REG - 3M Company - Half-year Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 6
03/08/2017 07:06
- Part 6: For the preceding part double click ID:nRSC9629Me
Price (0.3) (0.4) 0.4 1.0 - (0.1)
Organic local-currency sales 1.6 10.0 1.0 3.1 - 4.0
Divestitures (1.1) (0.2) (0.4) (0.9) - (0.7)
Translation - (0.7) (2.5) 2.1 - (0.5)
Total sales change 0.5 % 9.1 % (1.9) % 4.3 % - 2.8 %
Total sales change:
Industrial 3.8 % 6.0 % - % 2.8 % - 3.4 %
Safety and Graphics (0.3) % 5.0 % (0.4) % 1.5 % - 1.2 %
Health Care 2.8 % 6.6 % (4.9) % 10.2 % - 2.1 %
Electronics and Energy 0.1 % 16.1 % (4.1) % 1.8 % - 9.3 %
Consumer (2.6) % 7.4 % (4.9) % 7.6 % - (0.1) %
Organic local-currency sales change:
Industrial 5.0 % 7.3 % 2.9 % 1.1 % - 4.8 %
Safety and Graphics 2.7 % 7.1 % 3.7 % 2.7 % - 4.0 %
Health Care 2.8 % 7.3 % (1.7) % 7.7 % - 2.8 %
Electronics and Energy 1.4 % 16.6 % (3.0) % 0.6 % - 10.0 %
Consumer (2.6) % 6.7 % (2.8) % 4.5 % - (0.3) %
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 11 percent and Japan grew 9
percent. On an organic local-currency sales basis, China/Hong Kong grew 15 percent and Japan grew 11 percent.
· In EMEA, Central/East Europe and Middle East/Africa total sales and organic local-currency were flat. West Europe
total sales declined 2 percent, as organic local-currency sales growth of 1 percent was more than offset by foreign
currency translation.
· In Latin America/Canada, total sales increased 2 percent in Mexico, as organic local-currency sales growth of 8
percent was partially offset by foreign currency translation and divestitures. In Canada, total sales grew 1 percent,
helped by organic local-currency sales growth of 3 percent. In Brazil total sales growth of 16 percent was driven by
foreign currency translation, while organic local-currency sales increased 2 percent.
Foreign currency translation reduced year-on-year sales by 0.5 percent, with the translation-related sales increase in
Latin America/Canada more than offset by the decreases in EMEA and Asia Pacific.
Managing currency risks:
As discussed above, the stronger U.S. dollar had a negative impact on sales and earnings in both the second quarter and
first six months of 2017 compared to the same period last year. 3M utilizes a number of tools to hedge currency risk
related to earnings. 3M uses natural hedges such as pricing, productivity, hard currency and hard currency-indexed
billings, and localizing source of supply. 3M also uses financial hedges to mitigate currency risk. In the case of more
liquid currencies, 3M hedges a portion of its aggregate exposure, using a 12, 24 or 36 month horizon, depending on the
currency in question. For less liquid currencies, financial hedging is frequently more expensive with more limitations on
tenor. Thus this risk is largely managed via local operational actions using natural hedging tools as discussed above. In
either case, 3M's hedging approach is designed to mitigate a portion of foreign currency risk and reduce volatility,
ultimately allowing time for 3M's businesses to respond to changes in the marketplace.
Financial condition:
3M generated $2.630 billion of operating cash flows in the first six months of 2017, an increase of $85 million when
compared to the first six months of 2016. 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,
with no pre-established end date. In the first six months of 2017, the Company purchased $1.2 billion of its own stock,
compared to $2.1 billion of stock purchases in the first six months of 2016. As of June 30, 2017, approximately $6.0
billion remained available under the February 2016 authorization. The Company expects to purchase $2.0 billion to $3.5
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. In May
2017, 3M's Board of Directors declared a second quarter 2017 dividend of $1.175 per share.
3M currently has an AA- credit rating with a stable outlook from Standard & Poor's and has 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.
