REG - 3M Company - Half Yearly Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 6
29/10/2014 09:35
- Part 6: For the preceding part double click ID:nRSA0731Oe
state of New Jersey for an amount that is not material to 3M. In December 2013, the Court approved the settlement and
entered the Consent Judgment. The settlement resolves claims or potential claims by the State of New Jersey regarding
discharges or alleged discharges into the Passaic River by the settling parties, and precludes certain cost recovery
actions by the third-party plaintiffs. The settlement with the State of New Jersey does not include release from potential
federal claims yet to be asserted. Total costs for the remedy currently proposed by EPA could easily exceed $1 billion.
While the Company does not yet have a basis for estimating its potential exposure in the yet to be asserted EPA claim, the
Company currently believes its allocable share of the possible loss, if any, is likely to be a fraction of one percent of
the total costs because of the Company's limited potential involvement at this site.
For environmental litigation matters described in this section for which a liability, if any, has been recorded, the
Company believes the amount recorded, as well as the possible loss or range of loss in excess of the established accrual is
not material to the Company's consolidated results of operations or financial condition. For those matters for which a
liability has not been recorded, the Company believes such liability is not probable and estimable and the Company is not
able to estimate a possible loss or range of loss at this time, with the exception of the Passaic River litigation, where
the Company's potential exposure, if any, is likely to be a fraction of one percent of the total costs.
Environmental Liabilities and Insurance Receivables
As of June 30, 2014, the Company had recorded liabilities of $26 million for estimated "environmental remediation" costs
based upon an evaluation of currently available facts with respect to each individual site and also recorded related
insurance receivables of $11 million. The Company records liabilities for remediation costs on an undiscounted basis when
they are probable and reasonably estimable, generally no later than the completion of feasibility studies or the Company's
commitment to a plan of action. Liabilities for estimated costs of environmental remediation, depending on the site, are
based primarily upon internal or third-party environmental studies, and estimates as to the number, participation level and
financial viability of any other potentially responsible parties, the extent of the contamination and the nature of
required remedial actions. The Company adjusts recorded liabilities as further information develops or circumstances
change. The Company expects that it will pay the amounts recorded over the periods of remediation for the applicable sites,
currently ranging up to 20 years.
As of June 30, 2014, the Company had recorded liabilities of $45 million for "other 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. As of June 30,
2014, the Company's receivable for insurance recoveries related to "other environmental liabilities" was $15 million.
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
Commercial Litigation
In October 2012, four plaintiffs filed purported class actions against Ceradyne, Inc., its directors, 3M, and Cyborg
Acquisition Corporation (a direct wholly owned subsidiary of 3M) in connection with 3M's proposed acquisition of Ceradyne.
Two suits were filed in California Superior Court for Orange County, and two were filed in the Delaware Chancery Court. The
suits alleged that the defendants breached and/or aided and abetted the breach of their fiduciary duties to Ceradyne by
seeking to sell Ceradyne through an allegedly unfair process and for an unfair price and on unfair terms, and/or by
allegedly failing to make adequate disclosures to Ceradyne stockholders regarding the acquisition of Ceradyne. 3M completed
its acquisition of Ceradyne in November 2012. In November 2012, the parties reached a settlement with the California
plaintiffs for an amount that is not material to the Company, while the Delaware plaintiffs dismissed their complaints
without prejudice. The settlement will bind all former Ceradyne shareholders and has received preliminary approval from the
California court. A final approval hearing was held in July 2013, and the California Court denied approval of the
settlement. The plaintiffs filed a motion for reconsideration of the denial of approval of the settlement, which motion was
denied by the California court. The plaintiffs then filed a motion for leave to amend their complaint, which motion was
denied without prejudice in January 2014. By stipulation in February 2014, plaintiffs agreed to voluntarily dismiss claims
against 3M and Cyborg Acquisition Corporation without prejudice. In March 2014, the Court entered its Order dismissing 3M
and Cyborg Acquisition Corporation from the action without prejudice.
