Company Announcements

Annual Financial Report - Part 1

Source: RNS
RNS Number : 6559E
3M Company
12 February 2018
 

 

Click on, or paste the following link into your web browser, to view the associated PDF document.

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l

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

 

Commission file number 1-3285

 

3M COMPANY

 

 

 

State of Incorporation: Delaware

 

I.R.S. Employer Identification No. 41-0417775

Principal executive offices: 3M Center, St. Paul, Minnesota 55144

Telephone number: (651) 733-1110

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

 

 

Title of each class

 

Name of each exchange
on which registered

Common Stock, Par Value $.01 Per Share

 

Floating Rate Notes due 2018

1.500% Notes due 2026

Floating Rate Notes due 2020

0.375% Notes due 2022

0.950% Notes due 2023

1.750% Notes due 2030

1.500% Notes due 2031

 

New York Stock Exchange, Inc.
Chicago Stock Exchange, Inc.

New York Stock Exchange, Inc.

New York Stock Exchange, Inc.

New York Stock Exchange, Inc.

New York Stock Exchange, Inc.

New York Stock Exchange, Inc.

New York Stock Exchange, Inc.

New York Stock Exchange, Inc.

 

Note: The common stock of the Registrant is also traded on the SWX Swiss Exchange.

Securities registered pursuant to section 12(g) of the Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x    No  o

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o    No  x

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this

Form 10-K.  x

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer  x

Accelerated filer  o

 

Non-accelerated filer o

  Smaller reporting company o

Emerging growth company  o

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  o     No  x

 

The aggregate market value of voting stock held by nonaffiliates of the Registrant, computed by reference to the closing price and shares outstanding, was approximately $149.2 billion as of January 31, 2018 (approximately $124.2 billion as of June 30, 2017, the last business day of the Registrant's most recently completed second quarter).

 

Shares of common stock outstanding at January 31, 2018: 595.5 million

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Parts of the Company's definitive proxy statement (to be filed pursuant to Regulation 14A within 120 days after Registrant's fiscal year-end of December 31, 2017) for its annual meeting to be held on May 8, 2018, are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.

 

 

 

3M COMPANY

FORM 10-K

For the Year Ended December 31, 2017

 

Pursuant to Part IV, Item 16, a summary of Form 10-K content follows, including hyperlinked cross-references (in the EDGAR filing). This allows users to easily locate the corresponding items in Form 10-K, where the disclosure is fully presented. The summary does not include certain Part III information that will be incorporated by reference from the proxy statement, which will be filed after this Form 10-K filing.

 

 

 

 

 

 

 

 

 

 

Beginning
Page

PART I

 

 

 

 

ITEM 1

 

Business

 

4

 

 

 

 

 

ITEM 1A

 

Risk Factors

 

10

 

 

 

 

 

ITEM 1B

 

Unresolved Staff Comments

 

13

 

 

 

 

 

ITEM 2

 

Properties

 

13

 

 

 

 

 

ITEM 3

 

Legal Proceedings

 

13

 

 

 

 

 

ITEM 4

 

Mine Safety Disclosures

 

13

 

 

 

 

 

PART II

 

 

 

 

ITEM 5

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

14

 

 

 

 

 

ITEM 6

 

Selected Financial Data

 

16

 

 

 

 

 

ITEM 7

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

 

 

 

 

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 eight sections:

 

 

 

 

 

 

 

 

 

Overview

 

17

 

 

Results of Operations

 

28

 

 

Performance by Business Segment

 

31

 

 

Performance by Geographic Area

 

38

 

 

Critical Accounting Estimates

 

39

 

 

New Accounting Pronouncements

 

43

 

 

Financial Condition and Liquidity

 

43

 

 

Financial Instruments

 

52

 

 

 

 

 

ITEM 7A

 

Quantitative and Qualitative Disclosures About Market Risk

 

52

 

 

 

 

 

ITEM 8

 

Financial Statements and Supplementary Data

 

54

 

 

 

 

 

 

 

Index to Financial Statements

 

54

 

 

 

 

 

 

 

Management's Responsibility for Financial Reporting

 

54

 

 

Management's Report on Internal Control Over Financial Reporting

 

54

 

 

Report of Independent Registered Public Accounting Firm

 

55

 

 

Consolidated Statement of Income for the years ended December 31, 2017, 2016 and 2015

 

57

 

 

Consolidated Statement of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015

 

58

 

 

Consolidated Balance Sheet at December 31, 2017 and 2016

 

59

 

 

 

 

 

 

 

 

 

Beginning
Page

ITEM 8

 

Financial Statements and Supplementary Data (continued)

 

 

 

 

 

 

 

 

 

Consolidated Statement of Changes in Equity for the years ended December 31, 2017, 2016 and 2015

 

60

 

 

Consolidated Statement of Cash Flows for the years ended December 31, 2017, 2016 and 2015

 

61

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

62

 

 

 

 

 

 

 

Note 1. Significant Accounting Policies

 

62

 

 

Note 2. Acquisitions and Divestitures

 

74

 

 

Note 3. Goodwill and Intangible Assets

 

79

 

 

Note 4. Restructuring Actions

 

81

 

 

Note 5. Supplemental Income Statement Information

 

82

 

 

Note 6. Supplemental Balance Sheet Information

 

83

 

 

Note 7. Supplemental Equity and Comprehensive Income Information

 

84

 

 

Note 8. Supplemental Cash Flow Information

 

85

 

 

Note 9. Income Taxes

 

86

 

 

Note 10. Marketable Securities

 

90

 

 

Note 11. Long-Term Debt and Short-Term Borrowings

 

91

 

 

Note 12. Pension and Postretirement Benefit Plans

 

93

 

 

Note 13. Derivatives

 

105

 

 

Note 14. Fair Value Measurements

 

112

 

 

Note 15. Commitments and Contingencies

 

116

 

 

Note 16. Stock-Based Compensation

 

128

 

 

Note 17. Business Segments

 

132

 

 

Note 18. Geographic Areas

 

135

 

 

Note 19. Quarterly Data (Unaudited)

 

135

 

 

 

 

 

ITEM 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

136

 

 

 

 

 

ITEM 9A

 

Controls and Procedures

 

136

 

 

 

 

 

ITEM 9B

 

Other Information

 

136

 

 

 

 

 

PART III

 

 

 

 

ITEM 10

 

Directors, Executive Officers and Corporate Governance

 

137

 

 

 

 

 

ITEM 11

 

Executive Compensation

 

137

 

 

 

 

 

ITEM 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

138

 

 

 

 

 

ITEM 13

 

Certain Relationships and Related Transactions, and Director Independence

 

138

 

 

 

 

 

ITEM 14

 

Principal Accounting Fees and Services

 

138

 

 

 

 

 

PART IV

 

 

 

 

ITEM 15

 

Exhibits, Financial Statement Schedules

 

139

 

 

 

 

 

ITEM 16

 

Form 10-K Summary

 

141

 

 

 

 

 

 

 

 

3M COMPANY

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2017

PART I

 

Item 1. Business.

 

3M Company was incorporated in 1929 under the laws of the State of Delaware to continue operations begun in 1902. The Company's ticker symbol is MMM. As used herein, the term "3M" or "Company" includes 3M Company and its subsidiaries unless the context indicates otherwise. In this document, for any references to Note 1 through Note 19, refer to the Notes to Consolidated Financial Statements in Item 8.

 

Available Information

 

The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company files annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

3M also makes available free of charge through its website (http://investors.3M.com) the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.

 

General

 

3M is a diversified technology company with a global presence in the following businesses: Industrial; Safety and Graphics; Health Care; Electronics and Energy; and Consumer. 3M is among the leading manufacturers of products for many of the markets it serves. Most 3M products involve expertise in product development, manufacturing and marketing, and are subject to competition from products manufactured and sold by other technologically oriented companies.

 

At December 31, 2017, the Company employed 91,536 people (full-time equivalents), with 36,958 employed in the United States and 54,578 employed internationally.

 

Business Segments

 

As described in Notes 3 and 17, effective in the first quarter of 2017, the Company changed its business segment reporting in its continuing effort to improve the alignment of its businesses around markets and customers. Business segment information presented herein reflects the impact of these changes for all periods presented.

 

3M manages its operations in five business segments. The reportable segments are Industrial, Safety and Graphics, Health Care, Electronics and Energy, and Consumer. 3M's five business segments bring together common or related 3M technologies, enhancing the development of innovative products and services and providing for efficient sharing of business resources. Financial information and other disclosures relating to 3M's business segments and operations in major geographic areas are provided in the Notes to Consolidated Financial Statements.

 

Industrial Business: The Industrial segment serves a broad range of markets, such as automotive original equipment manufacturer (OEM) and automotive aftermarket (auto body shops and retail), electronics and automotive electrification, appliance, paper and printing, packaging, food and beverage, and construction. Industrial products include tapes, a wide variety of coated, non-woven and bonded abrasives, adhesives, advanced ceramics, sealants, specialty materials, purification (filtration products), closure systems for personal hygiene products, acoustic systems products, and components and products that are used in the manufacture, repair and maintenance of automotive, marine, aircraft and specialty vehicles. 3M is also a leading global supplier of precision grinding technology serving customers in the area of hard-to-grind precision applications in industrial, automotive, aircraft and cutting tools. 3M develops and produces advanced technical ceramics for demanding applications in the automotive, oil and gas, solar, industrial, electronics and defense industries. In August 2015, 3M acquired assets and liabilities associated with Polypore International, Inc.'s Separations Media business, a leading provider of microporous membranes and modules for filtration in the life sciences, industrial and specialty segments. In the first quarter of 2016, 3M sold the assets of its pressurized polyurethane foam adhesives business, and in October 2016 sold the assets of its adhesive-backed temporary protective films business.

 

Major industrial products include vinyl, polyester, foil and specialty industrial tapes and adhesives; Scotch® Masking Tape, Scotch® Filament Tape and Scotch® Packaging Tape; packaging equipment; 3M™ VHB™ Bonding Tapes; conductive, low surface energy, sealants, hot melt, spray and structural adhesives; reclosable fasteners; label materials for durable goods; coated, nonwoven and microstructured surface finishing and grinding abrasives for the industrial market; a comprehensive line of filtration products for the separation, clarification and purification of fluids and gases; and fluoroelastomers for seals, tubes and gaskets in engines.

 

Major industrial products used in the transportation industry include insulation components, including Thinsulate™ Acoustic Insulation and components for cabin noise reduction and catalytic converters; functional and decorative graphics; abrasion-resistant films; adhesives; sealants; masking tapes; fasteners and tapes for attaching nameplates, trim, moldings, interior panels and carpeting; coated, nonwoven and microstructured finishing and grinding abrasives; structural adhesives; and other specialty materials. In addition, 3M provides paint finishing and detailing products, including a complete system of cleaners, dressings, polishes, waxes and other products.

 

Safety and Graphics Business: The Safety and Graphics segment serves a broad range of markets that increase the safety and productivity of people, facilities and systems. Major product offerings include personal protection products, such as respiratory, hearing, eye and fall protection equipment; commercial solutions, including commercial graphics sheeting and systems, architectural design solutions for surfaces, and cleaning and protection products for commercial establishments; transportation safety solutions, such as retroreflective sign sheeting; and roofing granules for asphalt shingles. In August 2015, 3M acquired Capital Safety Group S.A.R.L., a leading global provider of fall protection equipment. As discussed in Note 2, in October 2017, 3M completed the acquisition of the underlying legal entities and associated assets of Scott Safety, a premier manufacturer of innovative products, including self-contained breathing apparatus systems, gas and flame detection instruments, and other safety devices that complement 3M's personal safety portfolio. In January 2017, 3M sold the assets of its safety prescription eyewear business.

 

This segment's products include personal protection products, such as certain disposable and reusable respirators, fall protection equipment, personal protective equipment, head and face protection, body protection, hearing protection and protective eyewear, plus reflective materials that are widely used on apparel, footwear and accessories, enhancing visibility in low-light situations.

 

Major commercial graphics products include films, inks, and related products used to produce graphics for vehicles, signs and interior surfaces.

 

In transportation safety, 3M provides reflective sheeting used on highway signs, vehicle license plates, construction work-zone devices, trucks and other vehicles, and also provides pavement marking systems. In December 2015, 3M sold Faab Fabricauto, a French manufacturer of license plates and signage solutions, and in the first quarter of 2016 completed the sale of its library systems business. As discussed in Note 2, in May 2017, 3M completed the related sale or transfer of control, as applicable, of its identity management business. In June 2017, 3M also completed the sale of its tolling and automated license/number plate recognition business and in October 2017, sold its electronic monitoring business.

 

Other segment products include spill-control sorbents; nonwoven abrasive materials for floor maintenance and commercial cleaning; floor matting; and natural and color-coated mineral granules for asphalt shingles.

 

Health Care Business: The Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, dental and orthodontic practitioners, health information systems, and food manufacturing and testing. Products and services provided to these and other markets include medical and surgical supplies, skin health and infection prevention products, oral care solutions (dental and orthodontic products), health information systems, inhalation and transdermal drug delivery systems, and food safety products. In March 2015, 3M acquired Ivera Medical Corp., a manufacturer of health care products that disinfect and protect devices used for access into a patient's bloodstream.

 

In advanced wound management, 3M is a supplier of medical tapes, dressings, wound closure products, orthopedic casting materials, in addition to acute wound care, skin integrity and disinfecting port protection products. In infection prevention, 3M markets a variety of surgical drapes, masks and preps, electrodes, stethoscopes, as well as sterilization assurance equipment and patient warming solutions designed to prevent hypothermia in surgical settings. Other products include drug delivery systems, such as metered-dose inhalers, transdermal skin patches and related components. Oral care solutions include restoratives, adhesives, finishing and polishing products, crowns, impression materials, preventive sealants, professional tooth whiteners, prophylaxis and orthodontic appliances, as well as digital workflow solutions to transform traditional impression and analog processes. In health information systems, 3M develops and markets computer software for hospital coding and data classification, and provides related consulting services. 3M provides food safety products that make it faster and easier for food processors to test the microbiological quality of food. As discussed in Note 2, in September 2017, 3M purchased all of the ownership interests of Elution Technologies, LLC, a Vermont-based manufacturer of test kits that help enable food and beverage companies ensure their products are free from certain potentially harmful allergens such as peanuts, soy or milk.

 

Electronics and Energy Business: The Electronics and Energy segment serves customers in electronics and energy markets, including solutions that improve the dependability, cost-effectiveness, and performance of electronic devices; electrical products, including infrastructure protection; telecommunications networks; and power generation and distribution.

 

This segment's electronics solutions include the display materials and systems business, which provides films that serve numerous market segments of the electronic display industry. 3M provides distinct products for five market segments, including products for: 1) LCD computer monitors 2) LCD televisions 3) handheld devices such as cellular phones and tablets 4) notebook PCs and 5) automotive displays. This segment also provides desktop and notebook computer screen filters that address display light control, privacy, and glare reduction needs. Major electronics products also include packaging and interconnection devices; high performance fluids and abrasives used in the manufacture of computer chips, and for cooling electronics and lubricating computer hard disk drives; and high-temperature and display tapes. Flexible circuits use electronic packaging and interconnection technology, providing more connections in less space, and are used in ink-jet printer cartridges, cell phones and electronic devices. This segment also includes touch systems products, including touch screens, touch monitors, and touch sensor components. In December 2016, 3M sold the assets of its cathode battery technology out-licensing business.

 

This segment's energy solutions include electrical products, including infrastructure protection, telecommunications, and renewable energy. This segment serves the world's electrical and telecommunications markets, including electrical utilities, electrical construction, maintenance and repair, original equipment manufacturers (OEM), telecommunications central office, outside plant and enterprise, as well as aerospace, military, automotive and medical markets, with products that enable the efficient transmission of electrical power and speed the delivery of information. Products in this segment include pressure sensitive tapes and resins, electrical insulation, a wide array of fiber-optic and copper-based telecommunications systems for rapid deployment of fixed and wireless networks, as well as the 3M™ Aluminum Conductor Composite Reinforced (ACCR) electrical power cable that increases transmission capacity for existing power lines. This segment also includes renewable energy component solutions for the solar and wind power industries, as well as infrastructure products solutions that provide municipalities both protection and detection solutions for electrical, oil, natural gas, water, rebar and other infrastructure assets.

 

Consumer Business: The Consumer segment serves markets that include consumer retail, office retail, office business to business, home improvement, drug and pharmacy retail, and other markets. Products in this segment include office supply products, stationery products, home improvement products (do-it-yourself), home care products, protective material products, certain consumer retail personal safety products, and consumer health care products.

 

Major consumer products include Scotch® brand products, such as Scotch® Magic™ Tape, Scotch® Glue Stick and Scotch® Cushioned Mailer; Post-it® Products, such as Post-it® Flags, Post-it® Note Pads, Post-it® Labeling & Cover-up Tape, and Post-it® Pop-up Notes and Dispensers; home improvement products, including surface-preparation and wood-finishing materials, Command™ Adhesive Products and Filtrete™ Filters for furnaces and air conditioners; home care products, including Scotch-Brite® Scour Pads, Scotch-Brite® Scrub Sponges, Scotch-Brite® Microfiber Cloth products, O-Cel-O™ Sponges; protective material products, such as Scotchgard™ Fabric Protectors; certain maintenance-free respirators; certain consumer retail personal safety products, including safety glasses, hearing protectors, and 3M Thinsulate™ Insulation, which is used in jackets, pants, gloves, hats and boots to keep people warm; Nexcare™ Adhesive Bandages; and ACE® branded (and related brands) elastic bandage, supports and thermometer product lines.

 

Distribution

 

3M products are sold through numerous distribution channels, including directly to users and through numerous wholesalers, retailers, jobbers, distributors and dealers in a wide variety of trades in many countries around the world. Management believes the confidence of wholesalers, retailers, jobbers, distributors and dealers in 3M and its products - a confidence developed through long association with skilled marketing and sales representatives - has contributed significantly to 3M's position in the marketplace and to its growth.

 

Research and Patents

 

Research and product development constitutes an important part of 3M's activities and has been a major driver of 3M's sales and profit growth. Research, development and related expenses totaled $1.850 billion in 2017, $1.735 billion in 2016 and $1.763 billion in 2015. Research and development, covering basic scientific research and the application of scientific advances in the development of new and improved products and their uses, totaled $1.335 billion in 2017, $1.225 billion in 2016 and $1.223 billion in 2015. Related expenses primarily include technical support; internally developed patent costs, which include costs and fees incurred to prepare, file, secure and maintain patents; amortization of externally acquired patents and externally acquired in-process research and development; and gains/losses associated with certain corporate approved investments in R&D-related ventures, such as equity method effects and impairments.

 

The Company's products are sold around the world under various trademarks. The Company also owns, or holds licenses to use, numerous U.S. and foreign patents. The Company's research and development activities generate a steady stream of inventions that are covered by new patents. Patents applicable to specific products extend for varying periods according to the date of patent application filing or patent grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country.

 

The Company believes that its patents provide an important competitive advantage in many of its businesses. In general, no single patent or group of related patents is in itself essential to the Company as a whole or to any of the Company's business segments.