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.
Year 2017 announced acquisitions (not closed as of June 30, 2017):
In March 2017, 3M announced that it entered into an agreement to acquire Scott Safety from Johnson Controls for $2.0
billion, subject to closing and other adjustments. This transaction is expected to close in the second half of 2017 and
will be reflected within the Company's Safety and Graphics business. Refer to Note 2 for additional details.
Year 2017 announced divestitures (not closed as of June 30, 2017):
In June 2017, 3M announced that it has entered into an agreement to sell its electronic monitoring business to an affiliate
of Apax Partners, for $200 million, net of cash sold and subject to closing and other adjustments. This transaction is
expected to close in the second half of 2017 and will be reported within the Company's Safety and Graphics business. Refer
to Note 2 for additional details.
Divestitures and Strategic Investments:
In both the second quarter and first six months of 2017, the Company continued to execute on accelerating investments in
growth initiatives and footprint optimization. In addition, the Company divested certain businesses as it continued to
focus its portfolio on opportunities that create greater value for its shareholders. As shown below, these divestitures and
strategic investments led to a net year-on-year benefit of approximately $0.33 per diluted share and $0.15 per diluted
share, respectively, for the three and six months ended June 30, 2017.
Three months ended June 30, 2017 Six months ended June 30, 2017
Divestiture impacts and strategic investments net benefit/(cost) (in millions, except per share amounts) Pre-tax impact Impact per diluted share after-tax Pre-tax impact Impact per diluted share after-tax
Divestiture impacts:
2017 divestiture gains $ 461 $ 490
Less: prior year divestiture gains - (40)
Year-on-year lost operating income from divested businesses (10) (12)
Year-on-year divestiture impacts, net of lost operating income $ 451 $ 0.57 $ 438 $ 0.55
Strategic investments:
2017 portfolio and footprint optimization activities:
Restructuring actions and exit activities $ (99) $ (123)
Asset charges and accelerated depreciation (36) (116)
Other costs (15) (15)
Less: prior year portfolio and footprint optimization activities 11 15
Year-on-year portfolio and footprint optimization (139) $ (0.20) (239) $ (0.30)
Incremental year-on-year growth initiatives (39) (75)
Total incremental strategic investments $ (178) $ (0.24) $ (314) $ (0.40)
Year-on-year divestiture impacts and strategic investments net benefit/(cost) $ 273 $ 0.33 $ 124 $ 0.15
The total pre-tax year-on-year divestiture impacts, net of strategic investments from the table above, are further detailed
below by business group:
Three months ended Six months ended
(Millions) June 30, 2017 June 30, 2017
Industrial $ (60) $ (102)
Safety and Graphics 439 455
Health Care (27) (45)
Electronics and Energy (5) (73)
Consumer (56) (75)
Corporate and Unallocated (18) (36)
Total pretax divestiture gains, net of strategic investments $ 273 $ 124
During the second half of 2017, the Company will recognize additional portfolio and footprint optimization charges related
to accelerated depreciation from earlier 2017 actions. In addition, the Company also anticipates additional incremental
strategic investments, largely footprint related, during the same period. These actions combined are expected to have a
$0.20 to $0.25 per diluted share impact during the second half of 2017.
RESULTS OF OPERATIONS
Net Sales:
Refer to the preceding sections entitled "Sales and operating income by business segment" and "Sales and operating income
by geographic area" for discussion of sales change.
