Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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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 18, effective in the first quarter of 2018, 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 2018 compared to the same period last year, in addition to 2017 compared to 2016.

Three months endedYear ended December 31,
(Earnings per diluted share)December 31, 201820182017
Same period last year$0.85$7.93$8.16
2017 Enactment of TCJA Impact1.251.24—
Same period last year, excluding 2017 Tax Cuts and Jobs Act (TCJA)$2.10$9.17$8.16
Increase/(decrease) in earnings per share - diluted, due to:
2017 divestiture of identity management business—(0.54)0.54
Organic growth/productivity and other0.180.920.47
Acquisitions/other divestiture gains(0.15)(0.15)—
Foreign exchange impacts(0.03)(0.05)(0.13)
Legal-related charges—(0.04)—
Legal - respirator mask actuarial reserve——(0.07)
Other expense0.06(0.14)(0.22)
Income tax rate, excluding Tax Cuts and Jobs Act (TCJA) measurement period adjustment0.050.610.34
Shares of common stock outstanding0.080.180.08
2018 divestiture of Communication Markets Division, net of related restructuring actions0.020.50—
Current period, excluding MN Natural Resource Damages (NRD) resolution and TCJA measurement period adjustment$2.31$10.46$9.17
TCJA measurement period adjustment0.07(0.29)(1.24)
MN NRD resolution(0.11)(1.28)—
Current period$2.27$8.89$7.93

Year 2018 and fourth quarter EPS:

For the fourth quarter of 2018, net income attributable to 3M was $1.347 billion, or $2.27 per diluted share, compared to $523 million, or $0.85 per diluted share, in the fourth quarter of 2017, an increase of 167 percent on a per diluted share basis. Adjusting for the impacts related to the resolution of the Minnesota natural resource damages (NRD) matter and accounting for the enactment of the Tax Cuts and Jobs Act (TCJA), as further described in the Operating income, operating income margin, income before taxes, net income, earnings per share, and effective tax rate adjusted for impacts of the Minnesota NRD resolution and the measurement period adjustment to the impact of the enactment of the Tax Cuts and Jobs Act (TCJA) - (non-GAAP measures) section below, net income attributable to 3M was $1.366 billion, or $2.31 diluted share for the fourth quarter of 2018, compared to $1.285 billion, or $2.10 per diluted share for the fourth quarter of 2017, an increase of 10.0 percent on a per diluted share basis.

For full year 2018, net income attributable to 3M was $5.349 billion, or $8.89 per diluted share basis, compared to $4.858 billion, or $7.93 per diluted share, for full year 2017, an increase of 12.1 percent on a per diluted share. Adjusting for the NRD matter and the TCJA as described further below, net income was $6.295 billion, or $10.46 per diluted share for the full year 2018, compared to $5.620 billion, or $9.17 per diluted share for full year 2017, an increase of 14.1 percent on a per diluted share basis.

These non-GAAP measures are further described and reconciled to the most directly comparable GAAP financial measures in the section that follows.

Additional discussion related to the components of the year-on-year change in earnings per diluted share follows:

2017 divestiture of identity management business:

·In May 2017, 3M completed the related sale or transfer of control, as applicable of its identity management business and reflected a pre-tax gain of $457 million, which was reported within the Company’s Safety and Graphics business. The earnings per share impact reflects the specific income tax rate used for this divestiture.

Organic growth/productivity and other:

·Fourth quarter and full year 2018 year-on-year benefits include higher organic local-currency sales, selling price increases, and business transformation, which is having a positive impact on 3M’s productivity efforts. Higher raw material costs partially offset these year-on-year benefits.
·Lower year-on-year restructuring (other than activity related to the Communication Markets Division divestiture), portfolio and footprint actions increased pre-tax earnings by approximately $58 million and $307 million in the fourth quarter and full year 2018, respectively. These charges included $24 million related to exit activities and $80 million in asset charges, accelerated depreciation and other costs taken in the first quarter of 2017, $99 million in restructuring actions and $51 million in asset charges, accelerated depreciation and other costs taken in the second quarter of 2017, $35 million in asset charges, accelerated depreciation and other costs taken in the third quarter of 2017, in addition to $23 million related to exit activities and $41 million in asset charges, accelerated depreciation and other costs taken in the fourth quarter of 2017.

Acquisitions/other divestiture gains:

·In aggregate, acquisitions, year-on-year divestitures gains (other than the sale of the Communication Markets Division and identity management business), and lost operating income from divested businesses (other than lost income related to the divestiture of the Communication Markets Division) decreased earnings per diluted share by 12 cents year-on-year for the fourth quarter of 2018 and decreased earnings per diluted share by 10 cents for full year 2018.
·Remaining stranded costs and lost operating income related to the divestiture of the Communication Markets Division decreased earnings per diluted share by 3 cents and 5 cents year-on-year for the fourth quarter of 2018 and full year 2018, respectively.