 

Raw Materials

 

In 2017, the Company continued to manage year-on-year raw material input costs, benefiting from input management, reformulations, and multi-sourcing activities. These efforts more than offset increasing costs in certain raw material categories in oil-derivative chemical feedstock markets. Oil-derivative cost increases also impact other feedstock categories, including petroleum based materials, minerals, metals and wood pulp based products. To date, the Company is receiving sufficient quantities of all raw materials to meet its reasonably foreseeable production requirements. It is difficult to predict future shortages of raw materials or the impact any such shortages would have. 3M has avoided disruption to its manufacturing operations through careful management of existing raw material inventories, strategic relationships with key suppliers, and development and qualification of additional supply sources. 3M manages spend category price risks through negotiated supply contracts, price protection agreements and commodity price swaps.

 

Environmental Law Compliance

 

3M's manufacturing operations are affected by national, state and local environmental laws around the world. 3M has made, and plans to continue making, necessary expenditures for compliance with applicable laws. 3M is also involved in remediation actions relating to environmental matters from past operations at certain sites (refer to "Environmental Matters and Litigation" in Note 15, Commitments and Contingencies).

 

Environmental expenditures relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed. Reserves for liabilities for anticipated remediation costs are recorded on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of feasibility studies, the Company's commitment to a plan of action, or approval by regulatory agencies. Environmental expenditures for capital projects that contribute to current or future operations generally are capitalized and depreciated over their estimated useful lives.

 

In 2017, 3M expended about $33 million for capital projects related to protecting the environment. This amount excludes expenditures for remediation actions relating to existing matters caused by past operations that do not contribute to current or future revenues, which are expensed. Capital expenditures for environmental purposes have included pollution control devices - such as wastewater treatment plant improvements, scrubbers, containment structures, solvent recovery units and thermal oxidizers - at new and existing facilities constructed or upgraded in the normal course of business. Consistent with the Company's emphasis on environmental responsibility, capital expenditures (other than for remediation projects) for known projects are presently expected to be about $66 million over the next two years for new or expanded programs to build facilities or modify manufacturing processes to minimize waste and reduce emissions.

 

While the Company cannot predict with certainty the future costs of such cleanup activities, capital expenditures or operating costs for environmental compliance, the Company does not believe they will have a material effect on its capital expenditures, earnings or competitive position.

 

Executive Officers

 

Following is a list of the executive officers of 3M, and their age, present position, the year elected to their present position and other positions they have held during the past five years. No family relationships exist among any of the executive officers named, nor is there any undisclosed arrangement or understanding pursuant to which any person was selected as an officer. This information is presented in the table below as of the date of the 10-K filing (February 8, 2018).

 

 

 

 

 

 

 

 

 

 

Name

    

Age

    

Present Position

    

Year Elected
to Present
Position

    

Other Positions Held During 2013-2017

Inge. G. Thulin

 

64

 

Chairman of the Board, President and Chief Executive Officer

 

2012

 

 

 

 

 

 

 

 

 

 

 

John P. Banovetz

 

50

 

Senior Vice President, Research and Development and Chief Technology Officer

 

2017

 

Managing Director, DACH Region, 2016-2017

Vice President, Corporate Research Laboratory, Research and Development, 2015-2016

Global Business Director, Industrial Adhesives and Tapes Division, 2012-2015

 

 

 

 

 

 

 

 

 

James L. Bauman

 

58 

 

Executive Vice President, Industrial Business Group

 

2017 

 

Executive Vice President, Electronics and Energy Business Group, 2015-2017

Senior Vice President, Business Transformation, Americas, 2015

Senior Vice President, Asia Pacific, 2012-2014

 

 

 

 

 

 

 

 

 

Julie L. Bushman

 

56 

 

Executive Vice President, International Operations

 

2017

 

Senior Vice President, Business Transformation and Information Technology, 2013-2017

Executive Vice President, Safety and Graphics, 2012-2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Name

    

Age

    

Present Position

    

Year Elected
to Present
Position

    

Other Positions Held During 2013-2017

Joaquin Delgado

 

57 

 

Executive Vice President, Consumer Business Group

 

2016 

 

Executive Vice President, Health Care Business Group 2012-2016

 

 

 

 

 

 

 

 

 

Ivan K. Fong

 

56 

 

Senior Vice President, Legal Affairs and General Counsel

 

2012 

 

 

 

 

 

 

 

 

 

 

 

Nicholas C. Gangestad

 

53

 

Senior Vice President and Chief Financial Officer

 

2014

 

Vice President, Corporate Controller and Chief Accounting Officer, 2011-2014

 

 

 

 

 

 

 

 

 

Eric D. Hammes

 

43

 

Senior Vice President, Business Transformation & Information Technology

 

2017

 

Vice President, Corporate Controller and Chief Accounting Officer, 2014-2017

Vice President, Finance, International and Staff Operations, 2013-2014

Finance Director, Health Care Business, 2012-2013

 

 

 

 

 

 

 

 

 

Paul A. Keel

 

48

 

Senior Vice President, Business Development and Marketing-Sales

 

2017

 

Senior Vice President, Supply Chain, 2014-2017

Managing Director, 3M United Kingdom-Ireland Region, 2013-2014

Vice President and General Manager, Skin and Wound Care Division, 2010-2013

 

 

 

 

 

 

 

 

 

Ashish K. Khandpur

 

50

 

Executive Vice President, Electronics & Energy Business Group

 

2017

 

Senior Vice President, Research and Development, and Chief Technology Officer, 2014-2017

Vice President and General Manager, Personal Safety Division, 2014

Vice President, Research and Development, Industrial Business Group, 2013

 

 

 

 

 

 

 

 

 

Jon T. Lindekugel

 

53

 

Senior Vice President, Supply Chain

 

2017

 

Senior Vice President, Business Development and Marketing-Sales, 2015-2017

Senior Vice President, Business Development, 2014-2015

President, Health Information Systems Inc., 2008-2014

 

 

 

 

 

 

 

 

 

Frank R. Little

 

57

 

Executive Vice President, Safety and Graphics Business Group

 

2013

 

Vice President and General Manager, Personal Safety Division, 2013

 

 

 

 

 

 

 

 

 

Kristen M. Ludgate

 

55

 

Senior Vice President, Corporate Communications and Enterprise Services

 

2018

 

Vice President, Global Human Resources Business Operations, Human Resources, 2017-2018

Vice President, Associate General Counsel and Chief Compliance Officer, Compliance and Business Conduct, 2015-2017

Associate General Counsel, Labor and Employment, Office of General Counsel, 2013-2015

 

 

 

 

 

 

 

 

 

Marlene M. McGrath

 

55

 

Senior Vice President, Human Resources

 

2012

 

 

 

 

 

 

 

 

 

 

 

Michael F. Roman

 

58

 

Chief Operating Officer and Executive Vice President

 

2017

 

Executive Vice President, Industrial Business Group, 2014-2017

Senior Vice President, Business Development, 2013-2014

Vice President and General Manager, Industrial Adhesives and Tapes Division, 2011-2013

 

 

 

 

 

 

 

 

 

Hak Cheol Shin

 

60

 

Vice Chair and Executive Vice President

 

2017

 

Executive Vice President, International Operations, 2011-2017

 

 

 

 

 

 

 

 

 

Michael G. Vale

 

51

 

Executive Vice President, Health Care Business Group

 

2016

 

Executive Vice President, Consumer Business Group, 2012-2016

 

Cautionary Note Concerning Factors That May Affect Future Results

 

This Annual Report on Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7, 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 our suppliers and customers,

·      new business opportunities, product development, and future performance or results of current or anticipated products,

·      the scope, nature or impact of acquisition, strategic alliance and divestiture activities,

·      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 (including the newly enacted Tax Cuts and Jobs Act), 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 I, Item 1A, "Risk Factors," of this document, and should be considered an integral part of Part II, Item 7, "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 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 II, Item 7, "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. The Company's credit ratings have served to lower 3M's borrowing costs and facilitate access to a variety of lenders. The addition of further leverage to the Company's capital structure could impact 3M's credit ratings 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 or 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, patching, maintenance, and backup of systems and data), the Company's information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attacks by hackers, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, service or cloud provider breaches, 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 15 "Commitments and Contingencies" within the Notes to Consolidated Financial Statements.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

In the U.S., 3M's general offices, corporate research laboratories, and certain division laboratories are located in St. Paul, Minnesota. The Company operates 80 manufacturing facilities in 29 states. Internationally, the Company operates 125 manufacturing and converting facilities in 37 countries.

 

3M owns the majority of its physical properties. 3M's physical facilities are highly suitable for the purposes for which they were designed. Because 3M is a global enterprise characterized by substantial intersegment cooperation, properties are often used by multiple business segments.

 

Item 3. Legal Proceedings.

 

Discussion of legal matters is incorporated by reference from Part II, Item 8, Note 15, "Commitments and Contingencies," of this document, and should be considered an integral part of Part I, Item 3, "Legal Proceedings."

 

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. For the year 2017, 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 annual report.

 

 

PART II

 

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Equity compensation plans' information is incorporated by reference from Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," of this document, and should be considered an integral part of Item 5. At January 31, 2018, there were 78,331 shareholders of record. 3M's stock is listed on the New York Stock Exchange, Inc. (NYSE), the Chicago Stock Exchange, Inc., and the SWX Swiss Exchange. Cash dividends declared and paid totaled $1.175 and $1.11 per share for each quarter in 2017 and 2016, respectively. Stock price comparisons follow:

 

Stock price comparisons (NYSE composite transactions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

 

 

    

 

    

 

 

 

(Per share amounts)

 

First Quarter

 

Second Quarter

 

Third Quarter

 

Fourth Quarter

 

Year

 

2017 High

 

$

 193.50

 

$

 214.57

 

$

 214.65

 

$

 244.23

 

$

 244.23

 

2017 Low

 

 

 173.55

 

 

 188.62

 

 

 197.17

 

 

 210.03

 

 

 173.55

 

2016 High

 

$

 167.50

 

$

 175.14

 

$

 182.27

 

$

 180.06

 

$

 182.27

 

2016 Low

 

 

 134.64

 

 

 163.17

 

 

 173.51

 

 

 163.85

 

 

 134.64

 

 

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 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.

 

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, 2017

 

 1,245,580

 

$

 177.61

 

 1,245,347

 

$

 6,835

 

February 1-28, 2017

 

 1,038,362

 

$

 182.41

 

 1,037,719

 

$

 6,645

 

March 1-31, 2017

 

 1,168,893

 

$

 190.75

 

 1,168,893

 

$

 6,422

 

Total January 1-March 31, 2017

 

 3,452,835

 

$

 183.50

 

 3,451,959

 

$

 6,422

 

April 1-30, 2017

 

 934,900

 

$

 191.64

 

 933,463

 

$

 6,244

 

May 1-31, 2017

 

 1,017,290

 

$

 197.80

 

 1,017,000

 

$

 6,042

 

June 1-30, 2017

 

 396,770

 

$

 208.83

 

 396,770

 

$

 5,960

 

Total April 1-June 30, 2017

 

 2,348,960

 

$

 197.21

 

 2,347,233

 

$

 5,960

 

July 1-31, 2017

 

 431,272

 

$

 205.00

 

 431,272

 

$

 5,871

 

August 1-31, 2017

 

 572,552

 

$

 204.69

 

 572,552

 

$

 5,754

 

September 1-30, 2017

 

 893,559

 

$

 209.62

 

 893,559

 

$

 5,567

 

Total July 1-September 30, 2017

 

 1,897,383

 

$

 207.08

 

 1,897,383

 

$

 5,567

 

October 1-31, 2017

 

 982,356

 

$

 220.27

 

 980,804

 

$

 5,351

 

November 1-30, 2017

 

 621,143

 

$

 231.38

 

 621,143

 

$

 5,207

 

December 1-31, 2017

 

 575,924

 

$

 237.86

 

 575,924

 

$

 5,070

 

Total October 1-December 31, 2017

 

 2,179,423

 

$

 228.08

 

 2,177,871

 

$

 5,070

 

Total January 1-December 31, 2017

 

 9,878,601

 

$

 201.13

 

 9,874,446

 

$

 5,070

 

 

 

(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 6. Selected Financial Data.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions, except per share amounts)

    

2017

    

2016

    

2015

    

2014

    

2013

 

 Years ended December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 31,657

 

$

 30,109

 

$

 30,274

 

$

 31,821

 

$

 30,871

 

Net income attributable to 3M

 

 

 4,858

 

 

 5,050

 

 

 4,833

 

 

 4,956

 

 

 4,659

 

Per share of 3M common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M - basic

 

 

 8.13

 

 

 8.35

 

 

 7.72

 

 

 7.63

 

 

 6.83

 

Net income attributable to 3M - diluted

 

 

 7.93

 

 

 8.16

 

 

 7.58

 

 

 7.49

 

 

 6.72

 

Cash dividends declared per 3M common share

 

 

 4.70

 

 

 4.44

 

 

 3.075

 

 

 3.59

 

 

 3.395

 

Cash dividends paid per 3M common share

 

 

 4.70

 

 

 4.44

 

 

 4.10

 

 

 3.42

 

 

 2.54

 

 At December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

 37,987

 

$

 32,906

 

$

 32,883

 

$

 31,374

 

$

 33,304

 

Long-term debt (excluding portion due within one year) and long-term capital lease obligations

 

 

 12,156

 

 

 10,723

 

 

 8,799

 

 

 6,764

 

 

 4,367

 

 

Cash dividends declared and paid totaled $1.175 and $1.11 per share for each quarter in 2017 and 2016, respectively. 3M typically declares and pays dividends in the same quarter. In December 2013 and 2014, 3M declared dividends that were paid in the following first quarter.

 

 

 

Item 7. 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 eight sections:

 

·      Overview

·      Results of Operations

·      Performance by Business Segment

·      Performance by Geographic Area

·      Critical Accounting Estimates

·      New Accounting Pronouncements

·      Financial Condition and Liquidity

·      Financial Instruments

 

Forward-looking statements in Item 7 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 Item 1 and the risk factors provided in Item 1A for discussion of these risks and uncertainties).

 

OVERVIEW

 

3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. As described in Note 17, effective in the first quarter of 2017, 3M improved the alignment of its businesses around markets and customers. Segment information presented herein reflects the impact of these changes for all periods presented. 3M manages its operations in five operating business segments: Industrial; Safety and Graphics; Health Care; Electronics and Energy; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis.

 

Earnings per share (EPS) attributable to 3M common shareholders - diluted:

 

The following table provides the increase (decrease) in diluted earnings per share for the fourth quarter and year 2017 compared to the same period last year, in addition to 2016 compared to 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Year ended 

 

(Earnings per diluted share)

    

December 31, 2017

    

December 31, 2017

 

December 31, 2016

 

Same period last year

 

$

 1.88

 

$

 8.16

 

$

 7.58

 

Increase/(decrease) in earnings per share - diluted, due to:

 

 

 

 

 

 

 

 

 

 

Organic growth/other productivity

 

 

 0.33

 

 

 0.86

 

 

 0.16

 

Acquisitions and divestitures

 

 

 (0.02)

 

 

 0.54

 

 

 0.14

 

Incremental strategic investments

 

 

 (0.06)

 

 

 (0.51)

 

 

 0.14

 

Legal - respirator mask actuarial reserve

 

 

 (0.07)

 

 

 (0.07)

 

 

 -

 

Foreign exchange impacts

 

 

 -

 

 

 (0.13)

 

 

 (0.14)

 

Shares of common stock outstanding

 

 

 -

 

 

 0.08

 

 

 0.24

 

Other net interest

 

 

 (0.09)

 

 

 (0.10)

 

 

 (0.05)

 

Income tax rate, excluding Tax Cuts and Jobs Act (TCJA)

 

 

 0.13

 

 

 0.34

 

 

 0.09

 

Current period, excluding TCJA

 

$

 2.10

 

$

 9.17

 

$

 8.16

 

TCJA enactment impact

 

 

 (1.25)

 

 

 (1.24)

 

 

 -

 

Current period

 

$

 0.85

 

$

 7.93

 

$

 8.16

 

 

Year 2017 and fourth quarter EPS:

 

For the fourth quarter of 2017, net income attributable to 3M was $523 million, or $0.85 per diluted share, compared to $1.155 billion, or $1.88 per diluted share, in the fourth quarter of 2016, a decrease of 54.8 percent on a per diluted share. Excluding the $762 million impact related to the enactment of the Tax Cuts and Jobs Act (TCJA), net income was $1.285 billion, or $2.10 per diluted share, an increase of 11.7 percent on a per diluted share basis compared to the fourth quarter of 2016. For the full year 2017, net income attributable to 3M was $4.858 billion, or $7.93 per diluted share, compared to $5.050 billion, or $8.16 per diluted share, for the full year 2016, a decrease of 2.8 percent on a per diluted share basis. Excluding the 2017 impact related to TCJA, net income was $5.620 billion, or $9.17 per diluted share, an increase of 12.4 percent on a per diluted share basis compared to 2016. The Company refers to various measures excluding the 2017 net impact of enactment of the Tax Cuts and Jobs Act. These non-GAAP measures are further described and reconciled to the most directly comparable GAAP financial measures in the section that follows.

 

Organic growth/productivity in 2017 includes benefits from higher organic local-currency sales, raw material cost decreases from sourcing cost reduction projects, and business transformation, which is having a positive impact on 3M's productivity efforts. These benefits were partially offset by higher defined benefit pension expenses. During both the fourth quarter and full year 2017, organic growth and productivity were the primary drivers for the year-on-year benefit.

 

Acquisitions and divestitures decreased earnings per diluted share by 2 cents year-on-year for the fourth quarter of 2017, while increasing earnings per diluted share by 54 cents year-on-year for the full year 2017. Acquisition impacts, which are measured for the first twelve months post-transaction, relate primarily to the acquisition of Scott Safety (fourth quarter 2017). The net impact related to Scott Safety includes income from operations, more than offset by the transaction and integration costs of the acquisition. Interest expense related to financing costs of Scott Safety are also included. The net impact related to Scott Safety was equivalent to a year-on-year decrease of 7 cents per diluted share. Full year 2017 had year-on-year operating income impacts from the following divestitures: Polyfoam and the remaining portion of the library system business (both in first quarter 2016), protective films business and cathode battery technology out-license business (both in fourth quarter 2016), prescription safety eyewear business (January 2017), identity management business and tolling and automated license/number plate recognition business (both in the second quarter of 2017), and electronic monitoring business (fourth quarter 2017). The incremental year-on-year pre-tax gain on divestiture impact, net of lost operating loss/(income) during the fourth quarter of 2017 was $26 million, or approximately 5 cents per diluted share. For the full year 2017, the year-on-year net pre-tax increase from divestitures was approximately $474 million, which is equivalent to a year-on-year increase of 61 cents per diluted share (primarily related to the identity management business). Additional discussion on divestitures is provided later within the "Divestitures and Strategic Investments" section.

 

Operating income results include year-on-year incremental strategic investments that decreased pre-tax earnings by approximately $51 million and $413 million in the fourth quarter and full year 2017, respectively. These incremental strategic investments are comprised of 3M's investments in growth initiatives and optimization of its portfolio and supply chain footprint. Additional discussion on strategic investments is provided later within the "Divestitures and Strategic Investments" section.

 

In the fourth quarter of 2017, as a result of the Company's regular review of its respirator mask/asbestos liabilities, the Company increased its accruals. This incremental increase resulted in a year-on-year decrease of 7 cents per diluted share. Refer to Note 15 for more details.

 

Foreign currency impacts (net of hedging) decreased pre-tax earnings by approximately $3 million and $111 million year-on-year in the fourth quarter and full year 2017, respectively, excluding the impact of foreign currency changes on tax rates. This had a minimal impact per diluted share in the fourth quarter of 2017, and is equivalent to a year-on-year decrease of 13 cents per diluted share for the full year 2017.

 

Weighted-average diluted shares outstanding in the fourth quarter and full year 2017 declined 0.1 percent and 1.0 percent year-on-year, respectively, which benefited earnings per share. The Company purchased $504 million and $2.1 billion of its own stock in the fourth quarter and full year 2017, respectively.

 

Other net interest decreased earnings per share for both fourth quarter and full year 2017, largely due to the loss on extinguishment of debt, higher U.S. average balances, and higher interest rates. The early extinguishment of debt resulted in a charge of $96 million, which contributed to a year-on-year decrease of 11 cents per diluted share for both the fourth quarter and full year 2017. Additionally, the portion of interest expense related to the financing costs of acquiring Scott Safety, which was equivalent to a year-on-year decrease of 2 cents per diluted share, is included in the acquisitions and divestitures impact described above.

 

As discussed in the section below, the Company recorded a net tax expense of $762 million related to the enactment of the TCJA, which was equivalent to a decrease of $1.25 per diluted share in the fourth quarter of 2017. The effective tax rate for the fourth quarter 2017 was 68.6 percent, an increase of 40.4 percentage points versus 2016. Excluding the impact of TCJA, the effective income tax rate was 23.0 percent in the fourth quarter 2017, a decrease of 5.2 percentage points versus 2016. For the full year 2017, the effective tax rate was 35.5 percent, an increase of 7.2 percentage points versus 2016. Excluding the impact of TCJA, the effective income tax rate was 25.4 percent in the full year 2017, a decrease of 2.9 percentage points versus 2016. Excluding the impact of TCJA, the fourth quarter and full year 2017 change in tax rate was driven largely by increasing benefits from our supply chain centers of expertise, favorable geographic mix and other items, as referenced in Note 9.

 

Income, earnings per share, and effective tax rate adjusted for impacts of the Tax Cuts and Jobs Act (TCJA) -  (non-GAAP measures):

 

During the fourth quarter of 2017, 3M recorded a net tax expense of $762 million related to the enactment of the Tax Cuts and Jobs Act (TCJA). The expense is primarily related to the TCJA's transition tax on previously unremitted earnings of non-U.S. subsidiaries and is net of remeasurement of 3M's deferred tax assets and liabilities considering the TCJA's newly enacted tax rates and certain other impacts. This provisional amount is subject to adjustment during the measurement period of up to one year following the December 2017 enactment of the TCJA, as provided by recent SEC guidance. See additional information in Note 9. In addition to reporting financial results in accordance with U.S. GAAP, the Company also provides non-GAAP measures that adjust for the net impact of enactment of the TCJA. This item represents a significant charge that impacted the Company's financial results. Income, earnings per share, and the effective tax rate are all measures for which 3M provides the reported GAAP measure and an adjusted measure. The adjusted measures are not in accordance with, nor are they a substitute for, GAAP measures. The Company considers these non-GAAP measures in evaluating and managing the Company's operations. The Company believes that discussion of results adjusted for this item is meaningful to investors as it provides a useful analysis of ongoing underlying operating trends. The determination of this item may not be comparable to similarly titled measures used by other companies.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 2017

 

 

 

 

 

Q4 2016

 

 

 

Q4 2017

 

 

Adjusted income, earnings per share, & effective tax rate (non-GAAP measures) (Dollars in millions, except per share amounts)

 

 

Reported GAAP Measure

 

 

 

Reported GAAP Measure

 

 

Adjustment for TCJA

 

 

Adjusted Non-GAAP Measure

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

 1,665

 

 

$

 1,821

 

$

 -

 

$

 1,821

 

 

Income before taxes

 

$

 1,610

 

 

$

 1,672

 

$

 -

 

$

 1,672

 

 

Provision for income taxes

 

$

 454

 

 

$

 1,147

 

$

 (762)

 

$

 385

 

 

Effective tax rate

 

 

 28.2

%  

 

 

 68.6

%  

 

 

 

 

 23.0

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

 1,155

 

 

$

 523

 

$

 762

 

$

 1,285

 

 

Earnings per diluted share

 

$

 1.88

 

 

$

 0.85

 

$

 1.25

 

$

 2.10

 

 

Earnings per diluted share percent change

 

 

 

 

 

 

(54.8)

%  

 

 

 

 

 11.7

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2017

 

 

 

 

 

 Year End 2016

 

 

 

 Year End 2017

 

 

Adjusted income, earnings per share, & effective tax rate (non-GAAP measures) (Dollars in millions, except per share amounts)

 

 

Reported GAAP Measure

 

 

 

Reported GAAP Measure

 

 

Adjustment for TCJA

 

 

Adjusted Non-GAAP Measure

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

 7,223

 

 

$

 7,820

 

$

 -

 

$

 7,820

 

 

Income before taxes

 

$

 7,053

 

 

$

 7,548

 

$

 -

 

$

 7,548

 

 

Provision for income taxes

 

$

 1,995

 

 

$

 2,679

 

$

 (762)

 

$

 1,917

 

 

Effective tax rate

 

 

 28.3

%  

 

 

 35.5

%  

 

 

 

 

 25.4

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

 5,050

 

 

$

 4,858

 

$

 762

 

$

 5,620

 

 

Earnings per diluted share

 

$

 8.16

 

 

$

 7.93

 

$

 1.24

 

$

 9.17

 

 

Earnings per diluted share percent change

 

 

 

 

 

 

(2.8)

%  

 

 

 

 

12.4

%  

 

 

Year 2016 EPS:

 

For total year 2016, productivity and other increased earnings, helped by lower defined benefit pension and postretirement expenses, higher selling prices, lower raw material costs, and productivity benefits related to the fourth quarter 2015 restructuring. These benefits were partially offset by the impact of flat organic sales and lower asset utilization.

 

Acquisition and divestiture impacts, which are measured for the first twelve months post-transaction, related to the acquisitions of Membrana and Capital Safety (third quarter 2015) and Semfinder (September 2016), and the divestitures of Polyfoam (first quarter 2016), the library systems business (fourth quarter 2015/first quarter 2016), and the license plate converting business in France (fourth quarter 2015). In addition, in the fourth quarter of 2016, 3M sold the assets of its protective films business and its cathode battery technology out-licensing business. On a combined basis, these acquisition/divestiture year-on-year impacts resulted in a 14 cents per diluted share benefit to earnings per share in 2016, driven by solid performances from 2015 acquisitions and year-on-year divestiture gains. Refer to Note 2 for further discussion of these acquisition/divestiture impacts.

 

Restructuring actions (included within incremental strategic investments in the preceding table) resulted in an after-tax charge of 14 cents per diluted share in 2015, which provided a year-on-year benefit in 2016.

 

Foreign exchange impacts (net of hedging) decreased pre-tax earnings by approximately $127 million year-on-year in 2016, excluding the impact of foreign currency changes on tax rates. This was equivalent to a year-on-year decrease of 14 cents per diluted share for 2016.

 

Weighted-average diluted shares outstanding in 2016 declined 3 percent versus 2015, which benefited earnings per share. The benefits from share repurchases, net of issuances, were partially offset by the adoption of ASU No. 2016-09, which increased the calculated number of diluted shares in 2016.

 

Higher average debt balances led to an increase in interest expense year-on-year in 2016.

 

The income tax rate was 28.3 percent in 2016, a decline of 0.8 percentage points versus last year. The 2016 change in tax rate was driven by a number of factors as referenced in Note 9, including the first quarter 2016 adoption of Accounting Standards Update (ASU) No. 2016-09 (discussed in Note 1).

 

 

 

Fourth quarter 2017 sales and operating income by business segment:

 

The following tables contain sales and operating income results by business segment for the fourth quarters of 2017 and 2016, followed by additional discussion of business segment results.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Three months ended 

 

2017 vs 2016

 

 

 

December 31, 2017

 

December 31, 2016

 

% change

 

 

    

Net

    

% of

    

Oper.

    

Net

    

% of

    

Oper.

    

Net

    

Oper.

 

(Dollars in millions)

 

Sales

 

Total

 

Income

 

Sales

 

Total

 

Income

 

Sales

 

Income

 

Business Segments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

$

 2,718

 

 34.0

%  

$

 527

 

$

 2,543

 

 34.7

%  

$

 558

 

 6.9

%  

 (5.5)

%

Safety and Graphics

 

 

 1,545

 

 19.3

 

 

 406

 

 

 1,343

 

 18.3

 

 

 271

 

 15.0

 

 50.0

 

Health Care

 

 

 1,474

 

 18.4

 

 

 464

 

 

 1,390

 

 19.0

 

 

 413

 

 6.0

 

 12.3

 

Electronics and Energy

 

 

 1,321

 

 16.6

 

 

 334

 

 

 1,175

 

 16.0

 

 

 325

 

 12.5

 

 2.6

 

Consumer

 

 

 1,174

 

 14.7

 

 

 269

 

 

 1,094

 

 14.9

 

 

 229

 

 7.3

 

 17.6

 

Corporate and Unallocated

 

 

 (4)

 

 -

 

 

 (127)

 

 

 2

 

 -

 

 

 (83)

 

 -

 

 -

 

Elimination of Dual Credit

 

 

 (238)

 

 (3.0)

 

 

 (52)

 

 

 (218)

 

 (2.9)

 

 

 (48)

 

 -

 

 -

 

Total Company

 

$

 7,990

 

 100.0

%  

$

 1,821

 

$

 7,329

 

 100.0

%  

$

 1,665

 

 9.0

%  

 9.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 2017

 

 

    

Organic

    

    

    

    

    

    

    

    

 

Worldwide

 

local-

 

 

 

 

 

 

 

Total

 

Sales Change Analysis

 

currency

 

 

 

 

 

 

 

sales

 

By Business Segment

 

sales

 

Acquisitions

 

Divestitures

 

Translation

 

change

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 3.9

%  

 -

%  

 -

%  

 3.0

%  

 6.9

%

Safety and Graphics

 

 10.7

 

 10.2

 

 (9.1)

 

 3.2

 

 15.0

 

Health Care

 

 3.1

 

 0.1

 

 -

 

 2.8

 

 6.0

 

Electronics and Energy

 

 11.0

 

 -

 

 (0.3)

 

 1.8

 

 12.5

 

Consumer

 

 5.4

 

 -

 

 -

 

 1.9

 

 7.3

 

Total Company

 

 6.0

%  

 1.8

%  

 (1.5)

%  

 2.7

%  

 9.0

%

 

From a business segment perspective, 3M achieved both total sales growth and organic local-currency sales growth (which includes organic volume and selling price impacts) in all five business segments. Operating income margins were 22.8 percent, with four of five business segments above 22 percent.

 

·      In Industrial, total sales increased 6.9 percent, or 3.9 percent on an organic local currency basis, with organic sales growth in abrasives, automotive and aerospace solutions, industrial adhesives and tapes, automotive aftermarket, and separation and purification. Organic sales declined in advanced materials. Operating income margins were 19.4 percent, down 2.5 percentage points, with the decline driven by incremental strategic investments and a fourth quarter 2016 gain on sale of the temporary protective films business.

·      In Safety and Graphics, total sales increased 15.0 percent, or 10.7 percent on an organic local currency basis. Organic sales grew in all businesses, led by personal safety, roofing granules, and transportation safety. Operating income margins were 26.3 percent, up 6.1 percentage points, with 2.4 percentage points of this increase driven by divestitures, partially offset by acquisitions and incremental strategic investments.

·      In Health Care, total sales increased 6.0 percent, or 3.1 percent on an organic local currency sales basis. Organic sales grew in food safety, health information systems, medical consumables, and oral care. Organic sales declined in drug delivery systems. Operating income margins were 31.5 percent, up 1.8 percentage points.

·      In Electronics and Energy, total sales increased 12.5 percent, or 11.0 percent on an organic local currency basis. Electronics-related organic sales increased 14 percent, with growth in both electronics materials solutions and display materials and systems. Energy-related organic sales increased 4 percent as growth in electrical markets was partially offset by declines in telecommunications markets. Operating income margins were 25.2 percent, down 2.5 percentage points. The fourth quarter 2016 gain on sale of intellectual property and fourth quarter 2017 incremental strategic investments negatively impacted operating income margins by 3.3 percentage points.

·      In Consumer, total sales increased 7.3 percent, or 5.4 percent on an organic local currency basis. Organic sales grew in consumer health care, home improvement, and stationery and office, while sales in home care were flat. Operating income margins were 22.9 percent, up 2.0 percentage points

 

Year 2017 sales and operating income by business segment:

 

The following tables contain sales and operating income results by business segment for the years ended December 31, 2017 and 2016. Refer to the section entitled "Performance by Business Segment" later in MD&A for additional discussion concerning both 2017 versus 2016 results and 2016 versus 2015 results, including Corporate and Unallocated. Refer to Note 17 for additional information on business segments, including Elimination of Dual Credit.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 vs 2016

 

 

 

2017

 

2016

 

% change

 

 

    

Net

    

% of

    

Oper.

    

Net

    

% of

    

Oper.

    

Net

    

Oper.

 

(Dollars in millions)

 

Sales

 

Total

 

Income

 

Sales

 

Total

 

Income

 

Sales

 

Income

 

Business Segments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

$

 10,911

 

 34.5

%  

$

 2,289

 

$

 10,399

 

 34.5

%  

$

 2,395

 

 4.9

%  

 (4.4)

%

Safety and Graphics

 

 

 6,148

 

 19.4

 

 

 2,067

 

 

 5,881

 

 19.5

 

 

 1,423

 

 4.5

 

 45.3

 

Health Care

 

 

 5,813

 

 18.4

 

 

 1,781

 

 

 5,566

 

 18.5

 

 

 1,763

 

 4.4

 

 1.0

 

Electronics and Energy

 

 

 5,159

 

 16.3

 

 

 1,254

 

 

 4,643

 

 15.4

 

 

 1,041

 

 11.1

 

 20.4

 

Consumer

 

 

 4,589

 

 14.5

 

 

 993

 

 

 4,484

 

 14.9

 

 

 1,065

 

 2.3

 

 (6.8)

 

Corporate and Unallocated

 

 

 1

 

 -

 

 

 (352)

 

 

 7

 

 -

 

 

 (272)

 

 -

 

 -

 

Elimination of Dual Credit

 

 

 (964)

 

 (3.1)

 

 

 (212)

 

 

 (871)

 

 (2.8)

 

 

 (192)

 

 -

 

 -

 

Total Company

 

$

 31,657

 

 100.0

%  

$

 7,820

 

$

 30,109

 

 100.0

%  

$

 7,223

 

 5.1

%  

 8.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2017

 

Worldwide Sales Change

 

Organic local-

 

 

 

 

 

 

 

Total sales

 

By Business Segment

 

currency sales

 

Acquisitions

 

Divestitures

 

Translation

 

change

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 4.9

%  

 -

%  

 (0.5)

%  

 0.5

 %  

 4.9

%

Safety and Graphics

 

 6.1

 

 2.2

 

 (4.3)

 

 0.5

 

 4.5

 

Health Care

 

 3.9

 

 -

 

 -

 

 0.5

 

 4.4

 

Electronics and Energy

 

 11.0

 

 -

 

 (0.2)

 

 0.3

 

 11.1

 

Consumer

 

 1.7

 

 -

 

 -

 

 0.6

 

 2.3

 

Total Company

 

 5.2

%  

 0.4

%  

 (1.0)

%  

 0.5

%  

 5.1

%

 

 

 

Fourth-quarter 2017 sales results by geographic area/business segment: 

 

Percent change information compares the fourth quarter 2017 with the same period last year, unless otherwise indicated. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 2017

 

 

 

 

 

 

 

 

 

Europe,

 

Latin

 

 

 

 

 

 

 

 

 

United

 

Asia

 

Middle East

 

America/

 

Other

 

 

 

 

 

    

States

    

Pacific

    

& Africa

    

Canada

    

Unallocated

    

Worldwide

 

Net sales (millions)

 

$

 3,081

 

$

 2,474

 

$

 1,684

 

$

 756

 

$

 (5)

 

$

 7,990

 

% of worldwide sales

 

 

 38.5

%

 

 31.0

%

 

 21.1

%

 

 9.4

%

 

 -

 

 

 100.0

%

Components of net sales change:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume - organic

 

 

 3.1

%

 

 12.0

%

 

 5.4

%

 

 1.2

%

 

 -

 

 

 5.8

%

Price

 

 

 (0.3)

 

 

 (0.1)

 

 

 1.4

 

 

 1.3

 

 

 -

 

 

 0.2

 

Organic local-currency sales

 

 

 2.8

 

 

 11.9

 

 

 6.8

 

 

 2.5

 

 

 -

 

 

 6.0

 

Acquisitions

 

 

 2.2

 

 

 0.7

 

 

 3.2

 

 

 0.7

 

 

 -

 

 

 1.8

 

Divestitures

 

 

 (2.0)

 

 

 (0.7)

 

 

 (1.7)

 

 

 (1.5)

 

 

 -

 

 

 (1.5)

 

Translation

 

 

 -

 

 

 2.5

 

 

 8.8

 

 

 2.3

 

 

 -

 

 

 2.7

 

Total sales change

 

 

 3.0

%

 

 14.4

%

 

 17.1

%

 

 4.0

%

 

 -

 

 

 9.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total sales change:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 0.5

%

 

 10.9

%

 

 15.4

%

 

 6.8

%

 

 -

 

 

 6.9

%

Safety and Graphics

 

 

 9.8

%

 

 21.1

%

 

 28.1

%

 

 (0.2)

%

 

 -

 

 

 15.0

%

Health Care

 

 

 1.1

%

 

 14.4

%

 

 11.7

%

 

 6.1

%

 

 -

 

 

 6.0

%

Electronics and Energy

 

 

 6.1

%

 

 15.8

%

 

 13.4

%

 

 0.6

%

 

 -

 

 

 12.5

%

Consumer

 

 

 4.7

%

 

 11.0

%

 

 16.9

%

 

 8.3

%

 

 -

 

 

 7.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Organic local-currency sales change:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 0.5

%

 

 8.1

%

 

 6.1

%

 

 4.7

%

 

 -

 

 

 3.9

%

Safety and Graphics

 

 

 9.4

%

 

 18.2

%

 

 12.4

%

 

 0.7

%

 

 -

 

 

 10.7

%

Health Care

 

 

 1.0

%

 

 10.9

%

 

 3.3

%

 

 3.8

%

 

 -

 

 

 3.1

%

Electronics and Energy

 

 

 7.2

%

 

 14.6

%

 

 6.0

%

 

 (1.6)

%

 

 -

 

 

 11.0

%

Consumer

 

 

 4.7

%

 

 7.5

%

 

 7.9

%

 

 5.5

%

 

 -

 

 

 5.4

%

 

Additional information beyond what is included in the preceding table is as follows:

 

·      In the Asia Pacific geographic area, where 3M's Electronics and Energy business is concentrated, sales benefited from strengthened demand across most electronics market segments in addition to strong growth in 3M's Safety and Graphics business. In China/Hong Kong, total sales increased 21 percent and organic local-currency sales increased 18 percent. In Japan, total sales increased 6 percent, as organic local-currency sales growth of 7 percent was partially offset by foreign currency translation impacts.

·      In the EMEA geographic area, Central/East Europe and Middle East/Africa had total sales increase by 14 percent, with organic local-currency sales increases of 12 percent. West Europe total sales grew 18 percent, driven by foreign currency translation impacts, in addition to organic local-currency sales growth of 5 percent.