Operating Expenses:
Three months ended Six months ended
June 30, June 30,
(Percent of net sales) 2017 2016 Change 2017 2016 Change
Cost of sales 51.2 % 49.5 % 1.7 % 50.9 % 49.6 % 1.3 %
Selling, general and administrative expenses 20.6 20.4 0.2 20.7 20.6 0.1
Research, development and related expenses 6.1 5.7 0.4 6.1 5.9 0.2
Gain on sale of businesses (5.9) - (5.9) (3.2) (0.3) (2.9)
Operating income 28.0 % 24.4 % 3.6 % 25.5 % 24.2 % 1.3 %
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, which impacts cost
of sales; selling, general and administrative expenses (SG&A); and research, development and related expenses (R&D). Refer
to 3M's Current Report on Form 8-K dated May 4, 2017 (MD&A section entitled Critical Accounting Estimates - Pension and
Postretirement Obligations and Note 11, Pension and Postretirement Benefit Plans) for background concerning the change to
the spot yield curve approach and other factors that will impact pension and postretirement expenses in 2017. The
year-on-year increase in defined benefit pension and postretirement expense for the second quarter and first six months of
2017 was $22 million and $44 million, respectively.
The Company is investing in an initiative called business transformation, with these investments impacting cost of sales,
SG&A, and R&D. Business transformation encompasses the ongoing multi-year phased implementation of an enterprise resource
planning (ERP) system on a worldwide basis, as well as changes in processes and internal/external service delivery across
3M.
In both the first and second quarters of 2017, strategic investments in growth initiatives, portfolio actions and footprint
optimization, in addition to gains on divestitures, impacted 3M's operating expenses. The table below reflects actual
amounts within the period and does not include any year-on-year impacts.
Three months ended Six months ended
(Millions) June 30, 2017 June 30, 2017
Cost of sales $ 119 $ 202
Selling, general and administrative expenses 70 128
Research, development and related charges 8 9
Gain on sale of businesses (461) (490)
Total $ (264) $ (151)
Cost of Sales:
Cost of sales includes manufacturing, engineering and freight costs.
Cost of sales, measured as a percent of sales, increased in the second quarter due to charges related to 3M's optimization
of its portfolio and supply chain footprint, foreign currency effects (net of hedge gains), higher defined benefit pension
expense, and decreases in selling prices of 0.3 percent. This was partially offset by raw material cost deflation, which
was favorable by approximately 1 percent year-on-year.
Cost of sales, measured as a percent of sales, increased in the first six months of 2017 due to incremental strategic
investments in productivity and portfolio actions, foreign currency effects (net of hedge gains), and higher defined
benefit pension expense, in addition to the optimization charges in the second quarter of 2017 as described earlier. This
was partially offset by raw material cost deflation, which was favorable by approximately 1.5 percent year-on-year. Selling
prices decreased net sales year-on-year by 0.1 percent in the first six months of 2017.
Selling, General and Administrative Expenses:
SG&A in dollars increased 3.0 percent and 3.7 percent in the second quarter and first six months of 2017, respectively,
when compared to the same period last year, impacted by incremental strategic investments, optimization charges, and higher
defined benefit pension expense.
Research, Development and Related Expenses:
R&D in dollars increased $36 million and $57 million in the second quarter and first six months of 2017, respectively,
compared to the same period last year. 3M continued to invest in its key initiatives, including R&D aimed at disruptive
innovation programs with the potential to create entirely new markets and disrupt existing markets.
Gain on Sale of Businesses:
In January 2017, 3M completed the sale of assets related to its safety prescription eyewear business to HOYA Vision Care.
3M received proceeds of $53 million for this transaction and recognized, net of assets sold, transaction and other costs, a
pre-tax gain of $29 million, which was reported within the Company's Safety and Graphics business.
In May 2017, 3M completed the sale of its identity management business to Gemalto N.V. In June 2017, 3M completed the sale
of its tolling and automated license/number plate recognition business to Neology, Inc. 3M received proceeds of $833
million, or $809 million net of cash sold, and reflected a pre-tax gain of $461 million as a result of these two
divestitures in the second quarter of 2017, which was reported within the Company's Safety and Graphics business. For more
details, refer to Note 2.