Foreign exchange impacts:

·Foreign currency impacts (net of hedging) decreased pre-tax earnings year-on-year by approximately $27 million and approximately $42 million, or the equivalent of 3 cents and 5 cents per diluted share, for the fourth quarter and full year 2018, respectively, excluding the impact of foreign currency changes on tax rates.

Legal-related charges

·In the second quarter of 2018, 3M reached agreements in principle on a number of respiratory mask/asbestos claims and an oral care product liability matter, the implications of which resulted in an increase in certain legal accruals. Refer to Note 16 for further details.

Other expense:

·Fourth quarter 2018’s interest expense (net of interest income) decreased $72 million, primarily due to the $96 million early extinguishment of debt charge in the fourth quarter 2017 that was not repeated in 2018. Full year 2018’s interest expense (net of interest income) increased $8 million year-on-year as a result of higher U.S. average debt balances and higher borrowing costs.
·On a combined basis, higher defined benefit pension and postretirement service cost expense and defined contribution expense, in addition to lower income related to non-service cost components of pension and postretirement expense, increased expense year-on-year.

Income tax rate, excluding Tax Cuts and Jobs Act (TCJA) measurement period adjustment:

·The effective tax rate for the fourth quarter of 2018 was 21.6 percent, a decrease of 47 percentage points versus 2017. The effective tax rate for full year 2018 was 23.4 percent, a decrease of 12.1 percentage points versus 2017.
·The effect of income taxes on items that had specific tax rates are reflected within their respective diluted earnings per share impacts in the table above for both the fourth quarter and full year 2018. Additionally, as discussed in the section below titled Operating income, operating income margin, income before taxes, net income, earnings per share, and effective tax rate adjusted for impacts of the Minnesota NRD resolution and the measurement period adjustment to the impact of the enactment of the Tax Cuts and Jobs Act (TCJA) - (non-GAAP measures), excluding the Minnesota NRD Resolution and measurement period adjustment related to TCJA, the effective income tax rate was 20.5 percent and 20.1 percent in the fourth quarter 2018 and full year 2018, respectively. Excluding the $762 million impact related to the enactment of the TCJA in the fourth quarter of 2017, the effective income tax rate for the fourth quarter 2017 and full year 2017 was 23.0 percent and 25.4 percent, respectively.
·Factors that decreased the effective tax rate for the fourth quarter and full year 2018 primarily related to the favorable aspects of the TCJA such as the decrease in the U.S. income tax rate and foreign-derived intangible income (FDII), reduced transitional impact of TCJA related to transition tax and remeasurement of deferred tax assets/liabilities (further discussed below), and increased benefits from the R&D tax credit. These decreases were partially offset by the elimination of the domestic manufacturing deduction, the global intangible low-taxed income (GILTI) provision, and lower excess tax benefits related to employee share-based payments. Refer to Note 10 for additional details.

Shares of common stock outstanding:

·Lower shares outstanding increased earnings per share by 8 cents and 18 cents per diluted share for the fourth quarter and full year 2018, respectively. Weighted-average diluted shares outstanding in the fourth quarter and full year 2018 declined 3.4 percent and 1.8 percent year-on-year, respectively, which benefited earnings per share. The decrease in the outstanding weighted-average diluted shares relates to the Company’s purchase of $1.3 billion and $4.9 billion of its own stock in the fourth quarter and full year 2018, respectively.

2018 divestiture of Communication Markets Division, net of related restructuring actions and exit activities:

·In June 2018, 3M completed the sale of substantially all of its Communication Markets Division and reflected a pre-tax gain of $494 million as a result of this divestiture. Additionally in December 2018, 3M completed the sale of the remaining telecommunications system integration services portion of the business based in Germany and reflected a pre-tax gain of $15 million as a result of this divestiture. Both divestitures were reported within the Company’s Electronics and Energy business. During the second quarter and fourth quarter of 2018, management approved and committed to undertake certain restructuring actions related to addressing corporate functional costs following the Communication Markets Division divestiture. These actions affected approximately 1,200 positions worldwide and resulted in a second quarter 2018 pre-tax charge of $105 million and a fourth quarter 2018 pre-tax charge of $22 million, net of adjustments for reductions in cost estimates. The aggregate net impact of the gain on sale and related restructuring actions increased earnings per diluted share by 2 cents and 50 cents per diluted share for the fourth quarter and full year 2018, respectively, and reflects the specific income tax rate associated with these items.