3M sued TransWeb Corporation in Minnesota in 2010 for infringement of several 3M patents covering fluorination and
hydrocharging of filter media used in 3M's respirators and furnace filters. TransWeb does not make finished goods, but
sells filter media to competitors of 3M's respirator and furnace filter businesses. TransWeb filed a declaratory judgment
action in and successfully moved the litigation to the U.S. District Court for the District of New Jersey, seeking a
declaration of invalidity and non-infringement of 3M's patents, and further alleging that 3M waited too long to enforce its
rights. TransWeb also alleged 3M obtained the patents through inequitable conduct and that 3M's attempt to enforce the
patents constituted a violation of the antitrust laws. In November 2012, a jury returned a verdict in favor of TransWeb on
all but one count, including findings that 3M's patents were invalid and not infringed, and that 3M had committed an
antitrust violation by seeking to enforce a patent it had obtained fraudulently. The jury also recommended that the court
find 3M had committed inequitable conduct in obtaining the patents, and that the patents were therefore unenforceable.
Since the vast majority of TransWeb's claim for treble antitrust damages were in the form of its attorneys' fees and
expenses in connection with the defense of the patent case, the parties agreed that the measure of damages would not go to
the jury, but rather would be submitted to a special master after the trial. The special master's recommendations were
forwarded to the court in September 2013. On April 21, 2014, the court issued an order denying 3M's motions to set aside
the jury's verdict. In addition, the court found two 3M patents unenforceable due to inequitable conduct. The court
accepted the Special Master's recommendation as to the amount of attorneys' fees to be awarded as damages, and entered
judgment against 3M in the amount of $26 million. In July 2014, 3M filed a notice of appeal of the judgment to the U.S.
Court of Appeals for the Federal Circuit.
For commercial litigation matters described in this section for which a liability, if any, has been recorded, the Company
believes the amount recorded, as well as the possible loss or range of loss in excess of the established accrual is not
material to the Company's consolidated results of operations or financial condition. For those matters for which a
liability has not been recorded, the Company believes that such liability is not probable and estimable and the Company is
not able to estimate a possible loss or range of loss at this time, with the exception of the TransWeb matter, where the
Company's range of potential exposure, if any, could be approximately $26 million.
Product Liability Litigation
Électricité de France (EDF) filed a lawsuit against 3M France in the French courts in 2006 claiming commercial loss and
property damage after experiencing electrical network failures which EDF claims were caused by allegedly defective 3M
transition splices. The French Court of Appeals at Versailles affirmed the commercial trial court's decision that the
transition splices conformed to contract specifications which were thoroughly analyzed and tested by EDF before purchase
and installation. The Court of Appeals, however, ordered a court-appointed expert to study the problem and issue a
technical opinion on the cause of the network failures. The court-appointed expert submitted his report to the commercial
court in May 2014. The expert found potential defects in 3M's product and found that EDF incurred damages in excess of 100
million Euros. The expert's opinion is not dispositive of liability or damages and is subject to numerous factual and legal
challenges that will be raised with the court. The commercial court may take from six months to one year to render its
decision.
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. Another customer filed a lawsuit against 3M Deutschland GmbH (a German subsidiary) in the
German courts in March 2012 seeking commercial loss and property damage allegedly caused by the same 3M filters used in
that customer's manufacturing process. The Company has resolved on an amicable basis claims of two other customers arising
out of the same issue.
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 12. Stock-Based Compensation
The 3M 2008 Long-Term Incentive Plan, as discussed in 3M's Current Report on Form 8-K dated May 15, 2014 (which updated
3M's 2013 Annual Report on Form 10-K), provides for the issuance or delivery of up to 100 million shares of 3M common stock
pursuant to awards granted under the plan. Awards under this plan may be issued in the form of Incentive Stock Options,
Nonqualified Stock Options, Progressive Stock Options, Stock Appreciation Rights, Restricted Stock Units, Restricted Stock,
Other Stock Awards, and Performance Units and Performance Shares. The remaining total shares available for grant under the
2008 Long Term Incentive Plan Program are 28,813,481 as of June 30, 2014.
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 five years
of service. This retiree-eligible population represents 33 percent of the 2014 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 units, restricted stock, 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 six
months ended June 30, 2014 and 2013.