In the first quarter of 2016, 3M completed the sale of the remainder of the assets of 3M's library systems business to One
Equity Partners Capital Advisors L.P. (OEP). Also in the first quarter of 2016, 3M completed the sale of its pressurized
polyurethane foam adhesives business (formerly known as Polyfoam) to Innovative Chemical Products Group, a portfolio
company of Audax Private Equity. 3M received proceeds of $56 million for these transactions and recognized a pre-tax gain
of $40 million as a result of these two divestitures in the first quarter of 2016. These businesses were formerly part of
the Company's Safety and Graphics business and Industrial business, respectively. Refer to Note 2 in 3M's Current Report on
Form 8-K dated May 4, 2017 (which updated 3M's 2016 Annual Report on Form 10-K) for more information on 3M's acquisitions
and divestitures.
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 the three months and six months ended June 30, 2017 versus the same
periods last year.
Three months ended Six months ended
(Percent of net sales) June 30, 2017 June 30, 2017
Same period last year 24.4 % 24.2 %
Increase/(decrease) in operating income margin, due to:
Organic volume/other productivity 0.6 0.9
Selling price and raw material impact 0.1 0.3
Foreign exchange impacts (0.5) (0.4)
Pension and postretirement benefit costs (0.3) (0.3)
Incremental strategic investments (2.3) (2.0)
Divestiture gains, net of lost operating income 6.0 2.8
Current period 28.0 % 25.5 %
Operating income margins increased 3.6 percentage points in the second quarter of 2017 and increased 1.3 percentage points
in the first six months of 2017 when compared to the same periods last year. Items that reduced operating income margins
included year-on-year incremental strategic investments in growth, productivity and portfolio actions and charges related
to 3M's optimization of its portfolio and supply chain footprint. Additional items that reduced operating margins included
foreign currency effects (net of hedge gains), and higher year-on-year defined benefit pension expense. 3M benefited from
year-on-year divestiture gains, net of lost operating income (refer to Note 2), higher organic local-currency sales growth
and productivity. 3M also benefited from lower raw material costs.
Interest Expense and Income:
Three months ended Six months ended
June 30, June 30,
(Millions) 2017 2016 2017 2016
Interest expense $ 54 $ 38 $ 99 $ 85
Interest income (12) (7) (20) (12)
Total $ 42 $ 31 $ 79 $ 73
Interest expense was higher in the second quarter and first six months of 2017 compared to the same periods last year,
largely due to higher U.S. average debt balances and higher interest rates.
Provision for Income Taxes:
Three months ended Six months ended
June 30, June 30,
(Percent of pre-tax income) 2017 2016 2017 2016
Effective tax rate 26.0 % 29.6 % 25.0 % 28.2 %
The effective tax rate for the second quarter of 2017 was 26.0 percent, compared to 29.6 percent in the second quarter of
2016, a decrease of 3.6 percentage points. The effective tax rate for the first six months of 2017 was 25.0 percent,
compared to 28.2 percent in the first six months of 2016, a decrease of 3.2 percentage points. The changes in the rates
between years are impacted by many factors, as described further in Note 6.
The Company currently anticipates its 2017 full-year tax rate will be 26.0 to 27.0 percent. The rate can vary from quarter
to quarter due to discrete items, such as the settlement of income tax audits and changes in tax laws and employee
share-based payment accounting; as well as recurring factors, such as geographic mix of income before taxes and foreign
currency effects.
Net Income Attributable to Noncontrolling Interest:
Three months ended Six months ended
June 30, June 30,
(Millions) 2017 2016 2017 2016
Net income attributable to noncontrolling interest $ 2 $ 2 $ 5 $ 5
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 primary 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 $44 million and $79
million for the three and six months ended June 30, 2017, respectively. This estimate includes 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 and any impacts from swapping Venezuelan bolivars into U.S. dollars. 3M
estimates that year-on-year derivative and other transaction gains and losses decreased pre-tax income by $28 million and
$65 million for the three and six months ended June 30, 2017, respectively.
Significant Accounting Policies and Critical Accounting Estimates:
Information regarding new accounting standards is included in Note 1 to the Consolidated Financial Statements. In addition,
refer to the Critical Accounting Estimates section within the MD&A of 3M's Current Report on Form 8-K dated May 4, 2017
(which updated 3M's 2016 Annual Report on Form 10-K).
