REG - 3M Company - Half-year Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 7
03/08/2016 07:07
- Part 7: For the preceding part double click ID:nRSC0594Gf
1,130 $ 1,111 $ 2,179 $ 2,159
Sales change analysis:
Organic local currency 2.7 % 3.4 % 2.7 % 2.8 %
Translation (1.0) (5.9) (1.8) (5.5)
Total sales change 1.7 % (2.5) % 0.9 % (2.7) %
Operating income (millions) $ 281 $ 259 $ 519 $ 499
Percent change 8.8 % 7.4 % 4.0 % 6.3 %
Percent of sales 24.9 % 23.3 % 23.8 % 23.1 %
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 2016 results:
Consumer sales totaled $1.1 billion, up 1.7 percent in U.S. dollars. Organic local-currency sales increased 2.7 percent,
and foreign currency translation reduced sales by 1.0 percent.
On an organic local-currency sales basis:
· Sales growth was led by construction and home improvement, in addition to consumer health care.
· On a geographic basis, sales increased 6 percent in Asia Pacific, 3 percent in the United States, were flat in Latin
America/Canada, and declined 2 percent in EMEA.
Operating income:
· Operating income was $281 million, up 8.8 percent from the same period last year.
· Operating income margins were 24.9 percent, up from 23.3 percent in the same period last year, benefiting from the
combination of higher selling prices and lower raw material costs. In addition, organic sales growth, prioritization of
investments, and productivity efforts contributed to strong operating income margin performance.
First Six Months 2016 results:
Consumer sales totaled $2.2 billion, up 0.9 percent in U.S. dollars. Organic local-currency sales increased 2.7 percent,
and foreign currency translation reduced sales by 1.8 percent.
On an organic local-currency sales basis:
· Sales growth was led by construction and home improvement, in addition to consumer health care.
· On a geographic basis, sales increased 6 percent in Asia Pacific, and 3 percent in the United States, were flat in
Latin America/Canada, and declined 3 percent in EMEA.
Operating income:
· Operating income was $519 million, up 4.0 percent from the same period last year.
· Operating income margins were 23.8 percent, up from 23.1 percent in the same period last year, benefiting from the
combination of higher selling prices and lower raw material costs.
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 indefinitely, the Company currently has no plans or intentions to
repatriate these funds for U.S. operations. However, if these international funds are needed for operations in the U.S., 3M
would be required to accrue and pay U.S. taxes to repatriate them. See Note 8 in 3M's Current Report on Form 8-K dated May
17, 2016, for further information on earnings considered to be reinvested indefinitely.
3M's primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances. 3M believes it
will have continuous access to the commercial paper market. 3M's commercial paper program permits the Company to have a
maximum of $3 billion outstanding with a maximum maturity of 397 days from date of issuance. Effective July 15, 2016, this
program was increased to a maximum of $5 billion outstanding.
Total debt:
The strength of 3M's capital structure and significant ongoing cash flows provide 3M proven access to capital markets.
Additionally, the Company's maturity profile is staggered to help ensure refinancing needs in any given year are reasonable
in proportion to the total portfolio. 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 has a "well-known seasoned issuer" (WKSI) shelf registration statement, effective May 16, 2014, which registers
an indeterminate amount of debt and equity securities for future sales. In May 2016, in connection with the WKSI shelf, 3M
entered into an amended and restated distribution agreement relating to the future issuance and sale (from time to time) of
the Company's medium-term notes program (Series F), up to the aggregate principal amount of $18 billion, which was an
increase from the previous aggregate principal amount up to $9 billion of the same Series.
The Company's total debt was $952 million higher at June 30, 2016 when compared to December 31, 2015, with the increase
primarily due to May 2016 debt issuances. In May 2016, 3M issued 500 million Euro aggregate principal amount of 5.75-year
fixed rate medium-term notes due February 2022 with a coupon rate of 0.375% and 500 million Euro aggregate principal amount
of 15-year fixed rate medium-term notes due 2031 with a coupon rate of 1.50%. Both of these issuances were under the
medium-term notes program (Series F). As of June 30, 2016, the total amount of debt issued as part of the medium-term notes
program (Series F), inclusive of debt issued in 2011, 2012, 2014, 2015 and the 2016 debt referenced above, is approximately
$9.3 billion (utilizing the foreign exchange rates applicable at the time of issuance for the Euro denominated debt).