·      In the Latin America/Canada geographic area, total sales increased 7 percent in Mexico, driven by foreign currency translation impacts, in addition to organic local-currency sales growth of 3 percent. In Canada, total sales increased 13 percent, driven by organic local-currency sales growth of 8 percent. In Brazil, total sales and organic local-currency sales increased 3 percent.

 

Selling prices were up 0.2 percent year-on-year for the fourth quarter of 2017. In Asia Pacific, strong volume growth in electronics had a negative impact on price. EMEA and Latin America/Canada had price growth, while U.S. selling prices declined slightly.

 

 

 

Year 2017 sales results by geographic area/business segment: 

 

Percent change information compares the full year 2017 with the same period last year, unless otherwise indicated. Additional discussion of business segment results is provided in the Performance by Business Segment section.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2017

 

 

 

 

 

 

 

 

 

Europe,

 

Latin

 

 

 

 

 

 

 

 

 

United

 

Asia

 

Middle East

 

America/

 

Other

 

 

 

 

 

    

States

    

Pacific

    

& Africa

    

Canada

    

Unallocated

    

Worldwide

 

Net sales (millions)

 

$

 12,372

 

$

 9,809

 

$

 6,456

 

$

 3,033

 

$

 (13)

 

$

 31,657

 

% of worldwide sales

 

 

 39.1

%

 

 31.0

%

 

 20.4

%

 

 9.5

%

 

 -

 

 

100.0

%

Components of net sales change:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume - organic

 

 

 2.8

%

 

 11.5

%

 

 2.5

%

 

 2.5

%

 

 -

 

 

 5.2

%

Price

 

 

 (0.3)

 

 

 (0.3)

 

 

 0.7

 

 

 1.1

 

 

 -

 

 

 -

 

Organic local-currency sales

 

 

 2.5

 

 

 11.2

 

 

 3.2

 

 

 3.6

 

 

 -

 

 

 5.2

 

Acquisitions

 

 

 0.5

 

 

 0.2

 

 

 0.7

 

 

 0.2

 

 

 -

 

 

 0.4

 

Divestitures

 

 

 (1.5)

 

 

 (0.4)

 

 

 (0.8)

 

 

 (1.4)

 

 

 -

 

 

 (1.0)

 

Translation

 

 

 -

 

 

 (0.1)

 

 

 1.7

 

 

 2.2

 

 

 -

 

 

 0.5

 

Total sales change

 

 

 1.5

%

 

 10.9

%

 

 4.8

%

 

 4.6

%

 

 -

 

 

 5.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total sales change:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 3.0

%

 

 7.3

%

 

 5.9

%

 

 4.9

%

 

 -

 

 

 4.9

%

Safety and Graphics

 

 

 1.3

%

 

 8.8

%

 

 8.4

%

 

 0.6

%

 

 -

 

 

 4.5

%

Health Care

 

 

 3.7

%

 

 8.6

%

 

 1.4

%

 

 9.3

%

 

 -

 

 

 4.4

%

Electronics and Energy

 

 

 1.0

%

 

 16.9

%

 

 2.2

%

 

 3.1

%

 

 -

 

 

 11.1

%

Consumer

 

 

 0.2

%

 

 7.8

%

 

 1.7

%

 

 7.2

%

 

 -

 

 

 2.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Organic local-currency sales change:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 3.9

%

 

 7.9

%

 

 4.2

%

 

 3.2

%

 

 -

 

 

 4.9

%

Safety and Graphics

 

 

 4.2

%

 

 10.5

%

 

 6.6

%

 

 2.6

%

 

 -

 

 

 6.1

%

Health Care

 

 

 3.7

%

 

 8.5

%

 

 0.2

%

 

 7.0

%

 

 -

 

 

 3.9

%

Electronics and Energy

 

 

 2.0

%

 

 17.0

%

 

 -

%

 

 1.4

%

 

 -

 

 

 11.0

%

Consumer

 

 

 0.2

%

 

 7.0

%

 

 (0.2)

%

 

 4.2

%

 

 -

 

 

 1.7

%

 

Additional information beyond what is included in the preceding table is as follows:

 

·      In the Asia Pacific geographic area, where 3M's Electronics and Energy business is concentrated, sales benefited from strengthened demand across most electronics market segments, in addition to strong growth in 3M's Safety and Graphics business. Total sales in China/Hong Kong grew 16 percent and Japan grew 5 percent. On an organic local-currency sales basis, China/Hong Kong grew 18 percent and Japan grew 8 percent.

·      In the EMEA geographic area, Central/East Europe and Middle East/Africa total sales and organic local-currency grew 5 percent. West Europe total sales grew 5 percent, with organic local-currency sales growth of 3 percent along with an increase related to foreign currency translation.

·      In the Latin America/Canada geographic area, total sales increased 4 percent in Mexico, as organic local-currency sales growth of 6 percent was partially offset by divestitures. In Canada, total sales increased 8 percent, with organic-local currency sales growth of 7 percent. In Brazil total sales growth of 9 percent was driven by foreign currency translation, while organic local-currency sales increased 2 percent.

 

Foreign currency translation increased year-on-year sales by 0.5 percent, with the translation-related sales increase in Latin America/Canada and EMEA partially offset by the decreases in Asia Pacific. Selling prices were flat year-on-year for 2017. In Asia Pacific, strong volume growth in electronics had a negative impact on price. Latin America/Canada and EMEA had price growth, while the U.S. selling prices declined slightly.

 

 

Year 2016 sales results by geographic area/business segment: 

 

Percent change information compares the full year 2016 with the full year 2015, unless otherwise indicated. Additional discussion of business segment results is provided in the Performance by Business Segment section.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2016

 

 

 

 

 

 

 

 

 

Europe,

 

Latin

 

 

 

 

 

 

 

 

 

United

 

Asia

 

Middle East

 

America/

 

Other

 

 

 

 

 

    

States

    

Pacific

    

& Africa

    

Canada

    

Unallocated

    

Worldwide

 

Net sales (millions)

 

$

 12,188

 

$

 8,847

 

$

 6,163

 

$

 2,901

 

$

 10

 

$

 30,109

 

% of worldwide sales

 

 

 40.5

%

 

 29.4

%

 

 20.5

%

 

 9.6

%

 

 -

 

 

100.0

%

Components of net sales change:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume - organic

 

 

 0.7

%

 

 (2.5)

%

 

 (0.6)

%

 

 (2.4)

%

 

 -

 

 

 (0.8)

%

Price

 

 

 (0.2)

 

 

 (0.3)

 

 

 1.0

 

 

 6.1

 

 

 -

 

 

 0.7

 

Organic local-currency sales

 

 

 0.5

 

 

 (2.8)

 

 

 0.4

 

 

 3.7

 

 

 -

 

 

 (0.1)

 

Acquisitions

 

 

 1.3

 

 

 0.7

 

 

 1.7

 

 

 1.3

 

 

 -

 

 

 1.2

 

Divestitures

 

 

 (0.6)

 

 

 (0.2)

 

 

 (0.7)

 

 

 (0.3)

 

 

 -

 

 

 (0.4)

 

Translation

 

 

 -

 

 

 0.2

 

 

 (2.5)

 

 

 (7.4)

 

 

 -

 

 

 (1.2)

 

Total sales change

 

 

 1.2

%

 

 (2.1)

%

 

 (1.1)

%

 

 (2.7)

%

 

 -

 

 

 (0.5)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total sales change:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 (1.6)

%

 

 0.9

%

 

 2.8

%

 

 (2.2)

%

 

 -

 

 

 0.1

%

Safety and Graphics

 

 

 6.9

%

 

 1.6

%

 

 (2.7)

%

 

 -

%

 

 -

 

 

 2.5

%

Health Care

 

 

 3.0

%

 

 8.2

%

 

 (2.4)

%

 

 (1.2)

%

 

 -

 

 

 2.1

%

Electronics and Energy

 

 

 (1.9)

%

 

 (11.4)

%

 

 (2.6)

%

 

 (9.2)

%

 

 -

 

 

 (8.4)

%

Consumer

 

 

 2.4

%

 

 7.2

%

 

 (8.2)

%

 

 (5.9)

%

 

 -

 

 

 1.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Organic local-currency sales change:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 (2.1)

%

 

 (0.7)

%

 

 1.8

%

 

 4.8

%

 

 -

 

 

 (0.1)

%

Safety and Graphics

 

 

 2.9

%

 

 1.4

%

 

 0.2

%

 

 4.2

%

 

 -

 

 

 2.1

%

Health Care

 

 

 2.6

%

 

 8.0

%

 

 1.2

%

 

 6.9

%

 

 -

 

 

 3.6

%

Electronics and Energy

 

 

 (1.9)

%

 

 (11.4)

%

 

 (1.0)

%

 

 (2.3)

%

 

 -

 

 

 (7.8)

%

Consumer

 

 

 2.4

%

 

 6.0

%

 

 (6.2)

%

 

 0.1

%

 

 -

 

 

 1.8

%

 

Sales totaled $30.1 billion, a decrease of 0.5 percent from 2015. Organic local-currency sales declined 0.1 percent, with organic volume declines of 0.8 percent largely offset by selling price increases of 0.7 percent. Acquisitions added 1.2 percent to sales, while divestitures reduced sales by 0.4 percent. Foreign currency translation reduced sales by 1.2 percent year-on-year.

 

Total sales increased 1.2 percent in the United States, and declined 1.1 percent in EMEA, 2.1 percent in Asia Pacific, and 2.7 percent in Latin America/Canada. Organic local-currency sales grew 3.7 percent in Latin America/Canada, 0.5 percent in the United States, 0.4 percent in EMEA, and declined 2.8 percent in Asia Pacific.

 

Financial condition:

 

3M generated $6.2 billion of operating cash flow in 2017, a decrease of $422 million when compared to 2016. This followed an increase of $242 million when comparing 2016 to 2015. Refer to the section entitled "Financial Condition and Liquidity" later in MD&A for a discussion of items impacting cash flows. In February 2016, 3M's Board of Directors authorized the repurchase of up to $10 billion of 3M's outstanding common stock. This program has no pre-established end date. In 2017, the Company purchased $2.1 billion of its own stock, compared to purchases of $3.8 billion in 2016 and $5.2 billion in 2015. The Company expects to purchase $2.0 billion to $5.0 billion of its own stock in 2018. In January 2018, 3M's Board of Directors declared a first-quarter 2018 dividend of $1.36 per share, an increase of 16 percent. This marked the 60th consecutive year of dividend increases for 3M. The Company has an AA- credit rating, with a stable outlook, from Standard & Poor's and an A1 credit rating, with a stable outlook, from Moody's Investors Service. The Company generates significant ongoing cash flow and has proven access to capital markets funding throughout business cycles.

 

Raw materials:

 

In 2017, the Company continued to manage year-on-year raw material input costs, benefiting from input management, reformulations, and multi-sourcing activities. These efforts more than offset increasing costs in certain raw material categories in oil-derivative chemical feedstock markets. Oil-derivative cost increases also impact other feedstock categories, including petroleum based materials, minerals, metals and wood pulp based products. To date, the Company is receiving sufficient quantities of all raw materials to meet its reasonably foreseeable production requirements. It is difficult to predict future shortages of raw materials or the impact any such shortages would have. 3M has avoided disruption to its manufacturing operations through careful management of existing raw material inventories, strategic relationships with key suppliers, and development and qualification of additional supply sources. 3M manages spend category price risks through negotiated supply contracts, price protection agreements and commodity price swaps.

 

Pension and postretirement defined benefit/contribution plans:

 

On a worldwide basis, 3M's pension and postretirement plans were 87 percent funded at year-end 2017. The primary U.S. qualified pension plan, which is approximately 67 percent of the worldwide pension obligation, was 94 percent funded and the international pension plans were 90 percent funded. The U.S. non-qualified pension plan is not funded due to tax considerations and other factors. Asset returns in 2017 for the primary U.S. qualified pension plan were 12.4%, as 3M strategically invests in both growth assets and fixed income matching assets to manage its funded status. For the primary U.S. qualified pension plan, the expected long-term rate of return on an annualized basis for 2018 is 7.25%, consistent with 2017. The primary U.S. qualified pension plan year-end 2017 discount rate was 3.68%, down 0.53 percentage points from the year-end 2016 discount rate of 4.21%. The decrease in U.S. discount rates resulted in an increased valuation of the projected benefit obligation (PBO). The primary U.S. qualified pension plan's funded status increased 4 percentage points in 2017 as strong plan assets returns and $800 million in contributions increased asset values in excess of the higher PBO due to the significant discount rate decline. Additional detail and discussion of international plan asset returns and discount rates is provided in Note 12 (Pension and Postretirement Benefit Plans).

 

3M expects to contribute approximately $300 million to $500 million of cash to its global defined benefit pension and postretirement plans in 2018. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2018. 3M expects global defined benefit pension and postretirement expense in 2018 (before settlements, curtailments, special termination benefits and other) to increase by approximately $76 million pre-tax when compared to 2017. Refer to "Critical Accounting Estimates" within MD&A and Note 12 (Pension and Postretirement Benefit Plans) for additional information concerning 3M's pension and post-retirement plans.

 

Divestitures and strategic investments:

 

In both the fourth quarter and full year of 2017, the Company continued to accelerate investments in growth initiatives and footprint optimization. In addition, the Company divested certain businesses as it continued to focus its portfolio on opportunities that create greater value for its shareholders. As shown below, these divestitures and strategic investments led to a net year-on-year decrease of approximately $0.01 per diluted share and a benefit of $0.10 per diluted share, respectively, for the three months and year ended December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 2017

 

Year ended December 31, 2017

 

Divestiture impacts and strategic investments net benefit/(cost) (in millions, except per share amounts)

    

Pre-tax impact

    

Impact per diluted share after-tax

    

Pre-tax impact

    

Impact per diluted share after-tax

 

Divestiture impacts:

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 divestiture gains

 

$

 96

 

 

 

 

$

 586

 

 

 

 

Less: prior year divestiture gains

 

 

 (71)

 

 

 

 

 

 (111)

 

 

 

 

Year-on-year lost operating loss/(income) from divested businesses

 

 

 1

 

 

 

 

 

 (1)

 

 

 

 

Year-on-year divestiture impacts, net of operating loss/(income)

 

$

 26

 

$

 0.05

 

$

 474

 

$

 0.61

 

Strategic investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 portfolio and footprint optimization activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring actions and exit activities, net of adjustments

 

$

 (20)

 

 

 

 

$

 (143)

 

 

 

 

Asset charges and accelerated depreciation

 

 

 (40)

 

 

 

 

 

 (180)

 

 

 

 

Other costs

 

 

 (4)

 

 

 

 

 

 (30)

 

 

 

 

Less: prior year portfolio and footprint optimization activities

 

 

 19

 

 

 

 

 

 40

 

 

 

 

Year-on-year portfolio and footprint optimization

 

 

 (45)

 

$

 (0.05)

 

 

 (313)

 

$

 (0.39)

 

Incremental year-on-year growth initiatives

 

 

 (6)

 

 

 

 

 

 (100)

 

 

 

 

Total incremental strategic investments

 

$

 (51)

 

$

 (0.06)

 

$

 (413)

 

$

 (0.51)

 

Year-on-year divestiture impacts and strategic investments net benefit/(cost)

 

$

 (25)

 

$

 (0.01)

 

$

 61

 

$

 0.10

 

 

The total pre-tax year-on-year divestiture impacts, net of strategic investments from the table above, are further detailed below by business group:

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Year ended 

 

(Millions)

    

December 31, 2017

    

December 31, 2017

 

Industrial

 

$

 (79)

 

$

 (193)

 

Safety and Graphics

 

 

 93

 

 

 553

 

Health Care

 

 

 6

 

 

 (43)

 

Electronics and Energy

 

 

 (40)

 

 

 (120)

 

Consumer

 

 

 2

 

 

 (86)

 

Corporate and Unallocated

 

 

 (7)

 

 

 (50)

 

Total pretax divestiture gains, net of strategic investments

 

$

 (25)

 

$

 61

 

 

2017 announced and 2018 closed divestitures:

 

In December 2017, 3M announced it had reached an agreement to sell substantially all of its Communications Markets Division, which consists of optical fiber and copper passive connectivity solutions, structured cabling solutions, and telecommunications system integration services. The business has annual global sales of approximately $400 million. The Company expects a pre-tax gain of approximately $500 million in 2018 as a result of this divestiture. 3M expects to realize a gain of approximately $0.40 per diluted share from this transaction, net of actions related to this divestiture. Refer to Note 2 for additional discussion.

 

In February 2018, 3M closed on the sale of certain personal safety product offerings primarily focused on noise, environmental, and heat stress monitoring. This business has annual sales of approximately $15 million. The transaction is expected to result in a pre-tax gain of less than $20 million that will be reported within the Company's Safety and Graphics business. Refer to Note 2 for additional discussion.

 

RESULTS OF OPERATIONS

 

Net Sales:

 

Refer to the preceding "Overview" section and the "Performance by Business Segment" section later in MD&A for additional discussion of sales change.

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

 

    

 

    

 

 

 

 

 

 

 

 

 

 

 

2017 versus

 

2016 versus

 

(Percent of net sales)

 

 

2017

 

2016

 

2015

 

2016

 

2015

 

Cost of sales

 

 

 50.6

%  

 49.9

%  

 50.9

%  

 0.7

%  

 (1.0)

%

Selling, general and administrative expenses

 

 

 20.8

 

 20.7

 

 20.6

 

 0.1

 

 0.1

 

Research, development and related expenses

 

 

 5.8

 

 5.8

 

 5.8

 

 -

 

 -

 

Gain on sale of businesses

 

 

 (1.9)

 

 (0.4)

 

 (0.2)

 

 (1.5)

 

 (0.2)

 

Operating income margin

 

 

 24.7

%  

 24.0

%  

 22.9

%  

 0.7

%  

 1.1

%

 

Operating income margins increased in 2017 versus 2016, driven by gains from sale of businesses, partially offset by cost of sales increases. A number of factors impact the various income statement line items, such as raw material cost management, strategic investments, divestitures, foreign currency, cost management, and pension and postretirement effects. Expanded discussion of each of the income statement line items follows in the various sections below. Pension and postretirement expense is recorded in cost of sales; selling, general and administrative expenses (SG&A); and research, development and related expenses (R&D). In total, 3M's defined benefit pension and postretirement expense increased $82 million in 2017, compared to a decrease of $305 million in 2016. Refer to Note 12 (Pension and Postretirement Plans) for components of net periodic benefit cost and the assumptions used to determine net cost.

 

The Company is investing in business transformation. Business transformation is defined as changes in processes and internal/external service delivery across 3M to move to more efficient business models to improve operational efficiency and productivity, while allowing 3M to serve customers with greater speed and efficiency. This is enabled by the ongoing multi-year phased implementation of an enterprise resource planning (ERP) system on a worldwide basis.

 

In 2017, as referenced above in the "Divestitures and strategic investments" section, 3M incurred $413 million in incremental strategic actions, primarily reported within the cost of sales and SG&A income statement line items.

 

Of these strategic investments, 3M incurred $96 million (net of adjustments) in restructuring actions and $47 million in exit activities during 2017. In addition, in the fourth quarter of 2015, 3M incurred $114 million in restructuring charges. Refer to Note 4 for additional information on the impact to operating expenses.

 

Cost of Sales:

 

Cost of sales includes manufacturing, engineering and freight costs.