PERFORMANCE BY BUSINESS SEGMENT
Disclosures relating to 3M's business segments are provided in Note 14. 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 combined the former Automotive Division and
Aerospace and Commercial Transportation Division, which were both within the Industrial business segment. 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 14. 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 $40 million and increased by $1 million in the second quarter and
first six months of 2017, respectively, when compared to the same period last year. The second quarter of 2016 included an
unfavorable 2016 arbitration ruling, which benefited year-on-year comparisons. In both the first and second quarters of
2017, a portion of the severance actions were reflected in Corporate and Unallocated. In addition, 3M's defined benefit
pension and postretirement expense allocation to Corporate and Unallocated increased by $9 million and $19 million,
respectively, in the second quarter and first six months of 2017 when compared to the same periods last year.
Operating Business Segments:
Information related to 3M's business segments for the second quarter and first six months of 2017 and 2016 is presented in
the tables that follow. Organic local-currency sales include both organic volume impacts plus selling price impacts.
Acquisition impacts, if any, are measured separately for the first twelve months post-transaction. The divestiture impacts,
if any, 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.
Refer to the preceding "Sales and operating income by geographic area" section for organic local-currency sales growth by
business segment within major geographic areas.
Industrial Business:
Three months ended Six months ended
June 30, June 30,
2017 2016 2017 2016
Sales (millions) $ 2,720 $ 2,654 $ 5,429 $ 5,253
Sales change analysis:
Organic local-currency 3.8 % (1.3) % 4.8 % (1.6) %
Acquisitions - 2.8 - 2.4
Divestitures (0.6) (0.2) (0.7) (0.2)
Translation (0.7) (1.3) (0.7) (2.1)
Total sales change 2.5 % - % 3.4 % (1.5) %
Operating income (millions) $ 523 $ 620 $ 1,148 $ 1,242
Percent change (15.6) % 1.2 % (7.6) % 2.4 %
Percent of sales 19.2 % 23.4 % 21.2 % 23.7 %
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, 3M purification (filtration 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.
Second Quarter 2017 results:
Sales in Industrial totaled $2.7 billion, up 2.5 percent in U.S. dollars. Organic local-currency sales increased 3.8
percent, divestitures reduced sales by 0.6 percent, and foreign currency translation reduced sales by 0.7 percent.
On an organic local-currency sales basis:
· Sales growth was led by advanced materials, automotive and aerospace solutions, and industrial adhesives and tapes,
while separations and purification sciences declined.
· Abrasives and automotive aftermarket also showed positive growth.
Acquisitions and divestitures:
· In October 2016, 3M sold the assets of its temporary protective films business.
· In January 2016, 3M completed its sale of the assets of 3M's pressurized polyurethane foam adhesives business
(formerly known as Polyfoam).
· Acquisition sales growth in 2016 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.
Operating income:
· Operating income margins decreased 4.2 percentage points, as incremental strategic investments decreased margins by
2.3 percentage points. In addition, foreign currency impacts, sales mix, and select pricing actions to drive volume growth
all decreased margins.
First Six Months 2017 results:
Sales in Industrial totaled $5.4 billion, up 3.4 percent in U.S. dollars. Organic local-currency sales increased 4.8
percent, divestitures reduced sales by 0.7 percent, and foreign currency translation reduced sales by 0.7 percent.
On an organic local-currency sales basis:
· Sales growth was led by advanced materials, automotive and aerospace solutions, industrial adhesives and tapes,
abrasives, and automotive aftermarket, while separations and purification sciences was flat.
Acquisitions and divestitures:
· In October 2016, 3M sold the assets of its temporary protective films business.
· In January 2016, 3M completed its sale of the assets of 3M's pressurized polyurethane foam adhesives business
(formerly known as Polyfoam).
· Acquisition sales growth in 2016 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.
Operating income:
· Operating income margins decreased 2.5 percentage points, as divestiture gains related to the first quarter 2016
sale of the Polyfoam business resulted in a net year-on-year operating income margin reduction of 0.6 percentage points. In
addition, incremental strategic investments decreased first six months margins by 1.3 percentage points.