Stock-Based Compensation Expense
Three months ended Six months ended
June 30, June 30,
(Millions) 2014 2013 2014 2013
Cost of sales $ 11 $ 6 $ 33 $ 18
Selling, general and administrative expenses 35 36 112 113
Research, development and related expenses 6 5 29 19
Stock-based compensation expenses $ 52 $ 47 $ 174 $ 150
Income tax benefits $ (13) $ (13) $ (53) $ (45)
Stock-based compensation expenses, net of tax $ 39 $ 34 $ 121 $ 105
The following table summarizes stock option activity during the six months ended June 30, 2014:
Stock Option Program
Number ofOptions Weighted Average ExercisePrice Weighted Average RemainingContractualLife (months) AggregateIntrinsic Value(millions)
Under option -
January 1 43,938,778 $ 83.84
Granted:
Annual 5,736,183 126.77
Exercised (6,229,925) 83.02
Canceled (154,922) 103.29
June 30 43,290,114 $ 89.58 68 $ 2,323
Options exercisable
June 30 31,486,006 $ 81.41 53 $ 1,947
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, 2014, there was $89 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 25
months. The total intrinsic values of stock options exercised were $340 million and $338 million during the six months
ended June 30, 2014 and 2013, respectively. Cash received from options exercised was $517 million and $1.039 billion for
the six months ended June 30, 2014 and 2013, respectively. The Company's actual tax benefits realized for the tax
deductions related to the exercise of employee stock options were $125 million for both the six months ended June 30, 2014
and 2013.
For the primary 2014 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.
Annual
Stock Option Assumptions 2014
Exercise price $ 126.72
Risk-free interest rate 1.9 %
Dividend yield 2.6 %
Expected volatility 20.8 %
Expected life (months) 75
Black-Scholes fair value $ 19.63
Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period.
For the 2014 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 term assumption is based
on the weighted average of historical grants.
The following table summarizes restricted stock and restricted stock unit activity during the six months ended June 30,
2014:
Restricted Stock Units and Restricted Stock
Weighted Average
Restricted Stock Units and Number of Grant Date
Restricted Stock Awards Fair Value
Nonvested balance -
As of January 1 3,105,361 $ 92.31
Granted:
Annual 798,615 126.79
Other 15,647 141.58
Vested (1,066,382) 90.63
Forfeited (33,543) 100.63
As of June 30 2,819,698 $ 102.89
As of June 30, 2014, there was $110 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 25 months. The total fair value of restricted stock units and restricted stock that vested during the six
months ended June 30, 2014 and 2013 was $140 million and $106 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 $53 million and
$40 million for the six months ended June 30, 2014 and 2013, respectively.
Restricted stock units granted under the 3M 2008 Long-Term Incentive Plan generally vest three years following the grant
date assuming continued employment. Dividend equivalents equal to the dividends payable on the same number of shares of 3M
common stock accrue on these restricted stock units during the vesting period, although no dividend equivalents are paid on
any of these restricted stock units that are forfeited prior to the vesting date. Dividends are paid out in cash at the
vest date on restricted stock units, except for performance shares which do not earn dividends. Since the rights to
dividends are forfeitable, there is no impact on basic earnings per share calculations. Weighted average restricted stock
unit shares outstanding are included in the computation of diluted earnings per share.
Performance Shares
Instead of restricted stock units, the Company makes annual grants of performance shares to members of its executive
management. The performance criteria for these performance shares (Organic Sales Growth, Return on Invested Capital and
sales from new products) were selected because the Company believes that they are important drivers of long-term
shareholder 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 first performance shares,
which were granted in 2008, were distributed in 2011. Performance shares do not accrue dividends during the performance
period. Therefore, the grant date fair value is determined by reducing the closing stock price on the date of grant by the
net present value of dividends during the performance period.
The following table summarizes performance share activity during the six months ended June 30, 2014:
Weighted Average
Number of Grant Date
Performance Shares Awards Fair Value
Undistributed balance -
As of January 1 895,635 $ 88.12
Granted 285,149 123.88
Distributed (277,357) 84.74
Performance change 59,443 114.15
Forfeited (6,501) 102.45
As of June 30 956,369 $ 101.28
As of June 30, 2014, there was $35 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 10 months. During
the six months ended June 30, 2014 and June 30, 2013, the total fair value of performance shares that were distributed were
$35 million and $52 million, respectively. The Company's actual tax benefits realized for the tax deductions related to the
distribution of performance shares for the six months ended June 30, 2014 and June 30, 2013 were $11 million and $16
million, respectively.
NOTE 13. 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 operating business segments: Industrial; Safety and Graphics;
Electronics and Energy; Health Care; 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. These segments have worldwide responsibility for virtually all 3M product lines. 3M is not dependent on any
single product/service or market. 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 2014, 3M transferred a product line between divisions within different business segments
and made other changes within business segments in its continuing effort to improve the alignment of its businesses around
markets and customers.
The product move between business segments was as follows:
• The movement of the Fire Protection product line from the Building and Commercial Services Division (Safety and
Graphics business segment) to the Industrial Adhesives and Tapes Division (Industrial business segment). This product move
resulted in an increase in net sales for total year 2013 of $73 million in the Industrial business segment offset by a
corresponding decrease in the Safety and Graphics business segment.
In addition, other changes within business segments were as follows:
• The combination of certain existing divisions/departments into new divisions. Within the Electronics and Energy
business segment, the new divisions include the Electrical Markets Division (which includes the former Infrastructure
Protection Division), and the Electronic Solutions Division (which includes the former 3M Touch Systems, Inc.). Within the
Safety and Graphics business segment, the new Commercial Solutions Division was created from the combination of the former
Architectural Markets Department, the former Building and Commercial Services Division and the former Commercial Graphics
Division. None of these combinations crossed business segments.
• The renaming of the former Aerospace and Aircraft Maintenance Division within the Industrial business segment to
the Aerospace and Commercial Transportation Division.
• The movement of certain product lines between various divisions within the same business segment.
Effective in the second quarter of 2014, within the Electronics and Energy business segment, 3M combined three existing
divisions into two new divisions. A large portion of both the Electronics Markets Materials Division and the Electronic
Solutions Division were combined to form the Electronics Materials Solutions Division, which focuses on semiconductor and
electronics materials and assembly solutions. The Optical Systems Division, the remaining portion of the Electronic
Solutions Division and a portion of the Electronics Markets Materials Division were combined to form the Display Materials
and Systems Division, which focuses on delivering light, color and user interface solutions.
The financial information presented herein reflects the impact of the preceding product move between business segments for
all periods presented.
Business Segment Information Three months ended Six months ended
June 30, June 30,
(Millions) 2014 2013 2014 2013
Net Sales
Industrial $ 2,815 $ 2,683 $ 5,591 $ 5,376
Safety and Graphics 1,494 1,434 2,917 2,833
Electronics and Energy 1,422 1,340 2,733 2,617
Health Care 1,416 1,336 2,790 2,647
Consumer 1,139 1,098 2,218 2,179
Corporate and Unallocated (1) 1 2 3
Elimination of Dual Credit (151) (140) (286) (269)
Total Company $ 8,134 $ 7,752 $ 15,965 $ 15,386
Operating Income
Industrial $ 617 $ 603 $ 1,235 $ 1,182
Safety and Graphics 353 328 671 660
Electronics and Energy 293 237 520 433
Health Care 434 417 861 821
Consumer 241 235 469 472
Corporate and Unallocated (49) (87) (121) (161)
Elimination of Dual Credit (33) (31) (63) (59)
Total Company $ 1,856 $ 1,702 $ 3,572 $ 3,348
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 operating 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 provides
additional ("dual") credit to those business segments selling products in the U.S. to an external customer when that
segment is not the primary seller of the product. For example, certain respirators are primarily sold by the Personal
Safety Division within the Safety and Graphics business segment; however, the Industrial business segment also sells this
product to certain customers in its U.S. markets. In this example, the non-primary selling segment (Industrial) would also
receive credit for the associated net sales it initiated 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.
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, 2014, and
the related consolidated statements of income and comprehensive income, for the three-month and six-month periods ended
June 30, 2014 and 2013, and the consolidated statement of cash flows for the six-month periods ended June 30, 2014 and
2013. 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, 2013, 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
13, 2014, except with respect to our opinion on the consolidated financial statements insofar as it relates to the segment
realignments discussed in Notes 3 and 15 as to which the date is May 15, 2014, 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, 2013, 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
July 31, 2014
________________________________________________________________________________________
* 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
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. 3M
manages its operations in five operating business segments: Industrial; Safety and Graphics; Electronics and Energy; Health
Care; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a
combined basis.
As described in 3M's Current Report on Form 8-K dated May 15, 2014 (which updated 3M's 2013 Annual Report on Form 10-K) and
3M's Quarterly Report on Form 10-Q for the period ended March 31, 2014, effective in the first quarter of 2014, 3M
transferred a product line between divisions within different business segments and made other changes within business
segments in its continuing effort to improve the alignment of its businesses around markets and customers. Segment
information presented herein reflects the impact of these changes for all periods presented. 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 15, 2014.
