
impact of these changes for all periods presented. Refer to Note 14 for additional detail. This quarterly report on Form
10-Q should be read in conjunction with the Company's consolidated statements and notes included in its Current Report on
Form 8-K dated May 4, 2017.
3M manages its operations in five operating business segments: Industrial; Safety and Graphics; Health Care; Electronics
and Energy; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on
a combined basis. Any references to "Membrana" refer to the former Separations Media business acquired by 3M from Polypore
in 2015.
Earnings per share attributable to 3M common shareholders - diluted:
The following table provides the increase (decrease) in diluted earnings per share for the three months and six months
ended June 30, 2017 compared to 2016.
Three months ended Six months ended
(Earnings per diluted share) June 30, 2017 June 30, 2017
Same period last year $ 2.08 $ 4.13
Increase/(decrease) in earnings per share - diluted, due to:
Organic growth/other productivity 0.08 0.29
Foreign exchange impacts (0.05) (0.09)
Income tax rate 0.12 0.20
Shares of common stock outstanding/net interest 0.02 0.06
Divestiture gains, net of lost operating income 0.57 0.55
Incremental strategic investments (0.24) (0.40)
Current period $ 2.58 $ 4.74
Earnings per diluted share increased 50 cents, or 24.0 percent and 61 cents, or 14.8 percent in the second quarter and
first six months of 2017, respectively, when compared to the same periods last year. The second quarter of 2017 includes a
net year-on-year benefit of $273 million, comprised of divestiture gains (net of lost operating income) of $451 million
partially offset by $178 million of incremental strategic investments in accelerated growth programs, productivity and
portfolio actions.
Operating income results include year-on-year incremental strategic investments that decreased pre-tax earnings by
approximately $178 million and $314 million in the second quarter of 2017 and first six months of 2017, respectively. The
second quarter impact was comprised of 3M's investments in growth initiatives and optimization of its portfolio and supply
chain footprint of $178 million. In addition to the second quarter strategic investments discussion above, the first
quarter of 2017 included strategic investments of $136 million. Additional discussion on strategic investments is provided
later within "Divestitures and Strategic Investments" and also within the "Results of Operations" section.
Divestiture lost operating income impacts, which are measured for the first twelve months post-transaction, related to the
divestitures of Polyfoam and the remaining portion of the library system business (both in first quarter 2016), the
divestitures of the protective films business and cathode battery technology out-license business (both in fourth quarter
2016), and the divestitures of the identity management and tolling and automated license/number plate recognition
businesses (both in the second quarter of 2017). In addition, 3M sold its prescription safety eyewear business (January
2017), sold and transferred control of its identify management business (May 2017), and sold its tolling and automated
license/number plate recognition business (June 2017). On a combined basis, higher year-on-year divestiture gains, net of
lost operating income in the second quarter of 2017 (largely related to the identity management business) increased
earnings per share.
Organic growth, productivity and other include benefits from higher organic local-currency sales, lower raw material costs,
and business transformation, which is having a positive impact on 3M's productivity efforts. These benefits were partially
offset by higher defined benefit pension expenses.
Foreign currency impacts (net of hedging) decreased pre-tax earnings by approximately $44 million and $79 million
year-on-year in the second quarter and first six months of 2017, respectively, excluding the impact of foreign currency
changes on tax rates. This is equivalent to a year-on-year decrease of 5 cents and 9 cents per diluted share for the second
quarter and first six months of 2017, respectively.
The effective income tax rate was 26.0 percent in the second quarter of 2017, a decrease of 3.6 percentage points versus
last year's second quarter, and 25.0 percent in the first six months of 2017, a decline of 3.2 percentage points versus
last year's first six months. The second quarter and first six months 2017 change in tax rate was driven by a number of
factors as referenced in Note 6.
Lower shares outstanding, partially offset by higher interest expense, increased earnings per share. Weighted-average
diluted shares outstanding in the second quarter and first six months of 2017 declined 1.3 percent and 1.4 percent
year-on-year, respectively, which benefited earnings per share. The decrease in the outstanding weighted-average diluted
shares relates to the Company's purchase of $494 million and $1.2 billion of its own stock in the second quarter and first
six months of 2017, respectively. Higher net interest expense was largely due to higher U.S. average debt balances and
higher interest rates.
Sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the three months and six months
ended June 30, 2017 and 2016. In addition to the discussion below, refer to the section entitled "Performance by Business
Segment" later in MD&A for a more detailed discussion of the sales and operating income results of the Company and its
respective business segments (including Corporate and Unallocated). Refer to Note 14 for additional information on business
segments, including Elimination of Dual Credit. Further discussion of the Company's operating income results is in the
section entitled "Operating Income" within the "Results of Operations" section.