Safety and Graphics Business:
Three months ended Six months ended
June 30, June 30,
2017 2016 2017 2016
Sales (millions) $ 1,547 $ 1,561 $ 3,074 $ 3,038
Sales change analysis:
Organic local-currency 3.2 % 2.4 % 4.0 % 2.5 %
Acquisitions - 6.6 - 6.6
Divestitures (3.4) (2.2) (2.1) (2.2)
Translation (0.7) (2.2) (0.7) (3.1)
Total sales change (0.9) % 4.6 % 1.2 % 3.8 %
Operating income (millions) $ 852 $ 421 $ 1,251 $ 780
Percent change 102.0 % 13.2 % 60.3 % 8.3 %
Percent of sales 55.1 % 27.0 % 40.7 % 25.7 %
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 solutions, such as retroreflective sign sheeting; commercial solutions,
including commercial graphics sheeting and systems, architectural design solutions for surfaces, and cleaning and
protection products for commercial establishments; and roofing granules for asphalt shingles.
Second Quarter 2017 results:
Sales in Safety and Graphics totaled $1.5 billion, down 0.9 percent in U.S. dollars. Organic local-currency sales increased
3.2 percent, divestitures reduced sales by 3.4 percent, and foreign currency translation reduced sales by 0.7 percent.
On an organic local-currency sales basis:
· Sales growth was led by personal safety, as 3M experienced strong demand around the world, with particular strength
in Asia Pacific and the U.S.
· Sales in commercial solutions were flat.
· The transportation safety business declined, as 3M continues to take actions to improve the portfolio. In the second
quarter of 2017, 3M finalized the sale of its identity management and tolling and automated license/number plate
recognition businesses, and announced the exit of its electronic monitoring business.
· Sales in roofing granules declined, primarily due to tough year-on-year comparisons.
Acquisitions and divestitures:
· Acquisition sales growth in 2016 reflected the acquisition of Capital Safety in August 2015. Capital Safety is a
leading global provider of fall protection equipment.
· In January 2017, 3M sold its safety prescription eyewear business.
· In May 2017, 3M closed on the sale and transfer of control of its identity management business. In June 2017, 3M
completed the sale of its tolling and automated license/number plate recognition business. 3M recorded a pre-tax gain of
approximately $461 million as a result of these two divestitures.
Operating income:
· Operating income margins increased 28.1 percentage points, as divestiture gains year-on-year were partially offset
by acquisition charges and incremental strategic investments, which combined resulted in a net operating income margin
benefit of 28.0 percentage points.
Six Months 2017 results:
Sales in Safety and Graphics totaled $3.1 billion, up 1.2 percent in U.S. dollars. Organic local-currency sales increased
4.0 percent, divestitures reduced sales by 2.1 percent, and foreign currency translation reduced sales by 0.7 percent.
On an organic local-currency sales basis:
· Sales growth was led by personal safety and roofing granules, as both transportation safety and commercial solutions
were flat.
Acquisitions and divestitures:
· In January 2017, 3M sold its safety prescription eyewear business.
· Acquisition sales growth in 2016 reflected the acquisition of Capital Safety in August 2015. Capital Safety is a
leading global provider of fall protection equipment.
· In the first quarter of 2016, 3M divested the remainder of the library systems business.
Operating income:
· Operating income margins increased 15.0 percentage points, largely driven by year-on-year divestiture gains that
were partially offset by acquisition charges and incremental strategic investments, which resulted in a net operating
income margin benefit of 14.9 percentage points.
In March 2017, 3M announced that it entered into an agreement to acquire Scott Safety from Johnson Controls for $2.0
billion, subject to closing and other adjustments. This transaction is expected to close in the second half of 2017 and
will be reflected within the Company's Safety and Graphics business. Refer to Note 2 for additional details.