Year 2017 EPS:

2017 divestiture of identity management business:

·In May 2017, 3M completed the related sale or transfer of control, as applicable of its identity management business and reflected a pre-tax gain of $457 million. The earnings per share impact reflects the specific income tax rate used for this divestiture.

Organic growth/productivity and other:

·Organic growth/productivity in 2017 included benefits from higher organic local-currency sales, raw material cost decreases from sourcing cost reduction projects, and business transformation, which had a positive impact on 3M’s productivity efforts. These benefits were partially offset by higher defined benefit pension service cost expenses. During 2017, organic growth and productivity were the primary drivers for the year-on-year benefit.
·Year-on-year incremental strategic investments decreased pre-tax earnings by approximately $413 million in 2017. These incremental strategic investments are comprised of 3M’s investments in growth initiatives and optimization of its portfolio and supply chain footprint.

Acquisitions/other divestiture gains:

·Acquisitions and divestitures (other than the sale of the identity management business) had a neutral impact to earnings per diluted share for full year 2017. Acquisition impacts, which are measured for the first twelve months post-transaction, related primarily to the acquisition of Scott Safety (fourth quarter 2017). The net impact related to Scott Safety included 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), tolling and automated license/number plate recognition business (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 2017 was an increase of approximately 7 cents per diluted share.

Foreign exchange impacts:

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

Legal – respirator mask actuarial reserve

·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. Refer to Note 16 for more details.

Other expense:

·Other expense decreased earnings per share for 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. 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.
·On a combined basis, higher defined benefit pension and postretirement service cost expense and defined contribution expense, in addition to lower income related to non-service cost components of pension and postretirement expense, increased expense year-on-year

Income tax rate, excluding Tax Cuts and Jobs Act (TCJA) measurement period adjustment:

·The effect of income taxes on items that had specific tax rates are reflected within their respective diluted earnings per share impacts in the table above for full year 2017. 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 $1.24 per diluted share in 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 10.

Shares of common stock outstanding:

·Weighted-average diluted shares outstanding in 2017 declined 1.0 percent year-on-year, which benefited earnings per share. The Company purchased $2.1 billion of its own stock in 2017.

Operating income, operating income margin, income before taxes, net income, earnings per share, and effective tax rate adjusted for impacts of the Minnesota NRD resolution and the measurement period adjustment to the impact of the enactment of the Tax Cuts and Jobs Act (TCJA) - (non-GAAP measures):

As further discussed in Note 16, in February 2018, 3M reached an agreement with the State of Minnesota that resolved the previously disclosed Natural Resource Damages (NRD) lawsuit filed by the State against the Company related to certain PFCs present in the environment. Under the terms of the settlement, 3M agreed to provide an $850 million grant to the State for a special “3M Water Quality and Sustainability Fund.” This Fund will enable projects that support water sustainability in the Twin Cities East Metro region, such as continued delivery of water to residents and enhancing groundwater recharge to support sustainable growth. The projects will also result in habitat and recreation improvements, such as fishing piers, trails, and open space preservation. 3M recorded a charge of $897 million ($710 million after-tax), inclusive of legal fees and other related obligations, in the first quarter of 2018 associated with the resolution of this matter. In the fourth quarter of 2018, 3M recorded a related $60 million tax expense resulting from the Company’s ongoing IRS examination under the Compliance Assurance Process (CAP) and new guidance released under the Tax Cuts and Jobs Act. Also during the first quarter of 2018, 3M recorded a tax expense of $217 million related to a measurement period adjustment to the provisional amounts recorded in December 2017 from the enactment of the Tax Cuts and Jobs Act (TCJA). In the fourth quarter 2018, 3M finalized the tax impact related to TCJA with a reversal of previously recorded tax expense in the amount of $41 million.

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 was primarily related to the TCJA’s transition tax on previously unremitted earnings of non-U.S. subsidiaries and was 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 was subject to adjustment during the measurement period of up to one year following the December 2017 enactment of the TCJA, as provided by SEC guidance.

In addition to providing financial results in accordance with U.S. GAAP, the Company also provides non-GAAP measures that adjust for the impacts of the NRD resolution and enactment/measurement period adjustments to the impact of the enactment of the TCJA. These items represent significant charges/benefits that impacted the Company’s financial results. Operating income, operating income margin, effective tax rate, net income, and earnings per share are all measures for which 3M provides the 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 these items is meaningful to investors as it provides a useful analysis of ongoing underlying operating trends. The determination of these items may not be comparable to similarly titled measures used by other companies.