In March 2016, 3M amended and restated its existing $2.25 billion five-year revolving credit facility expiring in August
2019 to a $3.75 billion five-year revolving credit facility expiring in March 2021. This credit agreement includes a
provision under which 3M may request an increase of up to $1.25 billion (at lenders' discretion), bringing the total
facility up to $5.0 billion. This revolving credit facility is undrawn at June 30, 2016. Under the $3.75 billion credit
agreement, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not
less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four
consecutive quarters then ended to total interest expense on all funded debt for the same period. At June 30, 2016, this
ratio was approximately 51 to 1. Debt covenants do not restrict the payment of dividends. Apart from the committed
facilities, $291 million in stand-alone letters of credit and $22 million in bank guarantees were also issued and
outstanding at June 30, 2016. These lines of credit are utilized in connection with normal business activities.
Cash, cash equivalents and marketable securities:
At June 30, 2016, 3M had $1.9 billion of cash, cash equivalents and marketable securities, of which approximately $1.7
billion was held by the Company's foreign subsidiaries and approximately $160 million was held by the United States. These
balances are invested in bank instruments and other high-quality fixed income securities. Specifics concerning marketable
securities investments are provided in Note 7. At December 31, 2015, cash, cash equivalents and marketable securities held
by the Company's foreign subsidiaries and by the United States totaled approximately $1.7 billion and $200 million,
respectively.
Net Debt (non-GAAP measure):
Net debt is not defined under U.S. GAAP and may not be computed the same as similarly titled measures used by other
companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term
marketable securities. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be an
important indicator of liquidity and a guiding measure of capital structure strategy. The following table provides net debt
as of June 30, 2016, and December 31, 2015.
June 30, December 31,
(Millions) 2016 2015
Total Debt $ 11,749 $ 10,797
Less: Cash and cash equivalents and marketable securities 1,879 1,925
Net Debt (non-GAAP measure) $ 9,870 $ 8,872
In the first six months of 2016, net debt increased by $1.0 billion to a net debt balance of $9.9 billion, driven by the
May 2016 debt issuances.
Balance Sheet:
3M's strong balance sheet and liquidity provide the Company with significant flexibility to take advantage of future
investment opportunities. The Company will continue to invest in its operations to drive both organic growth and
acquisition opportunities.
Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month to month
depending on short-term liquidity needs. Working capital (defined as current assets minus current liabilities) totaled
$4.182 billion at June 30, 2016, compared with $3.868 billion at December 31, 2015, an increase of $314 million. Current
asset balance changes increased working capital by $450 million, driven by higher accounts receivable balances, which are
discussed further below. Current liability balance changes decreased working capital by $136 million, driven by higher
short-term debt balances.
The Company uses working capital measures that place emphasis and focus on certain working capital assets. These measures
are not defined under U.S. generally accepted accounting principles and may not be computed the same as similarly titled
measures used by other companies. These measures include accounts receivable turns (defined as quarterly net sales
multiplied by 4 divided by ending accounts receivable - net) and inventory turns (defined as quarterly manufacturing cost
multiplied by 4 divided by ending inventory). For inventory turns calculation purposes, manufacturing cost is defined as
cost of sales less freight and engineering costs. Freight and engineering cost totaled $159 million for both the second
quarter of 2016 and fourth quarter of 2015, and totaled $165 million for the second quarter of 2015.
Accounts receivable increased $513 million, or approximately 12%, compared with December 31, 2015, as higher June 2016
sales compared to December 2015 sales contributed to this increase. Accounts receivable increased $89 million compared to
the same quarter last year. Accounts receivable turns were 6.57 at June 30, 2016, compared to 7.03 at December 31, 2015 and
6.72 at June 30, 2015. Inventories increased $95 million, or approximately 3.0 percent, compared with December 31, 2015,
and decreased $234 million when compared to June 30, 2015. Inventory turns were 4.03 at June 30, 2016, down from 4.13 at
December 31, 2015, but an improvement from 3.84 at June 30, 2015.
Cash Flows:
Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts in
the Consolidated Statement of Cash Flows exclude the effects of acquisitions, divestitures and exchange rate impacts on
cash and cash equivalents, which are presented as separate line items within the statement of cash flows. Thus, the amounts
presented in the following operating, investing and financing activities tables reflect changes in balances from period to
period adjusted for these effects.
As discussed in Note 1, 3M adopted ASU No. 2016-09 effective January 1, 2016, on a prospective basis. The new guidance
impacts classifications within the statement of cash flows by no longer requiring inclusion of excess tax benefits as both
a hypothetical cash outflow within cash flows from operating activities and hypothetical cash inflow within cash flows from
financing activities. Instead, excess tax benefits would be classified in operating activities in the same manner as other
cash flows related to income taxes.
Cash Flows from Operating Activities:
Six months ended
June 30,
(Millions) 2016 2015
Net income including noncontrolling interest $ 2,571 $ 2,504
Depreciation and amortization 722 683
Company pension contributions (95) (183)
Company postretirement contributions (2) (2)
Company pension expense 94 213
Company postretirement expense 24 70
Stock-based compensation expense 193 187
Income taxes (deferred and accrued income taxes) (236) (126)
Excess tax benefits from stock-based compensation - (129)
Accounts receivable (419) (446)
Inventories (42) (269)
Accounts payable (57) (34)
Other - net (208) (50)
Net cash provided by operating activities $ 2,545 $ 2,418
Cash flows from operating activities can fluctuate significantly from period to period, as pension funding decisions, tax
timing differences and other items can significantly impact cash flows.
In the first six months of 2016, cash flows provided by operating activities increased $127 million compared to the same
period last year, with this increase primarily due to a year-on-year improvement in inventories and accounts receivable,
plus lower cash taxes. The combination of accounts receivable, inventories and accounts payable increased working capital
by $518 million in the first six months of 2016, compared to working capital increases of $749 million in the first six
months of 2015. Additional discussion on working capital changes is provided earlier in the "Financial Condition and
Liquidity" section. Information concerning pension and postretirement contributions and expense is provided in Note 9, with
additional discussion in the preceding Performance by Business Segment section. Other-net in the preceding table reflects a
reduction in cash flows from operating activities, partially due to a $40 million divestiture gain in 2016 (discussed in
Note 2), as cash divestiture activity is presented as proceeds from sale of businesses within investing activities, not
operating activities.
Cash Flows from Investing Activities:
Six months ended
June 30,
(Millions) 2016 2015
Purchases of property, plant and equipment (PP&E) $ (637) $ (661)
Proceeds from sale of PP&E and other assets 18 14
Acquisitions, net of cash acquired (4) (153)
Purchases and proceeds from maturities and sale of marketable securities and investments, net (61) 928
Proceeds from sale of businesses 56 19
Other investing activities (2) 19
Net cash provided by (used in) investing activities $ (630) $ 166
Capital spending was $637 million in the first six months of 2016, compared to $661 million in the first six months of
2015. The Company expects 2016 capital spending to be approximately $1.3 billion to $1.5 billion.
Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and
increasing manufacturing efficiency. 3M invests in renewal and maintenance programs, which pertain to cost reduction, cycle
time, maintaining and renewing current capacity, pollution reduction, and compliance. Costs related to maintenance,
ordinary repairs, and certain other items are expensed. 3M also invests in new growth capacity, both through expansion of
current facilities and by building new facilities. 3M also invests in corporate laboratory facilities and information
technology (IT).
Refer to Note 2 for information on acquisitions and divestitures. The Company is actively considering additional
acquisitions, investments and strategic alliances, and from time to time may also divest certain businesses. Proceeds from
sale of businesses in the first six months of 2016 related to the divestiture of the assets of the pressurized polyurethane
foam adhesives business (formerly known as Polyfoam) business within the Industrial business segment and the completion of
the divestiture of the Library business within the Safety and Graphics business segment.
Purchases of marketable securities and investments and proceeds from maturities and sale of marketable securities and
investments are primarily attributable to asset-backed securities, certificates of deposit/time deposits, commercial paper,
and other securities, which are classified as available-for-sale. Net proceeds from maturities and sale of marketable
securities in the first six months of 2015 were used to help fund the August 2015 acquisitions of Capital Safety and
Membrana. Refer to Note 7 for more details about 3M's diversified marketable securities portfolio. Purchases of investments
include additional survivor benefit insurance, plus cost method and equity investments.