 

Cost of sales as a percent of sales increased during 2017 due to incremental strategic investments in productivity, portfolio actions and footprint optimization, foreign currency effects (net of hedge impacts) and higher defined benefit pension expense. This was partially offset by a year-on-year reduction in raw material input costs as a result of sourcing cost reduction projects. Selling prices were flat year-on-year for the full year 2017.

 

Cost of sales as a percent of sales decreased in 2016 due to the combination of selling price increases and raw material cost decreases, as selling prices increased net sales by 0.7 percent and raw material cost deflation was favorable by approximately 3.5 percent year-on-year. In addition, cost of sales as a percent of sales benefited from lower defined benefit pension and postretirement costs. Fourth quarter 2015 restructuring charges also provided a favorable year-on-year comparison.

 

Selling, General and Administrative Expenses:

 

SG&A increased $350 million year-on year, or 5.6 percent, during 2017 due to incremental strategic investments and higher defined benefit pension expense. SG&A decreased $7 million, or 0.1 percent, in 2016 when compared to 2015, with 2016 results benefiting from foreign currency translation, and productivity benefits related to the fourth quarter 2015 restructuring. In addition, SG&A in 2016 benefited from lower defined benefit pension and postretirement expense. Fourth quarter 2015 restructuring charges also provided a favorable year-on-year comparison.

 

Research, Development and Related Expenses:

 

R&D increased $115 million year-on-year and decreased $28 million year-on-year in 2017 and 2016, respectively. 3M continued to invest in its key initiatives, including R&D aimed at disruptive innovation programs with the potential to create entirely new markets and disrupt existing markets. R&D, measured as a percent of sales, was 5.8 percent in 2017, 2016, and 2015.

 

Gain on Sale of Businesses:

 

In 2017, 3M sold the assets of its safety prescription eyewear business, completed the related sale or transfer of control, as applicable, of its identity management business, sold its tolling and automated license/number plate recognition and electronic monitoring businesses, and sold the assets of its electrical marking/labeling business. On a combined basis, these divestitures resulted in a gain on the sale of businesses of $586 million. 3M also divested certain businesses in 2016 and 2015, resulting in gains of $111 million and $47 million, respectively. Refer to Note 2 for additional detail on these divestitures.

 

Operating Income Margin:

 

3M uses operating income as one of its primary business segment performance measurement tools. Refer to the table below for a reconciliation of operating income margins for 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Year ended 

 

(Percent of net sales)

    

December 31, 2017

    

December 31, 2017

 

December 31, 2016

 

Same period last year

 

 22.7

%

 24.0

%

 22.9

%

Increase/(decrease) in operating income margin, due to:

 

 

 

 

 

 

 

Organic volume/other productivity

 

 1.5

 

 1.1

 

 (1.0)

 

Acquisitions and divestitures

 

 (0.3)

 

 1.4

 

 0.2

 

Incremental strategic investments

 

 (0.7)

 

 (1.4)

 

 0.1

 

Selling price and raw material impact

 

 0.4

 

 0.4

 

 1.0

 

Foreign exchange impacts

 

 (0.6)

 

 (0.5)

 

 (0.2)

 

Pension and postretirement benefit costs

 

 (0.2)

 

 (0.3)

 

 1.0

 

Current period

 

 22.8

%

 24.7

%

 24.0

%

 

Year 2017 and fourth quarter operating income:

 

Operating income margins increased 0.1 percentage points in the fourth quarter of 2017 and increased 0.7 percentage points for the full year 2017 when compared to the same periods last year. 3M benefited from higher organic local-currency sales growth and productivity, partially offset by actuarial adjustments to the Company's respirator mask/asbestos liability accrual. Acquisitions and divestitures consist of the transactions and integration costs, net of income, that relate to the acquisition of Scott Safety, in addition to the year-on-year divestiture gains (refer to Note 2) and non-repeating operating losses from divested businesses, which combined, reduced operating margins in the fourth quarter of 2017 and benefited operating income margins for the full year 2017. Items that reduced operating margins were incremental strategic investments in growth, productivity and portfolio actions, in addition to charges related to 3M's optimization of its portfolio and supply chain footprint. For full year 2017, the benefit from year-on-year divestiture gains and non-repeating net operating losses from divested businesses (primarily related to the sale of Identity Management) was partially offset by the impact of the Scott Safety acquisition noted earlier. 3M also benefited from raw material sourcing cost reduction projects. Lastly, operating margins were reduced by foreign currency effects (net of hedge impacts) and higher year-on-year defined benefit pension expense. 

 

Year 2016 operating income:

 

Operating income margins were 24.0 percent in 2016 compared to 22.9 percent in 2015, an increase of 1.1 percentage points. 3M benefited from the combination of higher selling prices and lower raw material costs, plus lower year-on-year defined benefit pension and postretirement expense. Acquisitions and divestitures had a favorable impact on operating margins. This included solid performances from both the Capital Safety and Membrana acquisitions. Divestiture impacts relate to the Polyfoam business, the library systems business, and the license plate converting business in France. In addition, in the fourth quarter of 2016, 3M sold the assets of its protective films business and its cathode battery technology out-licensing business. Items that reduced operating income margins included 2016 strategic investments, as 3M took actions to better optimize its manufacturing footprint and accelerated growth investments across its businesses. Foreign currency impacts (net of hedging) also reduced operating income margins. Organic volume, productivity, and other decreased operating margins as a result of lower asset utilization, primarily in the Industrial, and Electronics and Energy businesses. Also, 3M had an unfavorable arbitration ruling on an insurance claim, commercial litigation settlements related to Andover Healthcare and TransWeb, and accruals for respirator mask/asbestos liabilities. These declines within organic volume, productivity, and other were partially offset by 2015 restructuring charges, which provided a favorable year-on-year comparison, and productivity benefits in 2016 related to the 2015 restructuring actions.

 

Other Expense (Income), Net:

 

See Note 5 for a detailed breakout of this line item.

 

Interest expense increased during 2017 and 2016 due to higher average debt balances and higher U.S. borrowing costs. In addition, in October 2017, via cash tender offers, 3M repurchased $305 million aggregate principal amount of its outstanding notes. The Company recorded an early debt extinguishment charge of $96 million in the fourth quarter of 2017, which was included within interest expense. Capitalized interest related to property, plant and equipment construction in progress is recorded as a reduction to interest expense. Capitalized interest was $12 million, $10 million, and $13 million, in 2017, 2016 and 2015, respectively.

 

Interest income increased year-on-year in both 2017 and 2016 due to higher average interest rates.

 

Provision for Income Taxes:

 

 

 

 

 

 

 

 

 

(Percent of pre-tax income)

    

2017

    

2016

    

2015

 

Effective tax rate

 

 35.5

%  

 28.3

%  

 29.1

%

 

The effective tax rate for 2017 was 35.5 percent, compared to 28.3 percent in 2016, an increase of 7.2 percentage points. The effective tax rate for 2016 was 28.3 percent, compared to 29.1 percent in 2015, a decrease of 0.8 percentage points. The changes in the tax rates between years were impacted by many factors, including the enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017 as further described in the Overview, "Income, earnings per share, and effective tax rate adjusted for impacts of the Tax Cuts and Jobs Act (TCJA) -(non-GAAP measures)" section and in Note 9. During the fourth quarter of 2017, 3M recorded a net tax expense of $762 million related to the enactment of the TCJA. The expense is primarily related to the TCJA's transition tax on previously unremitted earnings of non-U.S. subsidiaries and is net of remeasurement of 3M's deferred tax assets and liabilities considering the TCJA's newly enacted tax rates and certain other impacts. This provisional amount is subject to adjustment during the measurement period of up to one year following the December 2017 enactment of the TCJA, as provided by recent SEC guidance.

 

The TCJA establishes new tax laws that will also affect 2018 and future periods, including, but not limited to: 1) reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent, 2) the creation of the base erosion anti-abuse tax (BEAT), 3) the creation of a new provision designed to tax global intangible low-taxed income (GILTI), 4) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, 5) limitations on the use of foreign tax credits to reduce the U.S. income tax liability, 6) limitations on the deductibility of certain executive compensation, and 7) the repeal of the domestic production activity deduction. Considering the impacts of the TCJA and other factors, the Company currently estimates its effective tax rate for 2018 will be approximately 20 to 22 percent. The tax rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, changes in tax laws, measurement period adjustment effects on the provisional items and remaining analyses to complete noted in Note 9 related to the 2017 impact of the TCJA, employee share-based payment accounting; as well as recurring factors, such as the geographic mix of income before taxes.

 

Refer to Note 9 for further discussion of income taxes.

 

Net Income Attributable to Noncontrolling Interest:

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

 

2017

    

2016

    

2015

 

Net income attributable to noncontrolling interest

 

$

 11

 

$

 8

 

$

 8

 

 

Net income attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M ownership interests in 3M consolidated entities. The amount primarily relates to 3M India Limited, of which 3M's effective ownership is 75 percent.

 

Currency Effects:

 

3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by $111 million and $127 million in 2017 and 2016, respectively. These estimates include the effect of translating profits from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks. 3M estimates that year-on-year derivative and other transaction gains and losses decreased pre-tax income by approximately $152 million and $69 million in 2017 and 2016, respectively. Refer to Note 13 in the Consolidated Financial Statements for additional information concerning 3M's hedging activities. 

 

PERFORMANCE BY BUSINESS SEGMENT

 

For a detailed discussion of the markets served and types of products offered by 3M's business segments, see Item 1, Business Segments. Financial information and other disclosures are provided in the Notes to the Consolidated Financial Statements. Effective in the first quarter of 2017, as part of 3M's continuing effort to improve the alignment of its businesses around markets and customers, the Company made the following changes:

 

Integration of former Renewable Energy Division

·      3M's former Renewable Energy Division (RED) has been integrated into existing divisions within the Electronics and Energy business segment and Safety and Graphics business segment. 3M is committed to leadership in sustainability and to enabling the advancement of energy solutions into the future. Integrating RED's offerings into larger divisions already serving these segments will provide increased scale and build on strength by leveraging 3M's existing brands, go-to-market capabilities, and relationships to support growth objectives.

 

Creation of Automotive and Aerospace Solutions Division

·      3M created the Automotive and Aerospace Solutions Division, which combined the former Automotive Division and Aerospace and Commercial Transportation Division, which were both within the Industrial business segment. Combining the strengths along with the deep industry knowledge of each business will enable this new division to utilize shared technology platforms and processes to deliver a broader set of innovative solutions, along with world-class quality and service to 3M's customers. This combination will help accelerate the Company's profitable growth and market relevance across the automotive, aerospace and commercial transportation industries.

 

Consolidation of U.S. customer account activity - impacting dual credit reporting

·      The Company consolidated its customer account activity in the U.S. into more centralized sales districts. This improved alignment reduces the complexity for customers when interacting with multiple businesses within 3M, creating a better customer experience. 3M business segment reporting measures include dual credit to business segments for certain U.S. sales and related operating income. This dual credit is based on which business segment provides customer account activity with respect to a particular product sold in the U.S. The alignment of U.S. customer accounts to fewer, more focused sales districts changed the attribution of dual credit across 3M's business segments.

 

Business segment information presented herein reflects the impact of these changes for all periods presented. 3M manages its operations in five business segments. The reportable segments are Industrial; Safety and Graphics; Health Care; Electronics and Energy; and Consumer.

 

Corporate and Unallocated:

 

In addition to these five business segments, 3M assigns certain costs to "Corporate and Unallocated," which is presented separately in the preceding business segments table and in Note 17. Corporate and Unallocated includes a variety of miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the Company determines not to allocate directly to its business segments. Because this category includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.

 

Corporate and Unallocated operating expenses increased by $80 million in 2017 when compared to 2016. In both the first and second quarters of 2017, a portion of the severance actions were reflected in Corporate and Unallocated. In the fourth quarter, an incremental $58 million was reflected within Corporate and Unallocated related to the Company's actuarial adjustments to its respirator mask/asbestos liability accrual. In addition, 3M's defined benefit pension and postretirement expense allocation to Corporate and Unallocated increased by approximately $30 million in 2017.

 

Corporate and Unallocated operating expenses decreased by $77 million in 2016 when compared to 2015. 3M's defined benefit pension and postretirement expense allocation to Corporate and Unallocated decreased by $223 million in 2016 when compared to 2015. In addition, the portion of the 2015 restructuring actions charged to corporate ($37 million) provided a favorable year-on-year comparison. These decreases were partially offset by an increase in legal expenses related to an unfavorable second quarter 2016 arbitration ruling on an insurance claim, commercial litigation settlements related to Andover Healthcare and TransWeb, and accruals for respirator mask/asbestos liabilities. 

 

Operating Business Segments:

 

Each of 3M's business segments were impacted by the following pre-tax amounts:

 

Incremental divestiture gains, net of strategic investments charges, by business segment:

 

 

 

 

 

 

(Millions)

    

2017

 

Industrial

 

 

 (193)

 

Safety and Graphics

 

 

 553

 

Health Care

 

 

 (43)

 

Electronics and Energy

 

 

 (120)

 

Consumer

 

 

 (86)

 

Corporate and Unallocated

 

 

 (50)

 

Total

 

$

 61

 

 

 

 

Restructuring charge by business segment:

 

 

 

 

 

 

(Millions)

    

Fourth Quarter 2015

 

Industrial

 

 

 42

 

Safety and Graphics

 

 

 11

 

Health Care

 

 

 9

 

Electronics and Energy

 

 

 12

 

Consumer

 

 

 3

 

Corporate and Unallocated

 

 

 37

 

Total

 

$

 114

 

 

Information related to 3M's business segments is presented in the tables that follow. Organic local-currency sales include both organic volume impacts plus selling price impacts. Acquisition and divestiture impacts, if any, are measured separately for the first twelve months post-transaction. Foreign currency translation impacts and total sales change are also provided for each business segment. Any references to EMEA relate to Europe, Middle East and Africa on a combined basis. 

 

The following discusses total year results for 2017 compared to 2016 and 2016 compared to 2015, for each business segment. Refer to the preceding year 2017 and 2016 sales results by geographic area/business segment sections for additional sales change information.

 

Industrial Business (34.5% of consolidated sales):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

2017

    

2016

    

2015

 

Sales (millions)

 

 

$

 10,911

 

$

 10,399

 

$

 10,388

 

Sales change analysis:

 

 

 

 

 

 

 

 

 

 

 

Organic local-currency

 

 

 

 4.9

%  

 

 (0.1)

%  

 

 

 

Acquisitions

 

 

 

 -

 

 

 1.6

 

 

 

 

Divestitures

 

 

 

 (0.5)

 

 

 (0.3)

 

 

 

 

Translation

 

 

 

 0.5

 

 

 (1.1)

 

 

 

 

Total sales change

 

 

 

 4.9

%  

 

 0.1

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (millions)

 

 

$

 2,289

 

$

 2,395

 

$

 2,277

 

Percent change

 

 

 

 (4.4)

%  

 

 5.2

%  

 

 

 

Percent of sales

 

 

 

 21.0

%  

 

 23.0

%  

 

 21.9

%

 

Year 2017 results:

 

Sales in Industrial totaled $10.9 billion, up 4.9 percent in U.S. dollars. Organic local-currency sales increased 4.9 percent, divestitures reduced sales by 0.5 percent, and foreign currency translation increased sales by 0.5 percent.

 

On an organic local-currency sales basis:

·      Sales grew in all businesses, led by advanced materials, automotive and aerospace solutions, industrial adhesives and tapes, and abrasives.

 

Acquisitions and divestitures:

·      There were no acquisitions or divestitures that closed during 2017. The year-on-year divestiture sales change was due to the impact of 2016 activity.

 

Operating income:

·      Operating income margins decreased 2.0 percentage points, as divestiture impacts related to the first quarter 2016 sale of the Polyfoam business resulted in a net year-on-year operating income margin reduction of 0.7 percentage points. In addition, incremental strategic investments decreased margins by 1.0 percentage points.

 

Year 2016 results:

 

Sales totaled $10.4 billion, up 0.1 percent in U.S. dollars. Organic local-currency sales were flat, acquisitions added 1.6 percent, divestitures reduced sales by 0.3 percent, and foreign currency translation reduced sales by 1.1 percent. The flat organic local-currency sales impact reflected economic challenges in the global industrial sector. Industrial rebounded in the fourth quarter of 2016, when it reflected 4.5 percent organic local-currency sales growth.

 

On an organic local-currency sales basis:

·      Sales grew in automotive and aerospace solutions, automotive aftermarket, and separation and purification.

·      Sales declined in abrasives and industrial adhesives and tapes.

·      Sales also declined in advanced materials, primarily due to persistent weakness in the oil and gas end markets.

 

Acquisitions and divestitures:

·      In October 2016, 3M sold the assets of its temporary protective films business.

·      In January 2016, 3M completed its sale of 3M's pressurized polyurethane foam adhesives business (formerly known as Polyfoam).

·      Acquisition sales growth in 2016 related to the acquisition of Membrana (closed in August 2015), a leading provider of microporous membranes and modules for filtration in the life sciences, industrial, and specialty segments.

 

Operating income:

·      Operating income margins increased 1.1 percentage points, helped by the gain on sale of Polyfoam and its temporary protective films business, productivity benefits from fourth quarter 2015 restructuring actions, and lower raw materials costs.

 

Safety and Graphics Business (19.4% of consolidated sales):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

2017

    

2016

    

2015

 

Sales (millions)

 

 

$

 6,148

 

$

 5,881

 

$

 5,736

 

Sales change analysis:

 

 

 

 

 

 

 

 

 

 

 

Organic local-currency

 

 

 

 6.1

%  

 

 2.1

%  

 

 

 

Acquisitions

 

 

 

 2.2

 

 

 3.9

 

 

 

 

Divestitures

 

 

 

 (4.3)

 

 

 (1.8)

 

 

 

 

Translation

 

 

 

 0.5

 

 

 (1.7)

 

 

 

 

Total sales change

 

 

 

 4.5

%  

 

 2.5

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (millions)

 

 

$

 2,067

 

$

 1,423

 

$

 1,332

 

Percent change

 

 

 

 45.3

%  

 

 6.8

%  

 

 

 

Percent of sales

 

 

 

 33.6

%  

 

 24.2

%  

 

 23.2

%

 

Year 2017 results:

 

Sales in Safety and Graphics totaled $6.1 billion, up 4.5 percent in U.S. dollars. Organic local-currency sales increased 6.1 percent, acquisitions increased sales by 2.2 percent, divestitures reduced sales by 4.3 percent, and foreign currency translation increased sales by 0.5 percent.

 

On an organic local-currency sales basis:

·      Sales growth was led by personal safety and roofing granules.

·      Transportation safety showed positive growth, while the commercial solutions business was flat.

 

 

 

Acquisitions and divestitures:

·      In January 2017, 3M sold its safety prescription eyewear business.

·      In the second quarter of 2017, 3M finalized the sale of its identity management business and tolling and automated license/number plate recognition business. 

·      In October 2017, 3M completed the acquisition of Scott Safety.

·      Also in October 2017, 3M completed the sale of its electronic monitoring business.

·      In February 2018, 3M closed on the sale of certain personal safety products primarily focused on noise, environmental, and heat stress monitoring.

 

Operating income:

·      Operating income margins increased 9.4 percentage points, largely driven by year-on-year divestiture gains that were partially offset by acquisition charges and incremental strategic investments, which combined resulted in a net operating income margin benefit of 8.6 percentage points.