Adjusted income, operating income margin, earnings per share, & effective tax rate (non-GAAP measures) (Dollars in millions, except per share amounts)Net SalesOperating IncomeOperating Income MarginIncome Before TaxesProvision for Income TaxesEffective Tax RateNet Income Attributable to 3MEarnings Per Diluted ShareEarnings per diluted share percent change
Q4 2017 GAAP$7,990$1,78922.4%$1,672$1,14768.6%$523$0.85
Adjustment for TCJA————(762)—7621.25
Q4 2017 Adjusted Non-GAAP Measure$7,990$1,78922.4%$1,672$38523.0%$1,285$2.10
Q4 2018 GAAP$7,945$1,78322.4%$1,720$37121.6%$1,347$2.27167.1%
Adjustment for measurement period accounting of TCJA————41(41)(0.07)
Adjustment for MN NRD Resolution————(60)600.11
Q4 2018 Adjusted Non-GAAP Measure$7,945$1,78322.4%$1,720$35220.5%$1,366$2.3110.0%
Adjusted income, operating income margin, earnings per share, & effective tax rate (non-GAAP measures) (Dollars in millions, except per share amounts)Net SalesOperating IncomeOperating Income MarginIncome Before TaxesProvision for Income TaxesEffective Tax RateNet Income Attributable to 3MEarnings Per Diluted ShareEarnings per diluted share percent change
Full Year 2017 GAAP$31,657$7,69224.3%$7,548$2,67935.5%$4,858$7.93
Adjustment for TCJA————(762)—7621.24
Full Year 2017 Adjusted Non-GAAP Measure$31,657$7,69224.3%$7,548$1,91725.4%$5,620$9.17
Full Year 2018 GAAP$32,765$7,20722.0%$7,000$1,63723.4%$5,349$8.8912.1%
Adjustment for measurement period accounting of TCJA————(176)1760.29
Adjustment for MN NRD Resolution—897—8971277701.28
Full Year 2018 Adjusted Non-GAAP Measure$32,765$8,10424.7%$7,897$1,58820.1%$6,295$10.4614.1%

Fourth-quarter 2018 sales and operating income by business segment:

The following tables contain sales and operating income results by business segment for the fourth quarters of 2018 and 2017, followed by additional discussion of business segment results.

Three months endedThree months ended2018 vs 2017
December 31, 2018December 31, 2017% change
Net% ofOper.Net% ofOper.NetOper.
(Dollars in millions)SalesTotalIncomeSalesTotalIncomeSalesIncome
Business Segments
Industrial$2,95237.2%$627$2,96137.1%$580(0.3)%8.1%
Safety and Graphics1,56919.83451,56519.64050.3(14.8)
Health Care1,52019.14581,48418.64602.4(0.2)
Electronics and Energy1,34216.93961,40517.6366(4.5)8.2
Consumer1,21115.22571,21015.12720.1(5.2)
Corporate and Unallocated30.0(136)(3)—(139)——
Elimination of Dual Credit(652)(8.2)(164)(632)(8.0)(155)——
Total Company$7,945100.0%$1,783$7,990100.0%$1,789(0.6)%(0.3)%
Three months ended December 31, 2018
Worldwide Sales ChangeOrganic local-Total sales
By Business Segmentcurrency salesDivestituresTranslationchange
Industrial2.5%(0.1)%(2.7)%(0.3)%
Safety and Graphics3.3(0.2)(2.8)0.3
Health Care4.8—(2.4)2.4
Electronics and Energy4.1(7.1)(1.5)(4.5)
Consumer1.9—(1.8)0.1
Total Company3.0%(1.3)%(2.3)%(0.6)%

From a business segment perspective, 3M achieved total sales growth in three business segments and organic local-currency sales growth (which includes organic volume and selling price impacts) in all five business segments. Operating income margins were 22.4 percent, with all five business segments above 21 percent.

·In Industrial, total sales decreased 0.3 percent, while organic local currency sales increased 2.5 percent, with organic sales growth in advanced materials, industrial adhesives and tapes, separation and purification, abrasives, and automotive aftermarket. Operating income margins were 21.2 percent, up 1.6 percentage points, with 1.2 percentage points of this increase driven by benefits from expenses related to portfolio and footprint actions taken in the fourth quarter of 2017 that were not repeated in the fourth quarter of 2018.
·In Safety and Graphics, total sales increased 0.3 percent, or 3.3 percent on an organic local currency basis. Organic sales increased in personal safety and commercial solutions while organic sales declined in transportation safety and roofing granules. Operating income margins were 22.0 percent, down 3.9 percentage points, with 2.8 percentage points of this decrease driven by year-on-year impact of 2017 divestiture gains, partially offset by acquisitions and portfolio and footprint actions that were not repeated in 2018.
·In Health Care, total sales increased 2.4 percent, or 4.8 percent on an organic local currency sales basis. Organic sales were led by food safety, health information systems, medical solutions, and oral care. