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3M Company (16OA)

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Tuesday 13 February, 2018

3M Company

Annual Financial Report - Part 1

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.

http://www.rns-pdf.londonstockexchange.com/rns/6559E_-2018-2-12.pdf

 

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 s