Cash Flows from Financing Activities:
Six months ended
June 30,
(Millions) 2016 2015
Change in short-term debt - net $ (337) $ (39)
Repayment of debt (maturities greater than 90 days) - (10)
Proceeds from debt (maturities greater than 90 days) 1,112 1,925
Total cash change in debt $ 775 $ 1,876
Purchases of treasury stock (2,055) (2,581)
Proceeds from issuances of treasury stock pursuant to stock option and benefit plans 612 450
Dividends paid to stockholders (1,344) (1,298)
Excess tax benefits from stock-based compensation - 129
Other - net (16) (50)
Net cash used in financing activities $ (2,028) $ (1,474)
Total debt at June 30, 2016 was $11.7 billion, up from $10.8 billion at year-end 2015, with the increase primarily due to
May 2016 debt issuances (approximately $1.1 billion at issue date exchange rates). This increase was partially offset by
the net impact of repayments and borrowings by international subsidiaries, which is reflected in "Change in short-term
debt-net" in the preceding table. Total debt was 50 percent of total capital (total capital is defined as debt plus equity)
at June 30, 2016, compared to 48 percent of total capital at year-end 2015.
Proceeds from debt for the six-months ended June 30, 2016, primarily related to the May 2016 issuance of 500 million Euros
aggregate principal amount of 5.75-year fixed rate medium-term notes due February 2022, and 500 million Euros aggregate
principal amount of 15-year fixed rate medium-term notes due 2031 (refer to Note 8 for more detail).
Proceeds from debt for the six-months ended June 30, 2015, primarily related to the May 2015 issuance of 650 million Euros
aggregate principal amount of five-year floating rate medium-term notes due 2020, 600 million Euros aggregate principal
amount of eight-year fixed rate medium-term notes due 2023, and 500 million Euros aggregate principal amount of
fifteen-year fixed rate medium-term notes due 2030, which in the aggregate totaled approximately $1.9 billion at issue date
exchange rates.
Repurchases of common stock are made to support the Company's stock-based employee compensation plans and for other
corporate purposes. 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 2016, the Company purchased $2.055
billion of its own stock, compared to $2.581 billion in the first six months of 2015. The Company expects full-year 2016
gross share repurchases will be in the range of $4 billion to $6 billion. For more information, refer to the table titled
"Issuer Purchases of Equity Securities" in Part II, Item 2. The Company does not utilize derivative instruments linked to
the Company's stock.
Cash dividends paid to shareholders totaled $1.344 billion in the first six months of 2016, compared to $1.298 billion in
the first six months of 2015. 3M has paid dividends each year since 1916. In February 2016, 3M's Board of Directors
declared a first quarter 2016 dividend of $1.11 per share, an increase of 8 percent. This is equivalent to an annual
dividend of $4.44 per share and marked the 58th consecutive year of dividend increases for 3M. In May 2016, 3M's Board of
Directors declared a second quarter 2016 dividend of $1.11 per share.
Other cash flows from financing activities may include various other items, such as distributions to or sales of
noncontrolling interests, changes in cash overdraft balances, and principal payments for capital leases.
Free Cash Flow (non-GAAP measure):
Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting principles (GAAP).
Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP
and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net
cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the
entire free cash flow amount is available for discretionary expenditures. The Company defines free cash flow conversion as
free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flow conversion
are meaningful to investors as they function as useful measures of performance and the Company uses these measures as an
indication of the strength of the company and its ability to generate cash. The first quarter of each year is typically
3M's seasonal low for free cash flow and free cash flow conversion. Below find a recap of operating, investing and
financing cash flows along with free cash flow details for the six months ended June 30, 2016 and 2015.
Six months ended
June 30,
(Millions) 2016 2015
Major GAAP Cash Flow Categories
Net cash provided by operating activities $ 2,545 $ 2,418
Net cash provided by (used in) investing activities (630) 166
Net cash used in financing activities (2,028) (1,474)
Free Cash Flow (non-GAAP measure)
Net cash provided by operating activities $ 2,545 $ 2,418
Purchases of property, plant and equipment (PP&E) (637) (661)
Free cash flow $ 1,908 $ 1,757
Net income attributable to 3M $ 2,566 $ 2,499
Free cash flow conversion 74 % 70 %
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The Company may also make forward-looking statements in other reports filed with the Securities and
Exchange Commission, in materials delivered to shareholders and in press releases. In addition, the Company's
representatives may from time to time make oral forward-looking statements.
Forward-looking statements relate to future events and typically address the Company's expected future business and
financial performance. Words such as "plan," "expect," "aim," "believe," "project," "target," "anticipate," "intend,"
"estimate," "will," "should," "could," "forecast" and other words and terms of similar meaning, typically identify such
forward-looking statements. In particular, these include, among others, statements relating to:
· the Company's strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of
financial performance, and market position,
· worldwide economic, political, and capital markets conditions, such as interest rates, foreign currency exchange
rates, financial conditions of our suppliers and customers, and natural and other disasters or climate change affecting the
operations of the Company or its suppliers and customers,
· new business opportunities, product development, and future performance or results of current or anticipated
products,
· the scope, nature or impact of acquisitions, strategic alliances and divestitures,
· the outcome of contingencies, such as legal and regulatory proceedings,
· future levels of indebtedness, common stock repurchases and capital spending,
· future availability of and access to credit markets,
· pension and postretirement obligation assumptions and future contributions,
· asset impairments,
· tax liabilities,
· information technology security, and
· the effects of changes in tax, environmental and other laws and regulations in the United States and other countries
in which we operate.
The Company assumes no obligation to update or revise any forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject
to risks and uncertainties. Actual future results and trends may differ materially from historical results or those
reflected in any such forward-looking statements depending on a variety of factors. Important information as to these
factors can be found in this document, including, among others, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the headings of "Overview," "Financial Condition and Liquidity" and annually in
"Critical Accounting Estimates." Discussion of these factors is incorporated by reference from Part II, Item 1A, "Risk
Factors," of this document, and should be considered an integral part of Part I, Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." For additional information concerning factors that may cause
actual results to vary materially from those stated in the forward-looking statements, see our reports on Form 10-K, 10-Q
and 8-K filed with the SEC from time to time.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the context of Item 3, 3M is exposed to market risk due to the risk of loss arising from adverse changes in foreign
currency exchange rates, interest rates and commodity prices. Changes in those factors could impact the Company's results
of operations and financial condition. For a discussion of sensitivity analysis related to these types of market risks,
refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in 3M's Current Report on Form 8-K
dated May 17, 2016 (which updated 3M's 2015 Annual Report on Form 10-K). There have been no material changes in information
that would have been provided in the context of Item 3 from the end of the preceding year until June 30, 2016. However, the
Company does provide risk management discussion in various places in this Quarterly Report on Form 10-Q, primarily in the
Derivatives note.
Item 4. Controls and Procedures.
a. The Company carried out an evaluation, under the supervision and with the participation of its management, including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's
"disclosure controls and procedures" (as defined in the Exchange Act Rule 13a-15(e)) as of the end of the period covered by
this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective.
b. There was no change in the Company's internal control over financial reporting that occurred during the Company's most
recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
The Company is implementing an enterprise resource planning ("ERP") system on a worldwide basis, which is expected to
improve the efficiency of certain financial and related transaction processes. The gradual implementation is expected to
occur in phases over the next several years. The implementation of a worldwide ERP system will likely affect the processes
that constitute our internal control over financial reporting and will require testing for effectiveness.
The Company completed implementation with respect to elements of certain processes/sub-processes in limited
subsidiaries/locations and will continue to roll out the ERP system over the next several years. As with any new
information technology application we implement, this application, along with the internal controls over financial
reporting included in this process, was appropriately considered within the testing for effectiveness with respect to the
implementation in these instances. We concluded, as part of its evaluation described in the above paragraphs, that the
implementation of the ERP system in these circumstances has not materially affected our internal control over financial
reporting.
3M COMPANY
FORM 10-Q
For the Quarterly Period Ended June 30, 2016
PART II. Other Information
Item 1. Legal Proceedings.
Discussion of legal matters is incorporated by reference from Part I, Item 1, Note 12, "Commitments and Contingencies" of
this document, and should be considered an integral part of Part II, Item 1, "Legal Proceedings."
Item 1A. Risk Factors.