Health Care Business:
Three months ended Six months ended
June 30, June 30,
2017 2016 2017 2016
Sales (millions) $ 1,440 $ 1,414 $ 2,863 $ 2,805
Sales change analysis:
Organic local-currency 2.5 % 5.0 % 2.8 % 5.6 %
Acquisitions - - - 0.4
Translation (0.7) (1.8) (0.7) (2.4)
Total sales change 1.8 % 3.2 % 2.1 % 3.6 %
Operating income (millions) $ 412 $ 462 $ 846 $ 919
Percent change (10.6) % 4.5 % (7.9) % 7.9 %
Percent of sales 28.6 % 32.6 % 29.5 % 32.8 %
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.
Second Quarter 2017 results:
Sales in Health Care totaled $1.4 billion, up 1.8 percent in U.S. dollars. Organic local-currency sales increased 2.5
percent and foreign currency translation reduced sales by 0.7 percent.
On an organic local-currency sales basis:
· Sales increased in drug delivery systems, food safety, and medical consumables (which is comprised of the critical
and chronic care and infection prevention businesses).
· Sales were flat in both health information systems and oral care.
· In developing markets, Health Care organic local-currency sales growth was led by China/Hong Kong and Latin
America.
Operating income:
· Operating income margins decreased 4.0 percentage points year-on-year, as incremental strategic investments,
primarily related to accelerating future growth opportunities, reduced margins by 2.0 percentage points.
First Six Months 2017 results:
Sales in Health Care totaled $2.9 billion, up 2.1 percent in U.S. dollars. Organic local-currency sales increased 2.8
percent and foreign currency translation reduced sales by 0.7 percent.
On an organic local-currency sales basis:
· Sales increased in drug delivery systems, food safety, oral care, and medical consumables (which is comprised of the
critical and chronic care and infection prevention businesses).
· Sales declined in health information systems.
Acquisitions:
· Acquisition sales growth in 2016 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.
Operating income:
· Operating income margins decreased year-on-year, as incremental strategic investments, primarily related to
accelerating future growth opportunities, reduced margins by 1.6 percentage points.
Electronics and Energy Business:
Three months ended Six months ended
June 30, June 30,
2017 2016 2017 2016
Sales (millions) $ 1,214 $ 1,129 $ 2,424 $ 2,218
Sales change analysis:
Organic local-currency 8.4 % (9.7) % 10.0 % (11.1) %
Divestitures (0.4) - (0.3) -
Translation (0.5) (0.8) (0.4) (1.3)
Total sales change 7.5 % (10.5) % 9.3 % (12.4) %
Operating income (millions) $ 301 $ 217 $ 526 $ 412
Percent change 38.8 % (20.0) % 27.6 % (23.9) %
Percent of sales 24.8 % 19.2 % 21.7 % 18.6 %
The Electronics and Energy segment includes 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.
Second Quarter 2017 results:
Sales in Electronics and Energy totaled $1.2 billion, up 7.5 percent in U.S. dollars. Organic local-currency sales
increased 8.4 percent, divestitures reduced sales by 0.4 percent, and foreign currency translation reduced sales by 0.5
percent.
Total sales within the electronics-related businesses were up 14 percent, while energy-related businesses sales declined 4
percent. Total sales increased 15 percent in Asia Pacific.
On an organic local-currency sales basis:
· Sales increased 15 percent in 3M's electronics-related businesses, with increases in both display materials and
systems and electronics materials solutions, as the businesses drove increased inclusion in OEM platforms in addition to
strengthened demand in consumer electronics.
· Sales declined 3 percent in 3M's energy-related businesses, as sales were flat in electrical markets and declined in
telecommunications.
· Sales increased 16 percent in Asia Pacific, where 3M's electronics business is concentrated.
Divestitures:
· In December 2016, 3M sold the assets of its cathode battery technology out-licensing business, with annual sales of
approximately $10 million.
Operating income:
· Operating income margins increased 5.6 percentage points, driven by underlying productivity gains related to
significant organic local-currency sales growth.