In addition, effective in the second quarter of 2014, within the Electronics and Energy business segment, 3M combined three
existing divisions into two new divisions. A large portion of both the Electronics Markets Materials Division and the
Electronic Solutions Division were combined to form the Electronics Materials Solutions Division, which focuses on
semiconductor and electronics materials and assembly solutions. The Optical Systems Division, the remaining portion of the
Electronic Solutions Division and a portion of the Electronics Markets Materials Division were combined to form the Display
Materials and Systems Division, which focuses on delivering light, color and user interface solutions.
Net income attributable to 3M was $1.267 billion, or $1.91 per diluted share, in the second quarter of 2014, compared to
$1.197 billion, or $1.71 per diluted share, in the second quarter of 2013. Second-quarter 2014 sales increased 4.9 percent
to $8.1 billion. 3M achieved organic local-currency sales growth (which includes organic volume impacts plus selling price
impacts) in all five of its business segments. Organic local-currency sales increased 6.4 percent in Electronics and
Energy, 5.1 percent in Health Care, 4.7 percent in both the Industrial business segment and Safety and Graphics, and 4.2
percent in Consumer. For the Company in total, organic local-currency sales grew 4.8 percent, with higher organic volumes
contributing 3.5 percent and selling price increases contributing 1.3 percent. Acquisitions added 0.1 percent to sales,
which related to the April 2014 acquisition of Treo Solutions LLC (Health Care business segment). Foreign currency
translation had no impact on worldwide sales. Foreign currency translation benefited EMEA sales by 3.7 percent, with this
benefit completely offset in other geographic areas as foreign currency translation reduced Latin America/Canada sales by
5.8 percent and Asia Pacific sales by 0.7 percent.
On a geographic basis, second-quarter 2014 organic local-currency sales growth was positive across all geographic areas.
Asia Pacific local-currency sales growth of 6.6 percent was broad-based, with all five business segments growing, led by
Electronics and Energy, and Consumer. Based on sales, Electronics and Energy is the largest business segment in Asia
Pacific, with results significantly impacted by electronics-related divisions (Display Materials and Systems Division, and
the Electronics Materials Solutions Division). Organic local-currency sales growth was 7 percent in Japan, or 2 percent
without electronics-related businesses. China/Hong Kong organic local-currency sales growth was 6 percent, or 10 percent
without electronics-related businesses, which was an improvement versus the first quarter's underlying growth rate. Refer
to the Electronic and Energy business segment section for additional discussion of electronics-related businesses.
In EMEA, organic local-currency sales increased 4.8 percent. Organic local-currency sales growth was led by Middle
East/Africa and Central/East Europe. Organic local-currency sales growth in West Europe was 3.5 percent. Sales growth in
EMEA was led by Safety and Graphics, Electronics and Energy, and Industrial.
In the United States, organic local-currency sales growth was 4.5 percent, up from first quarter year-on-year sales growth
of 2.6 percent, led by Health Care, and Safety and Graphics.
In Latin America/Canada, organic local-currency sales grew 2.7 percent, led by Electronics and Energy, and Health Care.
Latin America/Canada organic sales growth was led by Mexico, and Brazil was down slightly. Sales and operating income were
down substantially in Venezuela during the second quarter of 2014.
Operating income increased 9.1 percent in the second quarter and operating margins were 22.8 percent, a margin increase of
0.8 percentage points year-on-year. These results benefited from the combination of selling price increases and raw
material cost decreases, lower pension and postretirement benefit costs, plus leverage from organic volume growth. These
benefits were partially offset by the impact of strategic investments and foreign exchange impacts. Refer to the section
entitled "Results of Operations" for further discussion.
The income tax rate was 29.5 percent in the second quarter, up 2.1 percentage points versus last year's second quarter.
This higher rate decreased earnings per diluted share by approximately 5 cents. Weighted-average diluted shares outstanding
in the second quarter of 2014 declined 4.9 percent year-on-year to 664.6 million, which increased earnings per diluted
share by approximately 9 cents. Foreign exchange impacts decreased earnings per diluted share by approximately 4 cents.
In the first six months of 2014, net income attributable to 3M was $2.474 billion, or $3.70 per diluted share, compared to
$2.326 billion, or $3.32 per diluted share, in the first six months of 2013. First-half 2014 sales increased 3.8 percent to
$16.0 billion. 3M achieved organic local-currency sales growth (which includes organic volume impacts plus selling price
impacts) in all five of its business segments. Organic local-currency sales increased 5.7 percent in Health Care, 5.3
percent in Electronics and Energy, 4.8 percent in Industrial, 4.7 percent in Safety and Graphics, and 3.4 percent in
Consumer. For the Company in total, organic local-currency sales grew 4.8 percent, with higher organic volumes contributing
3.6 percent and selling price increases contributing 1.2 percent. Foreign currency translation reduced sales by 1.0 percent
year-on-year, with Latin America/Canada sales reduced by 8.5 percent and Asia Pacific sales reduced by 2.2 percent, while
EMEA sales benefited by 2.8 percent.
The following table contains sales and operating income results by business segment for the three months ended June 30,
2014 and 2013. 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 income results of the Company and its respective business segments
(including Corporate and Unallocated). Refer to Note 13 for additional information on business segments, including
Elimination of Dual Credit.
Three months ended June 30,
2014 2013 % change
Net Operating Net Operating Net Operating
(Dollars in millions) Sales Income Sales Income Sales Income
Business Segments
Industrial $ 2,815 $ 617 $ 2,683 $ 603 4.9 % 2.4 %
Safety and Graphics 1,494 353 1,434 328 4.1 7.4
Electronics and Energy 1,422 293 1,340 237 6.2 23.4
Health Care 1,416 434 1,336 417 5.9 4.1
Consumer 1,139 241 1,098 235 3.7 2.3
Corporate and Unallocated (1) (49) 1 (87)
Elimination of Dual Credit (151) (33) (140) (31)
Total Company $ 8,134 $ 1,856 $ 7,752 $ 1,702 4.9 % 9.1 %
Sales in the second quarter of 2014 increased 4.9 percent, led by Electronics and Energy at 6.2 percent, Health Care at 5.9
percent, Industrial at 4.9 percent, Safety and Graphics at 4.1 percent, and Consumer at 3.7 percent. Total company organic
local-currency sales increased 4.8 percent, acquisitions increased sales by 0.1 percent, and foreign currency translation
had no impact on worldwide sales. All five of 3M's business segments achieved operating income margins in excess of 20
percent. Worldwide operating income margins for the second quarter of 2014 were 22.8 percent, compared to 22.0 percent for
the second quarter of 2013.
3M generated $2.732 billion of operating cash flows in the first six months of 2014, an increase of $59 million when
compared to the first six months of 2013. Refer to the section entitled "Financial Condition and Liquidity" later in MD&A
for a discussion of items impacting cash flows.
In February 2014, 3M's Board of Directors authorized the repurchase of up to $12 billion of 3M's outstanding common stock,
which replaced the Company's February 2013 repurchase program. This new program has no pre-established end date. In the
first six months of 2014, the Company purchased $3.134 billion of stock, of which a portion was under the previous
authorization, compared to $1.995 billion of stock purchases in the first six months of 2013. As of June 30, 2014,
approximately $9.2 billion remained available under the February 2014 authorization. The Company expects to purchase $4.5
billion to $5.0 billion of stock in 2014. In December 2013, 3M's Board of Directors declared a first-quarter 2014 dividend
of $0.855 per share, an increase of 35 percent. This marked the 56th consecutive year of dividend increases for 3M.
3M's debt to total capital ratio (total capital defined as debt plus equity) was 28 percent at June 30, 2014 and 25 percent
at December 31, 2013. 3M has an AA- credit rating with a stable outlook from Standard & Poor's and an Aa2 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 $100 million to $200 million of cash to its global pension and postretirement plans
in 2014. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2014. 3M
expects defined benefit pension and postretirement expense in 2014 to decrease by approximately $160 million pre-tax when
compared to 2013. The change in both defined benefit and defined contribution plan expenses would increase earnings in 2014
by approximately 15 cents per diluted share when compared to 2013. Refer to Note 8 (Pension and Postretirement Benefit
Plans) for additional information concerning 3M's pension and post-retirement plans. In addition, 3M currently expects that
its effective tax rate for 2014 will be approximately 28.0 to 29.0 percent, compared to 28.1 percent for 2013. The 2014
estimate assumes that the U.S. research and development credit will be reinstated for 2014.
As discussed in Note 4, in July 2014, 3M announced that it will acquire (via Sumitomo 3M Limited) Sumitomo Electric
Industries, Ltd.'s 25 percent interest in 3M's consolidated Sumitomo 3M Limited subsidiary for 90 billion Japanese Yen
(approximately $885 million at announcement date exchange rates). This will add approximately $0.08 per diluted share to
earnings during the first 12 months following closing, with closing expected on September 1, 2014. As a result of this
transaction, 3M expects that its balance sheet amounts for noncontrolling interest equity and 3M Company shareholders'
equity will be reduced by approximately $460 million and $425 million, respectively, based on June 30, 2014 balances, with
an aggregate offsetting reduction to cash held by foreign subsidiaries.
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).
RESULTS OF OPERATIONS
Percent change information compares the second quarter of 2014 with the same period last year, unless otherwise indicated.
Net Sales:
Three months ended June 30, 2014
UnitedStates AsiaPacific Europe,Middle East& Africa Latin America/ Canada Other Unallocated Worldwide
Net sales (millions) $ 2,936 $ 2,371 $ 1,929 $ 901 $ (3) $ 8,134
% of worldwide sales 36.1 % 29.1 % 23.7 % 11.1 % - 100.0 %
Components of net sales change:
Volume - organic 3.6 % 6.4 % 3.6 % (2.2) % - 3.5 %
Price 0.9 0.2 1.2 4.9 - 1.3
Organic local-currency sales 4.5 6.6 4.8 2.7 - 4.8
Acquisitions 0.2 - - - - 0.1
Divestitures (0.1) - - - - -
Translation - (0.7) 3.7 (5.8) - -
Total sales change 4.6 % 5.9 % 8.5 % (3.1) % - 4.9 %
Sales in the second quarter of 2014 increased 4.9 percent when compared to the second quarter of 2013. Organic
local-currency sales grew 4.8 percent, with increases of 6.6 percent in Asia Pacific, 4.8 percent in Europe, Middle East
and Africa, 4.5 percent in the United States, and 2.7 percent in Latin America/Canada. Organic local-currency sales growth
was 7 percent across all developing markets, and 4 percent in developed markets. Currency impacts had no impact on second
quarter 2014 worldwide sales growth, with a benefit in EMEA offset by impacts in Latin America/Canada and Asia Pacific.
Worldwide selling prices rose 1.3 percent in the second quarter of 2014. Selling prices continue to be supported by
technology innovation, which is a key fundamental strength of the Company, helping to drive unique customer solutions and
an increasing flow of new products. 3M also began raising selling prices in mid-2013 to help offset currency weakness in
select developing countries. This will result in 3M's price performance moderating in the second half of 2014, beginning in
the third quarter.
Six months ended June 30, 2014
UnitedStates AsiaPacific Europe,Middle East& Africa Latin America/ Canada Other Unallocated Worldwide
Net sales (millions) $ 5,707 $ 4,732 $ 3,791 $ 1,741 $ (6) $ 15,965
% of worldwide sales 35.7 % 29.6 % 23.8 % 10.9 % - 100.0 %
Components of net sales change:
Volume - organic 2.8 % 6.4 % 3.2 % (1.0) % - 3.6 %
Price 0.7 0.4 1.0 5.6 - 1.2
Organic local-currency sales 3.5 6.8 4.2 4.6 - 4.8
Acquisitions 0.1 - - - - -
Divestitures (0.1) - - - - -
Translation - (2.2) 2.8 (8.5) - (1.0)
Total sales change 3.5 % 4.6 % 7.0 % (3.9) % - 3.8 %
Sales in the first six months of 2014 increased 3.8 percent when compared to the first six months of 2013. Organic
local-currency sales grew 4.8 percent, with increases of 6.8 percent in Asia Pacific, 4.6 percent in Latin America/Canada,
4.2 percent in Europe, Middle East and Africa, and 3.5 percent in the United States. Organic local-currency sales growth
was 6
- More to follow, for following part double click ID:nRSA0731OgRecent news on 3M Co
See all newsREG - Stock Exch Notice - Admission to ISM - 30/11/2023
AnnouncementRCS - 3M Company - StageZero Announces COC Protocol in Europe
AnnouncementREG - Official List - Removal: 3M Company
AnnouncementREG - Stock Exch Notice - Cancellation - 3M Company
AnnouncementREG - 3M Company - 3rd Quarter Results
Announcement