Three months ended June 30,
2017 2016 % change
Net Oper. Net Oper. Net Oper.
(Dollars in millions) Sales Income Sales Income Sales Income
Business Segments
Industrial $ 2,720 $ 523 $ 2,654 $ 620 2.5 % (15.6) %
Safety and Graphics 1,547 852 1,561 421 (0.9) % 102.0 %
Health Care 1,440 412 1,414 462 1.8 % (10.6) %
Electronics and Energy 1,214 301 1,129 217 7.5 % 38.8 %
Consumer 1,137 195 1,130 281 0.5 % (30.4) %
Corporate and Unallocated 2 (44) 3 (84) - -
Elimination of Dual Credit (250) (55) (229) (51) - -
Total Company $ 7,810 $ 2,184 $ 7,662 $ 1,866 1.9 % 17.1 %
Three months ended June 30, 2017
Organic
Worldwide local- Total
Sales Change Analysis currency sales
By Business Segment sales Divestitures Translation change
Industrial 3.8 % (0.6) % (0.7) % 2.5 %
Safety and Graphics 3.2 % (3.4) % (0.7) % (0.9) %
Health Care 2.5 % - % (0.7) % 1.8 %
Electronics and Energy 8.4 % (0.4) % (0.5) % 7.5 %
Consumer 0.7 % - % (0.2) % 0.5 %
Total Company 3.5 % (1.0) % (0.6) % 1.9 %
Sales in U.S. dollars in the second quarter of 2017 increased 1.9 percent compared to the same period in 2016, with an
increase in organic local-currency sales (which includes organic volume impacts plus selling price impacts) partially
offset by divestiture and foreign currency translation impacts. Total company organic local-currency sales increased 3.5
percent, with growth in all business segments. Worldwide operating income margins for the second quarter of 2017 were 28.0
percent, compared to 24.4 percent for the second quarter of 2016, helped by a net benefit from divestiture gains, net of
lost operating income, partially offset by incremental strategic investments.
Divestitures reduced second quarter sales growth by 1.0 percent. As part of its ongoing portfolio management process, 3M
sold its protective films business and cathode battery technology out-license business (both in fourth quarter 2016). In
addition, 3M sold its prescription safety eyewear business (January 2017), its identify management business (May 2017), and
its tolling and automated license/number plate recognition business (June 2017). Refer to Note 2 in the Consolidated
Financial Statements for additional detail.
Six months ended June 30,
2017 2016 % change
Net Oper. Net Oper. Net Oper.
(Dollars in millions) Sales Income Sales Income Sales Income
Business Segments
Industrial $ 5,429 $ 1,148 $ 5,253 $ 1,242 3.4 % (7.6) %
Safety and Graphics 3,074 1,251 3,038 780 1.2 % 60.3 %
Health Care 2,863 846 2,805 919 2.1 % (7.9) %
Electronics and Energy 2,424 526 2,218 412 9.3 % 27.6 %
Consumer 2,179 417 2,180 519 (0.1) % (19.6) %
Corporate and Unallocated 4 (125) 3 (124) - -
Elimination of Dual Credit (478) (105) (426) (94) - -
Total Company $ 15,495 $ 3,958 $ 15,071 $ 3,654 2.8 % 8.3 %
Six months ended June 30, 2017
Organic
Worldwide local- Total
Sales Change Analysis currency sales
By Business Segment sales Divestitures Translation change
Industrial 4.8 % (0.7) % (0.7) % 3.4 %
Safety and Graphics 4.0 % (2.1) % (0.7) % 1.2 %
Health Care 2.8 % - % (0.7) % 2.1 %
Electronics and Energy 10.0 % (0.3) % (0.4) % 9.3 %
Consumer (0.3) % - % 0.2 % (0.1) %
Total Company 4.0 % (0.7) % (0.5) % 2.8 %
Sales in U.S. dollars in the first six months of 2017 increased 2.8 percent, with an increase in organic local-currency
sales partially offset by divestiture and foreign currency translation impacts. Total company organic local-currency sales
increased 4.0 percent, with growth in all business segments except Consumer. All five of 3M's business segments achieved
operating income margins in excess of 19 percent. Worldwide operating income margins for the first six months of 2017 were
25.5 percent, compared to 24.2 percent for the first six months of 2016, helped by a net benefit from divestiture gains,
net of lost operating income, partially offset by incremental strategic investments.
In the first quarter of 2016, 3M completed the sale of the remaining portions of its library systems business. Also, in the
first quarter of 2016, 3M divested the assets of 3M's pressurized polyurethane foam adhesives business (formerly known as
Polyfoam). These businesses were formerly part of the Company's Safety and Graphics business and Industrial business,
respectively. Additional acquisition and divestiture impacts that impacted six months ended June 30, 2017 results are
provided in the preceding second quarter discussion.
Sales by geographic area:
Percent change information compares the second quarter and first six months of 2017 with the same periods last year, unless
otherwise indicated. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a
combined basis. Additional discussion of geographic area impacts by business segment is provided in the Performance by
Business Segment section.
Three months ended June 30, 2017
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 3,127 $ 2,322 $ 1,605 $ 757 $ (1) $ 7,810
% of worldwide sales 40.0 % 29.7 % 20.6 % 9.7 % - 100.0 %
Components of net sales change:
Volume - organic 2.3 % 10.7 % (2.0) % 3.5 % - 3.8 %
Price (0.4) (0.7) 0.4 0.2 - (0.3)
Organic local-currency sales 1.9 10.0 (1.6) 3.7 - 3.5
Divestitures (1.4) (0.4) (0.8) (1.3) - (1.0)
Translation - (1.3) (1.2) 0.1 - (0.6)
Total sales change 0.5 % 8.3 % (3.6) % 2.5 % - 1.9 %
Total sales change:
Industrial 3.2 % 4.7 % (0.6) % 1.8 % - 2.5 %
Safety and Graphics (2.2) % 4.8 % (3.7) % (1.4) % - (0.9) %
Health Care 3.4 % 6.3 % (5.9) % 7.6 % - 1.8 %
Electronics and Energy (1.7) % 14.9 % (8.9) % 1.3 % - 7.5 %
Consumer (0.7) % 6.0 % (5.8) % 6.7 % - 0.5 %
Organic local-currency sales change:
Industrial 4.3 % 6.8 % 0.8 % 1.8 % - 3.8 %
Safety and Graphics 1.9 % 8.5 % 0.6 % 3.2 % - 3.2 %
Health Care 3.4 % 7.6 % (4.1) % 7.8 % - 2.5 %
Electronics and Energy 0.1 % 15.7 % (8.8) % 1.4 % - 8.4 %
Consumer (0.7) % 6.6 % (5.0) % 6.5 % - 0.7 %
Additional information beyond what is included in the preceding table is as follows:
· In Asia Pacific, where 3M's Electronics and Energy business is concentrated, sales benefited from strengthened
demand across most market segments in consumer electronics. Total sales in China/Hong Kong grew 13 percent and Japan grew 4
percent. On an organic local-currency sales basis, China/Hong Kong grew 17 percent and Japan grew 8 percent.
· In EMEA, Central/East Europe and Middle East/Africa total sales decreased 3 percent, as organic local-currency sales
and divestiture impacts reduced sales growth by 2 percent each, partially offset by foreign currency translation impacts.
West Europe total sales declined 4 percent, as both organic local-currency sales and foreign currency translation reduced
sales growth by 2 percent each.
· In Latin America/Canada, total sales increased 6 percent in Mexico, driven by organic local-currency sales growth of
8 percent. In Canada, total sales declined 1 percent, with organic local-currency sales growth of 3 percent offset by
foreign currency translation and divestiture impacts. In Brazil total sales growth of 12 percent was driven by organic
local-currency sales growth of 6 percent and foreign currency translation.
Selling prices decreased 0.3 percent. Strong volume growth in electronics had a negative impact on price, plus 3M had less
price growth in Latin America, as currencies were more stable versus the U.S. dollar.
Foreign currency translation reduced year-on-year sales by 0.6 percent, with translation-related sales decreases in both
Asia Pacific and EMEA. In Asia Pacific, the U.S. dollar was weaker compared to the second quarter of 2016 by 4 percent
versus both the Japanese Yen and the Chinese Yuan. In EMEA, the U.S. dollar was weaker compared to the second quarter of
2016 by 9 percent versus the British Pound, while the Euro was flat.
Six months ended June 30, 2017
Europe, Latin
United Asia Middle East America/ Other
States Pacific & Africa Canada Unallocated Worldwide
Net sales (millions) $ 6,068 $ 4,755 $ 3,182 $ 1,493 $ (3) $ 15,495
% of worldwide sales 39.2 % 30.7 % 20.5 % 9.6 % - 100.0 %
Components of net sales change:
Volume - organic 1.9 % 10.4 % 0.6 % 2.1 % - 4.1 %
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