 

Year 2016 results:

 

Sales totaled $5.9 billion, up 2.5 percent in U.S. dollars. Organic local-currency sales increased 2.1 percent, and foreign currency translation reduced sales by 1.7 percent. Acquisitions added 3.9 percent, while divestitures reduced sales by 1.8 percent.

 

On an organic local-currency sales basis:

·      Sales growth was led by roofing granules, which had a consistently strong year.

·      Commercial solutions and personal safety also showed positive growth.

·      Sales declined in transportation safety (formerly traffic safety and security).

 

Acquisitions and divestitures:

·      Acquisition sales growth reflected the acquisition of Capital Safety in August 2015. Capital Safety is a leading global provider of fall protection equipment.

·      In the fourth quarter of 2015, 3M divested its license plate converting business in France and substantially all of its library systems business. In the first quarter of 2016, 3M divested the remainder of the library systems business.

 

Operating income:

·      Operating income margins increased 1.0 percentage point, benefiting from higher selling prices and lower raw material costs, plus productivity benefits related to fourth quarter 2015 restructuring actions that were partially offset by by margin dilution related to the Capital Safety acquisition, and divestiture impacts on margins.

 

Health Care Business (18.4% of consolidated sales):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2017

    

2016

    

2015

 

Sales (millions)

 

$

 5,813

 

$

 5,566

 

$

 5,449

 

Sales change analysis:

 

 

 

 

 

 

 

 

 

 

Organic local-currency

 

 

 3.9

%  

 

 3.6

%  

 

 

 

Acquisitions

 

 

 -

 

 

 0.2

 

 

 

 

Translation

 

 

 0.5

 

 

 (1.7)

 

 

 

 

Total sales change

 

 

 4.4

%  

 

 2.1

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (millions)

 

$

 1,781

 

$

 1,763

 

$

 1,730

 

Percent change

 

 

 1.0

%  

 

 1.9

%  

 

 

 

Percent of sales

 

 

 30.6

%  

 

 31.7

%  

 

 31.7

%

 

Year 2017 results:

 

Sales in Health Care totaled $5.8 billion, up 4.4 percent in U.S. dollars. Organic local-currency sales increased 3.9 percent and foreign currency translation increased sales by 0.5 percent.

 

On an organic local-currency sales basis:

·      Sales increased in all businesses, led by drug delivery systems, food safety, and medical consumables (which is comprised of the critical and chronic care and infection prevention businesses).

 

Acquisitions:

·      In September 2017, 3M acquired Elution Technologies, LLC, a manufacturer of food safety test kits.

 

Operating income:

·      Operating income margins decreased 1.1 percent year-on-year, as incremental strategic investments, primarily related to accelerating future growth opportunities, reduced margins by 0.7 percentage points.

 

Year 2016 results:

 

Sales totaled $5.6 billion, an increase of 2.1 percent in U.S. dollars. Organic local-currency sales increased 3.6 percent, acquisitions added 0.2 percent, and foreign currency translation reduced sales by 1.7 percent.

 

On an organic local-currency sales basis:

·      Sales growth was broad-based across the entire Health Care portfolio, led by food safety, critical and chronic care, and drug delivery systems.

·      In developing markets, Health Care organic local-currency sales grew 7 percent.

·      3M continued to increase investments across the businesses to drive efficient growth.

 

Acquisitions:

·      Acquisition sales growth related to the March 2015 purchase of Ivera Medical Corp, a manufacturer of health care products that disinfect and protect devices used for access into a patient's bloodstream.

 

Operating income:

·      Operating income increased 1.9 percent to $1.8 billion, while margins held steady at 31.7 percent.

·      Acquisitions had a minimal impact on operating income margins.

 

Electronics and Energy Business (16.3% of consolidated sales):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2017

    

2016

    

2015

 

Sales (millions)

 

$

 5,159

 

$

 4,643

 

$

 5,069

 

Sales change analysis:

 

 

 

 

 

 

 

 

 

 

Organic local-currency

 

 

 11.0

%  

 

 (7.8)

%  

 

 

 

Divestitures

 

 

 (0.2)

 

 

 -

 

 

 

 

Translation

 

 

 0.3

 

 

 (0.6)

 

 

 

 

Total sales change

 

 

 11.1

%  

 

 (8.4)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (millions)

 

$

 1,254

 

$

 1,041

 

$

 1,083

 

Percent change

 

 

 20.4

%  

 

 (3.9)

%

 

 

 

Percent of sales

 

 

 24.3

%  

 

 22.4

%  

 

 21.4

%

 

Year 2017 results: 

 

Sales in Electronics and Energy totaled $5.2 billion, up 11.1 percent in U.S. dollars. Organic local-currency sales increased 11.0 percent, divestitures reduced sales by 0.2 percent, and foreign currency translation increased sales by 0.3 percent.

 

Total sales within the electronics-related businesses were up 16 percent while energy-related businesses were up 2 percent.

 

On an organic local-currency sales basis:

·      Sales increased 16 percent in 3M's electronics-related businesses, with increases in both display materials and systems and electronics materials solutions, as the businesses drove increased penetration on OEM platforms in addition to strengthened end-market demand in consumer electronics.

·      Sales increased 1 percent in 3M's energy-related businesses, as sales growth in electrical markets was partially offset by declines in telecommunications.

 

Divestitures:

·      In the fourth quarter of 2017, 3M sold the assets of its electrical marking/labeling business.

·      In December 2016, 3M sold the assets of its cathode battery technology out-licensing business.

·      In December 2017, 3M announced the sale of substantially all of its Communication Markets division, which is expected to close in 2018.

 

Operating income:

·      Operating income margins increased 1.9 percentage points, as benefits from higher organic volume were partially offset by 2017 footprint and portfolio actions and year-on-year divestiture impacts. These actions resulted in a year-on-year operating income margin reduction of 2.3 percentage points.

 

Year 2016 results: 

 

Sales totaled $4.6 billion, down 8.4 percent in U.S. dollars. Organic local-currency sales declined 7.8 percent, and foreign currency translation reduced sales by 0.6 percent.

 

Total sales within the electronics-related and energy-related businesses decreased 10 percent and 4 percent, respectively.

 

On an organic local-currency sales basis:

·      Sales decreased 10 percent in 3M's electronics-related businesses, with declines in both electronics materials solutions and display materials and systems. 3M was impacted by weak end-market demand across most consumer electronic applications.

·      Sales decreased approximately 3 percent in 3M's energy-related businesses, with an increase in telecommunications more than offset by a decline in electrical markets. 3M exited its backsheet business in December 2015, which contributed to the reduction in energy-related sales.

 

Divestitures:

·      In December 2016, 3M sold the assets of its cathode battery technology out-licensing business. 

 

Operating income:

·      Operating income decreased 3.9 percent to $1.0 billion.

·      Operating income margins were 22.4 percent compared to 21.4 percent in 2015, as divestiture gains and productivity benefits from past portfolio and restructuring actions benefited results.

·      Expenses related to portfolio management actions in 2016, in addition to lower organic volume, reduced operating income margins.

 

Consumer Business (14.5% of consolidated sales):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

2017

    

2016

    

2015

 

Sales (millions)

 

 

$

 4,589

 

$

 4,484

 

$

 4,429

 

Sales change analysis:

 

 

 

 

 

 

 

 

 

 

 

Organic local-currency

 

 

 

 1.7

%  

 

 1.8

%  

 

 

 

Translation

 

 

 

 0.6

 

 

 (0.6)

 

 

 

 

Total sales change

 

 

 

 2.3

%  

 

 1.2

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (millions)

 

 

$

 993

 

$

 1,065

 

$

 1,048

 

Percent change

 

 

 

 (6.8)

%  

 

 1.6

%  

 

 

 

Percent of sales

 

 

 

 21.6

%  

 

 23.7

%  

 

 23.7

%

 

Year 2017 results:

 

Sales in Consumer totaled $4.6 billion, up 2.3 percent in U.S. dollars. Organic local-currency sales increased 1.7 percent, while foreign currency translation increased sales by 0.6 percent.

 

On an organic local-currency sales basis:

·      Sales grew in consumer health care, home improvement, and home care.

·      The stationery and office supplies business declined due to channel inventory adjustments, primarily in the U.S. office retail and wholesale market.

 

Operating income:

·      Operating income margins declined 2.1 percentage points year-on-year, in part due to incremental strategic investments, which reduced margins by 1.9 percentage points. 

 

Year 2016 results:

 

Consumer sales totaled $4.5 billion, up 1.2 percent in U.S. dollars. Organic local-currency sales increased 1.8 percent, and foreign currency translation reduced sales by 0.6 percent.

 

On an organic local-currency sales basis:

·      Sales growth was led by home improvement, in addition to consumer health care.

 

Operating income:

·      Operating income was $1.1 billion, up 1.6 percent from 2015.

·      Operating income margins were 23.7 percent, benefiting from ongoing productivity efforts.

 

PERFORMANCE BY GEOGRAPHIC AREA

 

While 3M manages its businesses globally and believes its business segment results are the most relevant measure of performance, the Company also utilizes geographic area data as a secondary performance measure. Export sales are generally reported within the geographic area where the final sales to 3M customers are made. A portion of the products or components sold by 3M's operations to its customers are exported by these customers to different geographic areas. As customers move their operations from one geographic area to another, 3M's results will follow. Thus, net sales in a particular geographic area are not indicative of end-user consumption in that geographic area. Financial information related to 3M operations in various geographic areas is provided in Note 18.

 

Refer to the "Overview" section for a summary of net sales by geographic area and business segment.

 

Geographic Area Supplemental Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, Plant and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment - net

 

 

 

 Employees as of December 31,

 

Capital Spending

 

 as of December 31,

 

(Millions, except Employees)

    

2017

    

2016

    

2015

    

2017

    

2016

    

2015

    

2017

    

2016

 

United States

 

 36,958

 

 35,748

 

 35,973

 

$

 852

 

$

 834

 

$

 936

 

$

 4,891

 

$

 4,914

 

Asia Pacific

 

 18,283

 

 18,124

 

 17,642

 

 

 209

 

 

 228

 

 

 172

 

 

 1,672

 

 

 1,573

 

Europe, Middle East and Africa

 

 20,869

 

 20,203

 

 20,563

 

 

 256

 

 

 294

 

 

 249

 

 

 1,798

 

 

 1,512

 

Latin America and Canada

 

 15,426

 

 17,509

 

 15,268

 

 

 56

 

 

 64

 

 

 104

 

 

 505

 

 

 517

 

Total Company

 

 91,536

 

 91,584

 

 89,446

 

$

 1,373

 

$

 1,420

 

$

 1,461

 

$

 8,866

 

$

 8,516

 

 

Employment:

 

Employment decreased by 48 positions in 2017 and increased by 2,138 positions in 2016.

 

Capital Spending/Net Property, Plant and Equipment:

 

Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. In 2017, 62% of 3M's capital spending was within the United States, followed by Europe, Middle East and Africa; Asia Pacific; and Latin America/Canada. 3M is increasing its investment in manufacturing and sourcing capability in order to more closely align its product capability with its sales in major geographic areas in order to best serve its customers throughout the world with proprietary, automated, efficient, safe and sustainable processes. Capital spending is discussed in more detail later in MD&A in the section entitled "Cash Flows from Investing Activities."

 

 

CRITICAL ACCOUNTING ESTIMATES

 

Information regarding significant accounting policies is included in Note 1 of the consolidated financial statements. As stated in Note 1, the preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

The Company believes its most critical accounting estimates relate to legal proceedings, the Company's pension and postretirement obligations, asset impairments and income taxes. Senior management has discussed the development, selection and disclosure of its critical accounting estimates with the Audit Committee of 3M's Board of Directors.

 

Legal Proceedings:

 

The categories of claims for which the Company has a probable and estimable liability, the amount of its liability accruals, and the estimates of its related insurance receivables are critical accounting estimates related to legal proceedings. Please refer to the section entitled "Process for Disclosure and Recording of Liabilities and Insurance Receivables Related to Legal Proceedings" (contained in "Legal Proceedings" in Note 15) for additional information about such estimates.

 

Pension and Postretirement Obligations:

 

3M has various company-sponsored retirement plans covering substantially all U.S. employees and many employees outside the United States. The primary U.S. defined-benefit pension plan was closed to new participants effective January 1, 2009. The Company accounts for its defined benefit pension and postretirement health care and life insurance benefit plans in accordance with Accounting Standard Codification (ASC) 715, Compensation - Retirement Benefits, in measuring plan assets and benefit obligations and in determining the amount of net periodic benefit cost. ASC 715 requires employers to recognize the underfunded or overfunded status of a defined benefit pension or postretirement plan as an asset or liability in its statement of financial position and recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income, which is a component of stockholders' equity. While the company believes the valuation methods used to determine the fair value of plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. See Note 12 for additional discussion of actuarial assumptions used in determining defined benefit pension and postretirement health care liabilities and expenses.

 

Pension benefits associated with these plans are generally based primarily on each participant's years of service, compensation, and age at retirement or termination. The benefit obligation represents the present value of the benefits that employees are entitled to in the future for services already rendered as of the measurement date. The Company measures the present value of these future benefits by projecting benefit payment cash flows for each future period and discounting these cash flows back to the December 31 measurement date, using the yields of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. Historically, the single aggregated discount rate used for each plan's benefit obligation was also used for the calculation of all net periodic benefit costs, including the measurement of the service and interest costs. Beginning in 2016, 3M changed the method used to estimate the service and interest cost components of the net periodic pension and other postretirement benefit costs. The new method measures service cost and interest cost separately using the spot yield curve approach applied to each corresponding obligation. Service costs are determined based on duration-specific spot rates applied to the service cost cash flows. The interest cost calculation is determined by applying duration-specific spot rates to the year-by-year projected benefit payments. The spot yield curve approach does not affect the measurement of the total benefit obligations as the change in service and interest costs offset in the actuarial gains and losses recorded in other comprehensive income. The Company changed to the new method to provide a more precise measure of service and interest costs by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates. The Company accounted for this change as a change in estimate prospectively beginning in the first quarter of 2016.

 

Using this methodology, the Company determined discount rates for its plans as follow:

 

 

 

 

 

 

 

 

 

 

U.S. Qualified Pension

    

International Pension (weighted average)

    

U.S. Postretirement Medical

 

December 31, 2017 Liability:

 

 

 

 

 

 

 

Benefit obligation

 

 3.68

%

 2.41

%

 3.60

%

2018 Net Periodic Benefit Cost Components:

 

 

 

 

 

 

 

Service cost

 

 3.78

%

 2.28

%

 3.77

%

Interest cost

 

 3.35

%

 2.14

%

 3.20

%

 

Another significant element in determining the Company's pension expense in accordance with ASC 715 is the expected return on plan assets, which is based on strategic asset allocation of the plan, long-term capital market return expectations, and expected performance from active investment management. For the primary U.S. qualified pension plan, the expected long-term rate of return on an annualized basis for 2018 is 7.25%, equal to 2017. Refer to Note 12 for information on how the 2017 rate was determined. Return on assets assumptions for international pension and other post-retirement benefit plans are calculated on a plan-by-plan basis using plan asset allocations and expected long-term rate of return assumptions. The weighted average expected return for the international pension plan is 5.02% for 2018, compared to 5.16% for 2017.

 

For the year ended December 31, 2017, the Company recognized total consolidated defined benefit pre-tax pension and postretirement expense (after settlements, curtailments, special termination benefits and other) of $333 million, up from $251 million in 2016. Defined benefit pension and postretirement expense (before settlements, curtailments, special termination benefits and other) is anticipated to increase to approximately $409 million in 2018, an increase of $76 million compared to 2017.

 

The table below summarizes the impact on 2018 pension expense for the U.S. and international pension plans of a 0.25 percentage point increase/decrease in the expected long-term rate of return on plan assets and discount rate assumptions used to measure plan liabilities and 2017 net periodic benefit cost. The table assumes all other factors are held constant, including the slope of the discount rate yield curves.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) in Net Periodic Benefit Cost

 

 

 

Discount Rate

 

Expected Return on Assets

 

(Millions)

   

-0.25%

   

+0.25%

   

-0.25%

   

+0.25%

 

U.S. pension plans

 

$

 34

 

$

 (33)

 

$

 38

 

$

 (38)

 

International pension plans

 

 

 24

 

 

 (23)

 

 

 16

 

 

 (16)

 

 

Asset Impairments:

 

As of December 31, 2017, net property, plant and equipment totaled $8.9 billion and net identifiable intangible assets totaled $2.9 billion. Management makes estimates and assumptions in preparing the consolidated financial statements for which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed in the business, including assets of acquired businesses. These estimates and assumptions are closely monitored by management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or an impairment recorded based on a change in the expected use of the asset or performance of the related asset group.

 

Of the $2.9 billion in net identifiable intangible assets, $0.6 billion relates to indefinite-lived tradenames, primarily Capital Safety, whose tradenames ($520 million at acquisition date) have been in existence for over 55 years (refer to Note 2 for more detail). The primary valuation technique used in estimating the fair value of indefinite lived intangible assets (tradenames) is a discounted cash flow approach. Specifically, a relief of royalty rate is applied to estimated sales, with the resulting amounts then discounted using an appropriate market/technology discount rate. The relief of royalty rate is the estimated royalty rate a market participant would pay to acquire the right to market/produce the product. If the resulting discounted cash flows are less than the book value of the indefinite lived intangible asset, impairment exists, and the asset value must be written down. Based on impairment testing in the third quarter of 2017, no impairment was indicated. The discounted cash flows related to the Capital Safety tradename exceeded its book value by more than 15 percent.

 

3M goodwill totaled approximately $10.5 billion as of December 31, 2017. 3M's annual goodwill impairment testing is performed in the fourth quarter of each year. Impairment testing for goodwill is done at a reporting unit level, with all goodwill assigned to a reporting unit. Reporting units are one level below the business segment level, but are required to be combined when reporting units within the same segment have similar economic characteristics. At 3M, reporting units correspond to a division. 3M did not combine any of its reporting units for impairment testing.

 

An impairment loss would be recognized when the carrying amount of the reporting unit's net assets exceeds the estimated fair value of the reporting unit, and the loss would equal that difference. The estimated fair value of a reporting unit is determined using earnings for the reporting unit multiplied by a price/earnings ratio for comparable industry groups, or by using a discounted cash flow analysis. 3M typically uses the price/earnings ratio approach for stable and growing businesses that have a long history and track record of generating positive operating income and cash flows. 3M uses the discounted cash flow approach for start-up, loss position and declining businesses, in addition to using for businesses where the price/earnings ratio valuation method indicates additional review is warranted. 3M also uses discounted cash flow as an additional tool for businesses that may be growing at a slower rate than planned due to economic or other conditions.

 

As described in Note 17, effective in the first quarter of 2017, 3M made business segment reporting changes. For any product moves that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill of the associated reporting units. During the first quarter of 2017, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed. The discussion that follows relates to the separate fourth quarter 2017 annual impairment test and is in the context of the reporting unit structure that existed at that time.

 

As of October 1, 2017, 3M had 24 primary reporting units, with ten reporting units accounting for approximately 86 percent of the goodwill. These ten reporting units were comprised of the following divisions: Advanced Materials, Communication Markets, Display Materials and Systems, Health Information Systems, Industrial Adhesives and Tapes, Infection Prevention, Oral Care Solutions, Personal Safety, Separation and Purification, and Transportation Safety. The estimated fair value for all reporting units was in excess of carrying value by approximately 40 percent or more. 3M's market value at both December 31, 2017, and September 30, 2017, was significantly in excess of its shareholders' equity of approximately $12 billion.