Provided below is a cautionary discussion of what we believe to be the most important risk factors applicable to the
Company. Discussion of these factors is incorporated by reference into and considered an integral part of Part I, Item 2,
"Management's Discussion and Analysis of Financial Conditions and Results of Operations."
* Results are impacted by the effects of, and changes in, worldwide economic, political, and capital markets conditions.
The Company operates in more than 70 countries and derives approximately 60 percent of its revenues from outside the United
States. The Company's business is subject to global competition and geopolitical risks and may be adversely affected by
factors in the United States and other countries that are beyond its control, such as slower economic growth, disruptions
in financial markets, economic downturns in the form of either contained or widespread recessionary conditions, inflation,
elevated unemployment levels, sluggish or uneven recovery, government deficit reduction and other austerity measures in
specific countries or regions, or in the various industries in which the Company operates; social, political or labor
conditions in specific countries or regions; natural and other disasters or climate change affecting the operations of the
Company or its customers and suppliers; or adverse changes in the availability and cost of capital, interest rates, tax
rates, tax laws, or exchange control, ability to expatriate earnings and other regulations in the jurisdictions in which
the Company operates.
* Change in the Company's credit ratings could increase cost of funding. The Company's credit ratings are important to 3M's
cost of capital. The major rating agencies routinely evaluate the Company's credit profile and assign debt ratings to 3M.
This evaluation is based on a number of factors, which include financial strength, business and financial risk, as well as
transparency with rating agencies and timeliness of financial reporting. 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. In
March 2016, Moody's downgraded 3M's rating from Aa3 to A1, revised 3M's outlook from negative to stable, and affirmed the
Company's short-term rating of P-1. This ratings action followed 3M's announcement of its new five-year plan for the period
2016 through 2020 in which the Company communicated its intent to further increase financial leverage. The Company's credit
ratings have served to lower 3M's borrowing costs and facilitate access to a variety of lenders. The Company's ongoing
transition to a better-optimized capital structure, financed with additional low-cost debt, could impact 3M's credit rating
in the future. Failure to maintain strong investment grade ratings would adversely affect the Company's cost of funding and
could adversely affect liquidity and access to capital markets.
* The Company's results are affected by competitive conditions and customer preferences. Demand for the Company's products,
which impacts revenue and profit margins, is affected by (i) the development and timing of the introduction of competitive
products; (ii) the Company's response to downward pricing to stay competitive; (iii) changes in customer order patterns,
such as changes in the levels of inventory maintained by customers and the timing of customer purchases which may be
affected by announced price changes, changes in the Company's incentive programs, or the customer's ability to achieve
incentive goals; and (iv) changes in customers' preferences for our products, including the success of products offered by
our competitors, and changes in customer designs for their products that can affect the demand for some of the Company's
products.
* Foreign currency exchange rates and fluctuations in those rates may affect the Company's ability to realize projected
growth rates in its sales and earnings. Because the Company's financial statements are denominated in U.S. dollars and
approximately 60 percent of the Company's revenues are derived from outside the United States, the Company's results of
operations and its ability to realize projected growth rates in sales and earnings could be adversely affected if the U.S.
dollar strengthens significantly against foreign currencies.
* The Company's growth objectives are largely dependent on the timing and market acceptance of its new product offerings,
including its ability to continually renew its pipeline of new products and to bring those products to market. This ability
may be adversely affected by difficulties or delays in product development, such as the inability to identify viable new
products, obtain adequate intellectual property protection, or gain market acceptance of new products. There are no
guarantees that new products will prove to be commercially successful.
* The Company's future results are subject to fluctuations in the costs and availability of purchased components,
compounds, raw materials and energy, including oil and natural gas and their derivatives, due to shortages, increased
demand, supply interruptions, currency exchange risks, natural disasters and other factors. The Company depends on various
components, compounds, raw materials, and energy (including oil and natural gas and their derivatives) supplied by others
for the manufacturing of its products. It is possible that any of its supplier relationships could be interrupted due to
natural and other disasters and other events, or be terminated in the future. Any sustained interruption in the Company's
receipt of adequate supplies could have a material adverse effect on the Company. In addition, while the Company has a
process to minimize volatility in component and material pricing, no assurance can be given that the Company will be able
to successfully manage price fluctuations or that future price fluctuations or shortages will not have a material adverse
effect on the Company.