First Six Months 2017 results:
Sales in Electronics and Energy totaled $2.4 billion, up 9.3 percent in U.S. dollars. Organic local-currency sales
increased 10.0 percent, divestitures reduced sales by 0.3 percent, and foreign currency translation reduced sales by 0.4
percent.
Total sales within the electronics-related businesses were up 16 percent while energy-related businesses declined 2
percent. Total sales increased 16 percent in Asia Pacific.
On an organic local-currency sales basis:
· Sales increased 17 percent in 3M's electronics-related businesses, with increases in both display materials and
systems and electronics materials solutions, as the businesses drove increased inclusion in OEM platforms in addition to
strengthened demand in consumer electronics.
· Sales declined 1 percent in 3M's energy-related businesses, as sales growth in electrical markets was more than
offset by declines in telecommunications.
· Sales increased 17 percent in Asia Pacific, where 3M's electronics business is concentrated.
Divestitures:
· In December 2016, 3M sold the assets of its cathode battery technology out-licensing business, with annual sales of
approximately $10 million.
Operating income:
· Operating income margins increased 3.1 percentage points, as benefits from higher organic volume were partially
offset by first half 2017 footprint and portfolio actions. These actions resulted in a year-on-year operating income margin
reduction of 3.0 percentage points.
Consumer Business:
Three months ended Six months ended
June 30, June 30,
2017 2016 2017 2016
Sales (millions) $ 1,137 $ 1,130 $ 2,179 $ 2,180
Sales change analysis:
Organic local-currency 0.7 % 2.5 % (0.3) % 2.6 %
Translation (0.2) (1.0) 0.2 (1.8)
Total sales change 0.5 % 1.5 % (0.1) % 0.8 %
Operating income (millions) $ 195 $ 281 $ 417 $ 519
Percent change (30.4) % 8.6 % (19.6) % 3.9 %
Percent of sales 17.2 % 24.9 % 19.2 % 23.8 %
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, construction and home improvement products (do-it-yourself), home care products, protective material
products, certain consumer retail personal safety products, and consumer health care products.
Second Quarter 2017 results:
Sales in Consumer totaled $1.1 billion, up 0.5 percent in U.S. dollars. Organic local-currency sales increased 0.7 percent,
while foreign currency translation decreased sales by 0.2 percent.
On an organic local-currency sales basis:
· Sales grew in home improvement, home care, and consumer health care.
· The stationery and office supplies business declined due to continued channel inventory adjustments, primarily in
the U.S. office retail and wholesale market.
Operating income:
· Operating income margins declined year-on-year, in part due to incremental strategic investments, which reduced
margins by 5.0 percentage points.
First Six Months 2017 results:
Sales in Consumer totaled $2.2 billion, down 0.1 percent in U.S. dollars. Organic local-currency sales declined 0.3
percent, while foreign currency translation increased sales by 0.2 percent.
On an organic local-currency sales basis:
· Sales grew in home improvement, home care, and consumer health care.
· The stationery and office supplies business declined due to channel inventory adjustments, primarily in the U.S.
office retail and wholesale market.
Operating income:
· Operating income margins declined year-on-year, in part due to incremental strategic investments, which reduced
margins by 3.5 percentage points.
FINANCIAL CONDITION AND LIQUIDITY
3M continues its transition to a better-optimized capital structure and is adding leverage at a measured pace. The strength
and stability of 3M's business model and strong free cash flow capability, together with proven capital markets access,
enable the Company to implement this strategy. Investing in 3M's businesses to drive organic growth remains the first
priority for capital deployment, including research and development, capital expenditures, and commercialization
capability. Investment in organic growth will be supplemented by complementary acquisitions. 3M will also continue to
return cash to shareholders through dividends and share repurchases. Sources for cash availability in the United States,
such as ongoing cash flow from operations and access to capital markets, have historically been sufficient to fund dividend
payments to shareholders and share repurchases, as well as funding U.S. acquisitions and other items as needed. For those
international earnings considered to be reinvested
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