 

As discussed in Note 2, 3M announced the sale of substantially all of its Communication Markets division, which is expected to close in 2018, which will result in an associated goodwill reduction of approximately $270 million upon sale.

 

In 2017, 3M determined fair values using either an industry price-earnings ratio approach or a discounted cash flows analysis. Where applicable, 3M used a weighted-average discounted cash flow analysis for certain divisions, using projected cash flows that were weighted based on different sales growth and terminal value assumptions, among other factors. The weighting was based on management's estimates of the likelihood of each scenario occurring.

 

3M is a highly integrated enterprise, where businesses share technology and leverage common fundamental strengths and capabilities, thus many of 3M's businesses could not easily be sold on a stand-alone basis. 3M's focus on research and development has resulted in a portion of 3M's value being comprised of internally developed businesses that have no goodwill associated with them. Based on the annual test in the fourth quarter of 2017, no goodwill impairment was indicated for any of the reporting units.

 

Factors which could result in future impairment charges include, among others, changes in worldwide economic conditions, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk factors are discussed in Item 1A, "Risk Factors," of this document. In addition, changes in the weighted average cost of capital could also impact impairment testing results. As indicated above, during the first quarter of 2017, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by changes between reporting units and determined that no impairment existed. Long-lived assets with a definite life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If future non-cash asset impairment charges are taken, 3M would expect that only a portion of the long-lived assets or goodwill would be impaired. 3M will continue to monitor its reporting units and asset groups in 2018 for any triggering events or other indicators of impairment.

 

Income Taxes:

 

The extent of 3M's operations involves dealing with uncertainties and judgments in the application of complex tax regulations in a multitude of jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes will be due. The Company follows guidance provided by ASC 740, Income Taxes, regarding uncertainty in income taxes, to record these liabilities (refer to Note 9 for additional information). The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the tax liabilities. If the Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary.

 

During the fourth quarter of 2017, 3M recorded a net tax expense related to the enactment of the Tax Cuts and Jobs Act (TCJA). The expense is primarily related to the TCJA's transition tax on previously unremitted earnings of non-U.S. subsidiaries and is net of remeasurement of 3M's deferred tax assets and liabilities considering the TCJA's newly enacted tax rates and certain other impacts. As discussed in Note 9, this expense is a provisional amount and is subject to adjustment during the measurement period of up to one year following the December 2017 enactment of the TCJA, as provided by recent SEC guidance.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

Information regarding new accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.

 

FINANCIAL CONDITION AND LIQUIDITY

 

The strength and stability of 3M's business model and strong free cash flow capability, together with proven capital markets access, positions the Company to be able to add further leverage to its capital structure. 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, as well as funding U.S. acquisitions and other items as needed. The TCJA creates additional repatriation opportunities for 3M to access international cash positions on a continual and on-going basis and will help support U.S. capital deployments needs. For those international earnings still considered to be reinvested indefinitely, the Company currently has no plans or intentions to repatriate these funds for U.S. operations. See Note 9 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 $5 billion outstanding with a maximum maturity of 397 days from date of issuance. At December 31, 2017, there was approximately $745 million in commercial paper issued and 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's total debt was $2.3 billion higher at December 31, 2017 when compared to December 31, 2016. Increases in debt related to October 2017 debt issuances of $2.0 billion, commercial paper of $745 million outstanding at year end 2017, and the net impact of repayments and borrowings of international subsidiaries along with foreign currency effects. These are partially offset by June 2017 repayments of $650 million aggregate principal amount of medium-term notes and the October 2017 $305 million debt tender. For discussion of repayments of and proceeds from debt refer to the following "Cash Flows from Financing Activities" section.

 

Effective February 24, 2017, the Company updated its "well-known seasoned issuer" (WKSI) shelf registration statement, which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M's previous shelf registration dated May 16, 2014. 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. 

 

As of December 31, 2017, 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, 2016, and the 2017 debt referenced above, is approximately $13.1 billion (utilizing the foreign exchange rates applicable at the time of issuance for the Euro denominated debt). Information with respect to long-term debt issuances and maturities for the periods presented is included in Note 11.

 

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 December 31, 2017. 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 December 31, 2017, this ratio was approximately 29 to 1. Debt covenants do not restrict the payment of dividends. Apart from the committed facilities, an additional $288 million in stand-alone letters of credit and bank guarantees were also issued and outstanding at December 31, 2017. These instruments are utilized in connection with normal business activities.

 

Cash, Cash Equivalents and Marketable Securities:

 

At December 31, 2017, 3M had $4.2 billion of cash, cash equivalents and marketable securities, of which approximately $3.975 billion was held by the Company's foreign subsidiaries and approximately $180 million was held by the United States. These balances are invested in bank instruments and other high-quality fixed income securities. At December 31, 2016, cash, cash equivalents and marketable securities held by the Company's foreign subsidiaries and by the United States totaled approximately $2.35 billion and $350 million, respectively. Specifics concerning marketable securities investments are provided in Note 10.

 

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 important indicators of liquidity and financial position. The following table provides net debt as of December 31, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31,

 

 

2017 versus

 

(Millions)

 

2017

 

2016

 

2016

 

Total debt

 

$

 13,949

 

$

 11,650

 

$

 2,299

 

Less: Cash, cash equivalents and marketable securities

 

 

 4,156

 

 

 2,695

 

 

 1,461

 

Net debt (non-GAAP measure)

 

$

 9,793

 

$

 8,955

 

$

 838

 

 

Refer to the preceding "Total Debt" and "Cash, Cash Equivalents and Marketable Securities" sections for additional details. 

 

Balance Sheet:

 

3M's strong balance sheet and liquidity provide the Company with significant flexibility to fund its numerous opportunities going forward. The Company will continue to invest in its operations to drive growth, including continual review of acquisition opportunities.

 

The Company uses working capital measures that place emphasis and focus on certain working capital assets. These measures include working capital, accounts receivable turns, and inventory turns.

 

Working Capital (non-GAAP measure):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

2017 versus

 

(Millions)

 

 

2017

 

 

2016

 

 

2016

 

Current assets

 

$

 14,277

 

$

 11,726

 

$

 2,551

 

Less: Current liabilities

 

 

 7,687

 

 

 6,219

 

 

 1,468

 

Working capital (non-GAAP measure)

 

$

 6,590

 

$

 5,507

 

$

 1,083

 

 

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 is not defined under U.S. generally accepted accounting principles and may not be computed the same as similarly titled measures used by other companies. The Company defines working capital as current assets minus current liabilities. 3M believes working capital is meaningful to investors as a measure of operational efficiency and short-term financial health.

 

Working capital increased $1.1 billion during 2017 when compared to December 31, 2016. Current asset balance changes increased working capital by $2.6 billion, driven by increases in cash/cash equivalents and marketable securities, in addition to higher accounts receivable and inventories (discussed further below). Current liability balance changes decreased working capital by $1.5 billion, largely due to increases in short-term borrowings, with commercial paper outstanding of $745 million at December 31, 2017 compared to none outstanding at December 31, 2016.

 

Accounts Receivable and Inventory Turns (non-GAAP measures):

 

Accounts receivable and inventory turns 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. 3M defines accounts receivable turns as quarterly net sales multiplied by 4 divided by ending accounts receivable - net, and defines inventory turns as quarterly manufacturing cost multiplied by 4 divided by ending inventory. 3M believes accounts receivable turns is meaningful to investors as a measure of how efficiently the Company manages credit and collects from its customers. For inventory turns calculation purposes, manufacturing cost is defined as cost of sales less freight and engineering costs. 3M believes inventory turns is meaningful to investors as a measure of how quickly inventory is sold. Details of these calculations follow. 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable turns (non-GAAP measure)

 

December 31,

 

 

2017 versus

 

(Millions, except turns)

 

 

2017

 

 

2016

 

 

2016

 

Quarterly net sales

 

$

 7,990

 

$

 7,329

 

$

 661

 

Ending accounts receivable - net

 

$

 4,911

 

$

 4,392

 

$

 519

 

Accounts receivable turns

 

 

 6.51

 

 

 6.67

 

 

 (0.16)

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory turns (non-GAAP measure)

 

December 31,

 

 

2017 versus

 

(Millions, except turns)

 

 

2017

 

 

2016

 

 

2016

 

Quarterly cost of sales

 

$

 4,080

 

$

 3,716

 

$

 364

 

Less: Freight and engineering

 

$

 172

 

$

 160

 

$

 12

 

Manufacturing cost

 

$

 3,908

 

$

 3,556

 

$

 352

 

Ending inventory

 

$

 4,034

 

$

 3,385

 

$

 649

 

Inventory turns

 

 

 3.88

 

 

 4.20

 

 

 (0.32)

 

 

Accounts receivable increased $519 million year-on-year in 2017, primarily due to increased sales. In addition, foreign currency impacts increased 2017 accounts receivable by $215 million and acquisitions, net of divestitures, increased accounts receivable by $57 million. As a result, accounts receivable turns decreased 2 percent versus 2016.

 

Inventory increased $649 million year-on-year in 2017. Foreign currency impacts increased 2017 inventory by $210 million and acquisitions, net of divestitures, increased inventory by $51 million. Higher fourth quarter sales contributed to a 10 percent increase in cost of sales, while inventory increased 19 percent, which combined contributed to an 8 percent decrease in inventory turns.

 

On a seasonal basis, both accounts receivable and inventory turns are historically higher at year-end, driven by lower year-end accounts receivable and inventory balances.

 

 

Return on Invested Capital (non-GAAP measure):

 

Return on Invested Capital (ROIC) is not defined under U.S. generally accepted accounting principles. Therefore, ROIC should not be considered a substitute for other measures prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines ROIC as adjusted net income (net income including non-controlling interest plus after-tax interest expense) divided by average invested capital (equity plus debt). The Company believes ROIC is meaningful to investors as it focuses on shareholder value creation. The calculation is provided in the below table.

 

In 2017, ROIC of 21.3 percent was lower than both 2016 and 2015. This decrease related to the net impact of the enactment of the TCJA and increases in commercial paper borrowings in conjunction with the December 2017 U.S. defined benefit pension plan contribution, which combined reduced ROIC by 3 percentage points in 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31

    

    

 

    

    

 

    

    

 

 

 

(Millions)

 

2017

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on Invested Capital (non-GAAP measure)

 

 

 

 

 

 

 

 

 

 

 

Net income including non-controlling interest

 

$

 4,869

 

$

 5,058

 

$

 4,841

 

 

Interest expense (after-tax) (1)

 

 

 208

 

 

 143

 

 

 106

 

 

Adjusted net income (Return)

 

$

 5,077

 

$

 5,201

 

$

 4,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shareholders' equity (including non-controlling interest) (2)

 

$

 11,627

 

$

 11,316

 

$

 12,484

 

 

Average short-term and long-term debt (3)

 

 

 12,156

 

 

 11,725

 

 

 9,266

 

 

Average invested capital

 

$

 23,783

 

$

 23,041

 

$

 21,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on invested capital (non-GAAP measure)

 

 

 21.3

%

 

 22.6

%

 

 22.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Effective income tax rate used for interest expense

 

 

 35.5

%

 

 28.3

%

 

 29.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Calculation of average equity (includes non-controlling interest)

 

 

 

 

 

 

 

 

 

 

 

Ending total equity as of:

 

 

 

 

 

 

 

 

 

 

 

March 31

 

$

 11,040

 

$

 11,495

 

$

 13,673

 

 

June 30

 

 

 11,644

 

 

 11,658

 

 

 12,851

 

 

September 30

 

 

 12,202

 

 

 11,769

 

 

 11,945

 

 

December 31

 

 

 11,622

 

 

 10,343

 

 

 11,468

 

 

Average total equity

 

$

 11,627

 

$

 11,316

 

$

 12,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3) Calculation of average debt

 

 

 

 

 

 

 

 

 

 

 

Ending short-term and long-term debt as of:

 

 

 

 

 

 

 

 

 

 

 

March 31

 

$

 11,711

 

$

 11,139

 

$

 6,566

 

 

June 30

 

 

 11,301

 

 

 11,749

 

 

 8,484

 

 

September 30

 

 

 11,663

 

 

 12,361

 

 

 11,216

 

 

December 31

 

 

 13,949

 

 

 11,650

 

 

 10,797

 

 

Average short-term and long-term debt

 

$

 12,156

 

$

 11,725

 

$

 9,266

 

 

 

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 separately in the 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.

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31

    

    

 

    

    

 

    

    

 

 

(Millions)

 

2017

 

2016

 

2015

 

Net income including noncontrolling interest

 

$

 4,869

 

$

 5,058

 

$

 4,841

 

Depreciation and amortization

 

 

 1,544

 

 

 1,474

 

 

 1,435

 

Company pension and postretirement contributions

 

 

 (967)

 

 

 (383)

 

 

 (267)

 

Company pension and postretirement expense

 

 

 333

 

 

 251

 

 

 556

 

Stock-based compensation expense

 

 

 324

 

 

 298

 

 

 276

 

Gain on sale of businesses

 

 

 (586)

 

 

 (111)

 

 

 (47)

 

Income taxes (deferred and accrued income taxes)

 

 

 1,074

 

 

 108

 

 

 (349)

 

Excess tax benefits from stock-based compensation

 

 

 -

 

 

 -

 

 

 (154)

 

Accounts receivable

 

 

 (245)

 

 

 (313)

 

 

 (58)

 

Inventories

 

 

 (387)

 

 

 57

 

 

 3

 

Accounts payable

 

 

 24

 

 

 148

 

 

 9

 

Other - net

 

 

 257

 

 

 75

 

 

 175

 

Net cash provided by operating activities

 

$

 6,240

 

$

 6,662

 

$

 6,420

 

 

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 2017, cash flows provided by operating activities decreased $422 million compared to the same period last year. Factors that decreased operating cash flows were increases in pension contributions, plus year-on-year increases in working capital. In December 2017, 3M contributed $600 million to its U.S. defined benefit pension plan, contributing to a year-on-year increase in pension and postretirement contributions of $584 million. The combination of accounts receivable, inventories and accounts payable increased working capital by $608 million in 2017, compared to working capital increases of $108 million in 2016. In 2017, year-on-year decreases in income tax payments (net of refunds) increased operating cash flows by $284 million. Additional discussion on working capital changes is provided earlier in the "Financial Condition and Liquidity" section. Information concerning defined benefit pension and postretirement contributions and expense is provided in Note 12, with additional discussion in the preceding Results of Operations section. Gain on sale of businesses in the preceding table reflects an adjustment for divestiture gains in 2017 (discussed in Note 2), as cash divestiture activity is presented as proceeds from sale of businesses within investing activities, not operating activities.

 

In 2016, cash flows provided by operating activities increased $242 million compared to the same period in 2015, with this increase primarily due to lower year-on-year cash taxes and higher net income. These items were partially offset by higher Company pension contributions. The combination of accounts receivable, inventories and accounts payable increased working capital by $108 million in 2016, compared to working capital increase of $46 million in 2015. Gain on sale of businesses in the preceding table reflects an adjustment for divestiture gains 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:

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31

    

    

 

    

    

 

    

    

 

 

(Millions)

 

2017

 

2016

 

2015

 

Purchases of property, plant and equipment (PP&E)

 

$

 (1,373)

 

$

 (1,420)

 

$

 (1,461)

 

Proceeds from sale of PP&E and other assets

 

 

 49

 

 

 58

 

 

 33

 

Acquisitions, net of cash acquired

 

 

 (2,023)

 

 

 (16)

 

 

 (2,914)

 

Purchases and proceeds from maturities and sale of marketable securities and investments, net

 

 

 (798)

 

 

 (163)

 

 

 1,300

 

Proceeds from sale of businesses, net of cash sold

 

 

 1,065

 

 

 142

 

 

 123

 

Other - net

 

 

 (6)

 

 

 (4)

 

 

 102

 

Net cash used in investing activities

 

$

 (3,086)

 

$

 (1,403)

 

$

 (2,817)

 

 

Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. The Company expects 2018 capital spending to be approximately $1.5 billion to $1.8 billion as 3M continues to invest in its businesses.

 

3M invests in renewal and maintenance programs, which pertain to cost reduction, cycle time, maintaining and renewing current capacity, eliminating pollution, and compliance. Costs related to maintenance, ordinary repairs, and certain other items are expensed. 3M also invests in growth, which adds to capacity, driven by new products, both through expansion of current facilities and new facilities, plus research facilities. Finally, 3M also invests in other initiatives, such as information technology (IT) and corporate laboratory facilities.

 

Investments included continued expansion and sustainment of current and new facilities across many geographies, focusing on growth, productivity and capacity. Other investments include IT systems and infrastructure, particularly the ongoing multi-year phased implementation of an ERP system on a worldwide basis. Additional specific investments in 2015 included a new state-of-the-art, four story, 400,000 square foot research facility at 3M Center in St. Paul, Minnesota.

 

Refer to Note 2 for information on acquisitions and divestitures. The Company is actively considering additional acquisitions, investments and strategic alliances to strengthen its portfolio, and from time to time may also divest certain businesses.

 

Acquisitions, net of cash acquired, in 2017 primarily includes the purchase of Scott Safety. In 2015, this amount consisted mostly of the Capital Safety and Membrana acquisitions. Proceeds from sale of businesses in 2017 primarily relate to the divestiture of the assets of the prescription safety eyewear, identity management, tolling and automated license/number plate recognition and electronic monitoring businesses within the Safety and Graphics business segment. Proceeds from sale of businesses in 2016 related to the divestiture of the assets of the pressurized polyurethane foam adhesives business (formerly known as Polyfoam) within the Industrial business segment and the completion of the divestiture of the Library business within the Safety and Graphics business segment. In addition, in the fourth quarter of 2016, 3M sold the assets of its protective films business within the Industrial business segment and its cathode battery technology out-licensing business within the Electronics and Energy 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 2015 were used to help fund the August 2015 acquisitions of Capital Safety and Membrana. Refer to Note 10 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:

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31

    

    

 

    

    

 

    

    

 

 

(Millions)

 

2017

 

2016

 

2015

 

Change in short-term debt - net

 

$

 578

 

$

 (797)

 

$

 860

 

Repayment of debt (maturities greater than 90 days)

 

 

 (962)

 

 

 (992)

 

 

 (800)

 

Proceeds from debt (maturities greater than 90 days)

 

 

 1,987

 

 

 2,832

 

 

 3,422

 

Total cash change in debt

 

$

 1,603

 

$

 1,043

 

$

 3,482

 

Purchases of treasury stock

 

 

 (2,068)

 

 

 (3,753)

 

 

 (5,238)

 

Proceeds from issuances of treasury stock pursuant to stock option and benefit plans

 

 

 734

 

 

 804

 

 

 635

 

Dividends paid to stockholders

 

 

 (2,803)

 

 

 (2,678)

 

 

 (2,561)

 

Excess tax benefits from stock-based compensation

 

 

 -

 

 

 -

 

 

 154

 

Other - net

 

 

 (121)

 

 

 (42)

 

 

 (120)

 

Net cash used in financing activities

 

$

 (2,655)

 

$

 (4,626)

 

$

 (3,648)

 

 

 

 

2017 Debt Activity:

 

The Company's total debt was $2.3 billion higher at December 31, 2017 when compared to December 31, 2016. Increases in debt related to October 2017 debt issuances of $2.0 billion, commercial paper of $745 million outstanding at year end 2017, and the net impact of repayments and borrowings of international subsidiaries. These are partially offset by June 2017 repayments of $650 million aggregate principal amount of medium-term notes and the October 2017 $305 million debt tender. Net commercial paper issuances and repayments and borrowings by international subsidiaries are largely reflected in "Change in short-term debt - net" in the preceding table. Foreign exchange rate changes also impacted debt balances.