* Acquisitions, strategic alliances, divestitures, and other unusual events resulting from portfolio management actions and
other evolving business strategies, and possible organizational restructuring could affect future results. The Company
monitors its business portfolio and organizational structure and has made and may continue to make acquisitions, strategic
alliances, divestitures and changes to its organizational structure. With respect to acquisitions, future results will be
affected by the Company's ability to integrate acquired businesses quickly and obtain the anticipated synergies.
* The Company's future results may be affected if the Company generates fewer productivity improvements than estimated. The
Company utilizes various tools, such as Lean Six Sigma, and engages in ongoing global 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. There can be no assurance that all of the projected productivity improvements
will be realized.
* The Company employs information technology systems to support its business, including ongoing phased implementation of an
ERP system as part of business transformation on a worldwide basis over the next several years. Security breaches and other
disruptions to the Company's information technology infrastructure could interfere with the Company's operations,
compromise information belonging to the Company and its customers, suppliers, and employees, exposing the Company to
liability which could adversely impact the Company's business and reputation. In the ordinary course of business, the
Company relies on information technology networks and systems, some of which are managed by third parties, to process,
transmit and store electronic information, and to manage or support a variety of business processes and activities.
Additionally, the Company collects and stores certain data, including proprietary business information, and may have access
to confidential or personal information in certain of our businesses that is subject to privacy and security laws,
regulations and customer-imposed controls. Despite our cybersecurity measures (including employee and third-party training,
monitoring of networks and systems, and maintenance of backup and protective systems) which are continuously reviewed and
upgraded, the Company's information technology networks and infrastructure may still be vulnerable to damage, disruptions
or shutdowns due to attack by hackers or breaches, employee error or malfeasance, power outages, computer viruses,
telecommunication or utility failures, systems failures, service providers including cloud services, natural disasters or
other catastrophic events. It is possible for such vulnerabilities to remain undetected for an extended period, up to and
including several years. While we have experienced, and expect to continue to experience, these types of threats to the
Company's information technology networks and infrastructure, none of them to date has had a material impact to the
Company. There may be other challenges and risks as the Company upgrades and standardizes its ERP system on a worldwide
basis. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption
in operations, and damage to the Company's reputation, which could adversely affect the Company's business. Although the
Company maintains insurance coverage for various cybersecurity risks, there can be no guarantee that all costs or losses
incurred will be fully insured.
* The Company's defined benefit pension and postretirement plans are subject to financial market risks that could adversely
impact our results. The performance of financial markets and discount rates impact the Company's funding obligations under
its defined benefit plans. Significant changes in market interest rates, decreases in the fair value of plan assets and
investment losses on plan assets, and relevant legislative or regulatory changes relating to defined benefit plan funding
may increase the Company's funding obligations and adversely impact its results of operations and cash flows.
* The Company's future results may be affected by various legal and regulatory proceedings and legal compliance risks,
including those involving product liability, antitrust, intellectual property, environmental, the U.S. Foreign Corrupt
Practices Act and other anti-bribery, anti-corruption, or other matters. The outcome of these legal proceedings may differ
from the Company's expectations because the outcomes of litigation, including regulatory matters, are often difficult to
reliably predict. Various factors or developments can lead the Company to change current estimates of liabilities and
related insurance receivables where applicable, or make such estimates for matters previously not susceptible of reasonable
estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments
or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in future charges
that could have a material adverse effect on the Company's results of operations or cash flows in any particular period.
For a more detailed discussion of the legal proceedings involving the Company and the associated accounting estimates, see
the discussion in Note 12 "Commitments and Contingencies" within the Notes to Consolidated Financial Statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
Repurchases of 3M common stock are made to support the Company's stock-based employee compensation plans and for other
corporate purposes. In February 2014, 3M's Board of Directors authorized the repurchase of up to $12 billion of 3M's
outstanding common stock, with no pre-established end date. In February 2016, 3M's Board of Directors replaced the
Company's February 2014 repurchase program with a new program. This new program authorizes the repurchase of up to $10
billion of 3M's outstanding common stock, with no pre-established end date.