 

Proceeds from debt for 2017 primarily related to the October 2017 issuance of $650 million aggregate principal amount of 5.5-year fixed rate medium-term notes due 2023 with a coupon rate of 2.25%, $850 million aggregate principal amount of 10-year fixed rate medium-term notes due 2027 with a coupon rate of 2.875%, and $500 million aggregate principal amount of 30-year fixed rate medium-term notes due 2047 with a coupon rate of 3.625%. Refer to Note 11 for more detail of these debt issuances.

 

In October 2017, via cash tender offers, 3M repurchased $305 million aggregate principal amount of its outstanding notes. This included $110 million of its $330 million principal amount of 6.375% notes due 2028 and $195 million of its $750 million principal amount of 5.70% notes due 2037. The Company recorded an early debt extinguishment charge of $96 million in the fourth quarter of 2017 within interest expense associated with the differential between the carrying value and the amount paid to acquire the tendered notes and related expenses.

 

2016 Debt Activity:

 

Total debt at December 31, 2016 increased $853 million when compared to year-end 2015, with the increase primarily due to May 2016 debt issuances (approximately $1.1 billion at issue date exchange rates) and September 2016 debt issuances of approximately $1.75 billion. This increase was partially offset by the repayment of $1 billion aggregate principal amount of medium-term notes due September 2016 along with the net impact of repayments and borrowings by international subsidiaries, primarily Japan and Korea (approximately $0.8 million decrease), which is reflected in "Change in short-term debt-net" in the preceding table. Foreign exchange rate changes also impacted debt balances.

 

Proceeds from debt for 2016 primarily related to the May 2016 issuance of 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%. In September 2016, 3M issued $600 million aggregate principal amount of five-year fixed rate medium-term notes due 2021 with a coupon rate of 1.625%, $650 million aggregate principal amount of 10-year fixed rate medium-term notes due 2026 with a coupon rate of 2.250%, and $500 million aggregate principal amount of 30-year fixed rate medium-term notes due 2046 with a coupon rate of 3.125%. All of these 2016 issuances were under the medium-term notes program (Series F).

 

2015 Debt Activity:

 

In 2015, the change in short-term debt primarily related to bank borrowings by international subsidiaries, primarily Japan and Korea. Repayment of debt primarily related to debt assumed (and paid off) as part of the Capital Safety acquisition. Proceeds from debt 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 total approximately $1.9 billion at issue date exchange rates. In addition, August 2015 issuances included $450 million aggregate principal amount of three-year fixed rate medium-term notes due 2018, $500 million aggregate principal amount of five-year fixed rate medium-term notes due 2020, and $550 million aggregate principal amount of 10-year fixed rate medium-term notes due 2025, which in aggregate total $1.5 billion.

 

 

Repurchases of Common Stock:

 

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. This authorization has no pre-established end date. In 2017, the Company purchased $2.1 billion of its own stock, compared to purchases of $3.8 billion and $5.2 billion in 2016 and 2015, respectively. The Company expects full-year 2018 gross share repurchases to be between $2.0 billion to $5.0 billion. For more information, refer to the table titled "Issuer Purchases of Equity Securities" in Part II, Item 5. The Company does not utilize derivative instruments linked to the Company's stock.

 

Dividends Paid to Shareholders:

 

Cash dividends paid to shareholders totaled $2.803 billion ($4.70 per share) in 2017, $2.678 billion ($4.44 per share) in 2016, and $2.561 billion ($4.10 per share) in 2015. 3M has paid dividends since 1916. In January 2018, 3M's Board of Directors declared a first-quarter 2018 dividend of $1.36 per share, an increase of 16 percent. This is equivalent to an annual dividend of $5.44 per share and marked the 60th consecutive year of dividend increases.

 

Other cash flows from financing activities may include various other items, such as changes in cash overdraft balances, and principal payments for capital leases. In addition, in 2017, this included a payment related to the $96 million in interest expense associated with premiums and fees for the early retirement of debt. See Note 11 for additional details.

 

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 are 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 free cash flow and free cash flow conversion for 2017, 2016 and 2015.

 

In 2017, free cash flow conversion was impacted by enactment of the TCJA, along with an additional U.S. pension contribution of $600 million that 3M made following the signing of tax reform. On a combined basis, these items benefited free cash flow conversion by 3 percentage points. Refer to the preceding "Cash Flows from Operating Activities" section for discussion of additional items that impacted operating cash flow. Refer to the preceding "Cash Flows from Investing Activities" section for discussion on capital spending for property, plant and equipment.

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31

    

    

 

    

    

 

    

    

 

 

(Millions)

 

2017

 

2016

 

2015

 

Major GAAP Cash Flow Categories

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

 6,240

 

$

 6,662

 

$

 6,420

 

Net cash provided by (used in) investing activities

 

 

 (3,086)

 

 

 (1,403)

 

 

 (2,817)

 

Net cash used in financing activities

 

 

 (2,655)

 

 

 (4,626)

 

 

 (3,648)

 

 

 

 

 

 

 

 

 

 

 

 

Free Cash Flow (non-GAAP measure)

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

 6,240

 

$

 6,662

 

$

 6,420

 

Purchases of property, plant and equipment (PP&E)

 

 

 (1,373)

 

 

 (1,420)

 

 

 (1,461)

 

Free cash flow

 

$

 4,867

 

$

 5,242

 

$

 4,959

 

Net income attributable to 3M

 

$

 4,858

 

$

 5,050

 

$

 4,833

 

Free cash flow conversion

 

 

 100

%  

 

 104

%

 

 103

%

 

Off-Balance Sheet Arrangements and Contractual Obligations:

 

As of December 31, 2017, the Company has not utilized special purpose entities to facilitate off-balance sheet financing arrangements. Refer to the section entitled "Warranties/Guarantees" in Note 15 for discussion of accrued product warranty liabilities and guarantees.

 

In addition to guarantees, 3M, in the normal course of business, periodically enters into agreements that require the Company to indemnify either major customers or suppliers for specific risks, such as claims for injury or property damage arising out of the use of 3M products or the negligence of 3M personnel, or claims alleging that 3M products infringe third-party patents or other intellectual property. While 3M's maximum exposure under these indemnification provisions cannot be estimated, these indemnifications are not expected to have a material impact on the Company's consolidated results of operations or financial condition.

 

A summary of the Company's significant contractual obligations as of December 31, 2017, follows:

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by year

 

 

    

    

 

    

    

 

   

   

 

   

   

 

   

   

 

   

   

 

   

After

 

(Millions)

 

Total

 

2018

 

2019

 

2020

 

2021

 

2022

 

2022

 

Total debt (Note 11)

 

$

13,949

 

$

1,853

 

$

 692

 

$

1,368

 

$

1,333

 

$

1,191

 

$

7,512

 

Interest on long-term debt

 

 

 3,375

 

 

 269

 

 

 256

 

 

 251

 

 

 241

 

 

 212

 

 

 2,146

 

Operating leases (Note 15)

 

 

 1,098

 

 

 258

 

 

 212

 

 

 160

 

 

 106

 

 

 88

 

 

 274

 

Capital leases (Note 15)

 

 

 76

 

 

 12

 

 

 10

 

 

 9

 

 

 6

 

 

 5

 

 

 34

 

Tax Cuts and Jobs Act (TCJA) transition tax payments (Note 9)

 

 

 745

 

 

 122

 

 

 59

 

 

 59

 

 

 59

 

 

 111

 

 

 335

 

Unconditional purchase obligations and other

 

 

 1,561

 

 

1,032

 

 

 211

 

 

 150

 

 

 99

 

 

 56

 

 

 13

 

Total contractual cash obligations

 

$

20,804

 

$

3,546

 

$

1,440

 

$

1,997

 

$

1,844

 

$

1,663

 

$

10,314

 

 

Long-term debt payments due in 2018, 2019, and 2020 include floating rate notes totaling $54 million, $71 million, and $95 million, respectively, as a result of put provisions associated with these debt instruments.

 

During the fourth quarter of 2017, 3M recorded a net tax expense related to the enactment of the Tax Cuts and Jobs Act (TCJA). The expense is primarily related to the TCJA's transition tax. The transition tax is payable over 8 years at the election of the taxpayer. As discussed in Note 9, this balance is a provisional amount and is subject to adjustment during the measurement period of up to one year following the December 2017 enactment of the TCJA, as provided by recent SEC guidance.

 

Unconditional purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding on the Company. Included in the unconditional purchase obligations category above are certain obligations related to take or pay contracts, capital commitments, service agreements and utilities. These estimates include both unconditional purchase obligations with terms in excess of one year and normal ongoing purchase obligations with terms of less than one year. Many of these commitments relate to take or pay contracts, in which 3M guarantees payment to ensure availability of products or services that are sold to customers. The Company expects to receive consideration (products or services) for these unconditional purchase obligations. Contractual capital commitments are included in the preceding table, but these commitments represent a small part of the Company's expected capital spending. The purchase obligation amounts do not represent the entire anticipated purchases in the future, but represent only those items for which the Company is contractually obligated. The majority of 3M's products and services are purchased as needed, with no unconditional commitment. For this reason, these amounts will not provide a reliable indicator of the Company's expected future cash outflows on a stand-alone basis.

 

Other obligations, included in the preceding table within the caption entitled "Unconditional purchase obligations and other," include the current portion of the liability for uncertain tax positions under ASC 740, which is expected to be paid out in cash in the next 12 months. The Company is not able to reasonably estimate the timing of the long-term payments, other than the transition tax prescribed under the Tax Cuts and Jobs Act (TCJA) which is separately included in the table above, or the amount by which the liability will increase or decrease over time; therefore, the long-term portion of the net tax liability of $523 million is excluded from the preceding table. Refer to Note 9 for further details.

 

As discussed in Note 12, the Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2018 and Company contributions to its U.S. and international pension plans are expected to be largely discretionary in future years; therefore, amounts related to these plans are not included in the preceding table.

 

FINANCIAL INSTRUMENTS

 

The Company enters into foreign exchange forward contracts, options and swaps to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies and certain intercompany financing transactions. The Company manages interest rate risks using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The Company manages commodity price risks through negotiated supply contracts, price protection agreements and commodity price swaps.

 

Refer to Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", for further discussion of foreign exchange rates risk, interest rates risk, commodity prices risk and value at risk analysis.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

In the context of Item 7A, 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 cause fluctuations in earnings and cash flows. Senior management provides oversight for risk management and derivative activities, determines certain of the Company's financial risk policies and objectives, and provides guidelines for derivative instrument utilization. Senior management also establishes certain associated procedures relative to control and valuation, risk analysis, counterparty credit approval, and ongoing monitoring and reporting.

 

The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps, currency swaps, commodity price swaps, and forward and option contracts. However, the Company's risk is limited to the fair value of the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counterparties. The Company does not anticipate nonperformance by any of these counterparties.

 

Foreign Exchange Rates Risk:

 

Foreign currency exchange rates and fluctuations in those rates may affect the Company's net investment in foreign subsidiaries and may cause fluctuations in cash flows related to foreign denominated transactions. 3M is also exposed to the translation of foreign currency earnings to the U.S. dollar. The Company enters into foreign exchange forward and option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies. These transactions are designated as cash flow hedges. 3M may dedesignate these cash flow hedge relationships in advance of the occurrence of the forecasted transaction. The maximum length of time over which 3M hedges its exposure to the variability in future cash flows of the forecasted transactions is 36 months. In addition, 3M enters into foreign currency forward contracts that are not designated in hedging relationships to offset, in part, the impacts of certain intercompany activities (primarily associated with intercompany licensing arrangements and intercompany financing transactions). As circumstances warrant, the Company also uses foreign currency forward contracts and foreign currency denominated debt as hedging instruments to hedge portions of the Company's net investments in foreign operations. The dollar equivalent gross notional amount of the Company's foreign exchange forward and option contracts designated as either cash flow hedges or net investment hedges was $3.6 billion at December 31, 2017. The dollar equivalent gross notional amount of the Company's foreign exchange forward and option contracts not designated as hedging instruments was $5.0 billion at December 31, 2017. In addition, as of December 31, 2017, the Company had 4.4 billion Euros in principal amount of foreign currency denominated debt designated as non-derivative hedging instruments in certain net investment hedges as discussed in Note 13 in the "Net Investment Hedges" section.

 

Interest Rates Risk:

 

The Company may be impacted by interest rate volatility with respect to existing debt and future debt issuances. 3M manages interest rate risk and expense using a mix of fixed and floating rate debt. In addition, the Company may enter into interest rate swaps that are designated and qualify as fair value hedges. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The dollar equivalent (based on inception date foreign currency exchange rates) gross notional amount of the Company's interest rate swaps at December 31, 2017 was $2.0 billion. Additional details about 3M's long-term debt can be found in Note 11, including references to information regarding derivatives and/or hedging instruments, further discussed in Note 13, associated with the Company's long-term debt.

 

Commodity Prices Risk:

 

The Company manages commodity price risks through negotiated supply contracts, price protection agreements and commodity price swaps. 3M used commodity price swaps as cash flow hedges of forecasted commodity transactions to manage price volatility, but discontinued this practice in the first quarter of 2015. The related mark-to-market gain or loss on qualifying hedges was included in other comprehensive income to the extent effective, and reclassified into cost of sales in the period during which the hedged transaction affected earnings. The Company may enter into other commodity price swaps to offset, in part, fluctuation and costs associated with the use of certain commodities and precious metals. These instruments are not designated in hedged relationships and the extent to which they were outstanding at December 31, 2017 was not material.

 

Value At Risk:

 

The value at risk analysis is performed annually to assess the Company's sensitivity to changes in currency rates, interest rates, and commodity prices. A Monte Carlo simulation technique was used to test the impact on after-tax earnings related to financial instruments (primarily debt), derivatives and underlying exposures outstanding at December 31, 2017. The model (third-party bank dataset) used a 95 percent confidence level over a 12-month time horizon. The exposure to changes in currency rates model used 9 currencies, interest rates related to two currencies, and commodity prices related to five commodities. This model does not purport to represent what actually will be experienced by the Company. This model does not include certain hedge transactions, because the Company believes their inclusion would not materially impact the results. The following table summarizes the possible adverse and positive impacts to after-tax earnings related to these exposures.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adverse impact on after-tax

 

Positive impact on after-tax

 

 

 

earnings

 

earnings

 

(Millions)

   

2017

   

2016

   

2017

    

2016

 

Foreign exchange rates

 

$

 (242)

 

$

 (245)

 

$

 253

 

$

 264

 

Interest rates

 

 

 (15)

 

 

 (13)

 

 

 14

 

 

 (2)

 

Commodity prices

 

 

 (3)

 

 

 (2)

 

 

 3

 

 

 1

 

 

In addition to the possible adverse and positive impacts discussed in the preceding table related to foreign exchange rates, recent historical information is as follows. 3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by $111 million and $127 million in 2017 and 2016, respectively. This estimate includes the effect of translating profits from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks. 3M estimates that year-on-year derivative and other transaction gains and losses decreased pre-tax income by approximately $152 million and $69 million in 2017 and 2016, respectively.

 

An analysis of the global exposures related to purchased components and materials is performed at each year-end. A one percent price change would result in a pre-tax cost or savings of approximately $75 million per year. The global energy exposure is such that a ten percent price change would result in a pre-tax cost or savings of approximately $40 million per year. Global energy exposure includes energy costs used in 3M production and other facilities, primarily electricity and natural gas.

 

Item 8. Financial Statements and Supplementary Data.

 

Index to Financial Statements

 

A complete summary of Form 10-K content, including the index to financial statements, is found at the beginning of this document.

 

 

Management's Responsibility for Financial Reporting

 

Management is responsible for the integrity and objectivity of the financial information included in this report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Where necessary, the financial statements reflect estimates based on management's judgment.

 

Management has established and maintains a system of internal control over financial reporting for the Company and its subsidiaries. This system and its established accounting procedures and related controls are designed to provide reasonable assurance that assets are safeguarded, that the books and records properly reflect all transactions, that policies and procedures are implemented by qualified personnel, and that published financial statements are properly prepared and fairly presented. The Company's system of internal control over financial reporting is supported by widely communicated written policies, including business conduct policies, which are designed to require all employees to maintain high ethical standards in the conduct of Company affairs. Internal auditors continually review the accounting and control system.

 

3M Company

 

Management's Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Management conducted an assessment of the Company's internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2017 excluded Scott Safety, which was acquired by the Company in October 2017 in a purchase business combination. Scott Safety is a wholly-owned subsidiary whose total assets and total net sales both represented less than 1 percent of the Company's consolidated financial statement amounts as of and for the year ended December 31, 2017. Companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of acquisition while integrating the acquired company under guidelines established by the Securities and Exchange Commission. Based on the assessment, management concluded that, as of December 31, 2017, the Company's internal control over financial reporting is effective.

 

The Company's internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein, which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2017.

 

3M Company

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors of 3M Company

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of 3M Company and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the "consolidated financial statements").  We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

 

Basis for Opinions

 

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting.  Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. 

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

As described in Management's Report on Internal Control over Financial Reporting, management has excluded Scott Safety from its assessment of internal control over financial reporting as of December 31, 2017 because it was acquired by the Company in a purchase business combination during 2017.  We have also excluded Scott Safety from our audit of internal control over financial reporting.  Scott Safety is a wholly-owned subsidiary whose total assets and total net sales excluded from management's assessment and our audit of internal control over financial reporting both represent less than 1 percent of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

 

 

/s/ PricewaterhouseCoopers LLP

Minneapolis, Minnesota

February 8, 2018

 

We have served as the Company's auditor since 1975.

 

 

 

 

3M Company and Subsidiaries

Consolidated Statement of Income

Years ended December 31

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions, except per share amounts)

    

 

2017

    

2016

    

2015

 

Net sales

 

 

$

 31,657

 

$

 30,109

 

$

 30,274

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 16,001

 

 

 15,040

 

 

 15,383

 

Selling, general and administrative expenses

 

 

 

 6,572

 

 

 6,222

 

 

 6,229

 

Research, development and related expenses

 

 

 

 1,850

 

 

 1,735

 

 

 1,763

 

Gain on sale of businesses

 

 

 

 (586)

 

 

 (111)

 

 

 (47)

 

Total operating expenses

 

 

 

 23,837

 

 

 22,886

 

 

 23,328

 

Operating income

 

 

 

 7,820

 

 

 7,223

 

 

 6,946

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income), net

 

 

 

 272

 

 

 170

 

 

 123

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

 7,548

 

 

 7,053

 

 

 6,823

 

Provision for income taxes

 

 

 

 2,679

 

 

 1,995

 

 

 1,982

 

Net income including noncontrolling interest

 

 

$

 4,869

 

$

 5,058

 

$

 4,841

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

 

 

 11

 

 

 8

 

 

 8

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

 

$

 4,858

 

$

 5,050

 

$

 4,833

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding - basic

 

 

 

 597.5

 

 

 604.7

 

 

 625.6

 

Earnings per share attributable to 3M common shareholders - basic

 

 

$

 8.13