Issuer Purchases of Equity
Securities (registered pursuant to
Section 12 of the Exchange Act)
Maximum
Approximate
Dollar Value of
Total Number of Shares that May
Shares Purchased Yet Be Purchased
Total Number of Average Price as Part of Publicly under the Plans
Shares Purchased Paid per Announced Plans or Programs
Period (1) Share or Programs (2) (Millions)
January 1-31, 2016 4,867,209 $ 141.70 4,867,019 $ 777
February 1-29, 2016 1,593,234 $ 153.47 1,590,500 $ 9,756
March 1-31, 2016 1,094,083 $ 162.58 1,091,293 $ 9,578
Total January 1-March 31, 2016 7,554,526 $ 147.21 7,548,812 $ 9,578
April 1-30, 2016 1,543,073 $ 167.78 1,538,003 $ 9,320
May 1-31, 2016 1,695,626 $ 167.90 1,695,200 $ 9,036
June 1-30, 2016 1,712,490 $ 169.72 1,712,490 $ 8,745
Total April 1-June 30, 2016 4,951,189 $ 168.49 4,945,693 $ 8,745
Total January 1-June 30, 2016 12,505,715 $ 155.63 12,494,505 $ 8,745
(1) The total number of shares purchased includes: (i) shares purchased under the Board's authorizations described above,
and (ii) shares purchased in connection with the exercise of stock options.
(2) The total number of shares purchased as part of publicly announced plans or programs includes shares purchased under
the Board's authorizations described above.
Item 3. Defaults Upon Senior Securities. - No matters require disclosure.
Item 4. Mine Safety Disclosures. Pursuant to Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the "Act"), the Company is required to disclose, in connection with the mines it operates, information concerning mine
safety violations or other regulatory matters in its periodic reports filed with the SEC. The information concerning mine
safety violations or other regulatory matters required by Section 1503(a) of the Act is included in Exhibit 95 to this
quarterly report.
Item 5. Other Information. - No matters require disclosure.
Item 6. Exhibits.
Exhibits. These exhibits are either incorporated by reference into this report or filed herewith with this report. Exhibit
numbers 10.1 through 10.34 are management contracts or compensatory plans or arrangements.
Index to Exhibits:
(3) Articles of Incorporation and bylaws
(3.1) Certificate of incorporation, as amended as of May 11, 2007, is incorporated by reference from our Form 8-K dated May 14, 2007.
(3.2) Amended and Restated Bylaws, as adopted as of November 10, 2015, are incorporated by reference from our Form 8-K dated November 10, 2015.
(4) Instruments defining the rights of security holders, including indentures:
(4.1) Indenture, dated as of November 17, 2000, between 3M and The Bank of New York Mellon Trust Company, N.A., as successor trustee, with respect to 3M's senior debt securities, is incorporated by reference from our Form 8-K dated December 7, 2000.
(4.2) First Supplemental Indenture, dated as of July 29, 2011, to Indenture dated as of November 17, 2000, between 3M and The Bank of New York Mellon Trust Company, N.A., as successor trustee, with respect to 3M's senior debt securities, is incorporated by reference from our Form 10-Q for the quarter ended June 30, 2011.
(10) Material contracts and management compensation plans and arrangements:
(10.1) 3M Company 2016 Long-Term Incentive Plan is incorporated by reference from our Form 8-K dated May 12, 2016.
(10.2) Form of Stock Option Award Agreement under 3M Company 2016 Long-Term Incentive Plan is incorporated by reference from our Form 8-K dated May 12, 2016.
(10.3) Form of Stock Appreciation Right Award Agreement under 3M Company 2016 Long-Term Incentive Plan is incorporated by reference from our Form 8-K dated May 12, 2016.
(10.4) Form of Restricted Stock Unit Award Agreement under 3M Company 2016 Long-Term Incentive Plan is incorporated by reference from our Form 8-K dated May 12, 2016.
(10.5) Form of Performance Share Award Agreement under 3M Company 2016 Long-Term Incentive Plan is incorporated by reference from our Form 8-K dated May 12, 2016.
(10.6) 3M 2008 Long-Term Incentive Plan (including amendments through February 2, 2016) is incorporated by reference from our Form 10-K for the year ended December 31, 2015.
(10.7) Form of Agreement for Stock Option Grants to Executive Officers under 3M 2008 Long-Term Incentive Plan is incorporated by reference from our Form 8-K dated May 13, 2008.
(10.8) Form of Stock Option Agreement for options granted to Executive Officers
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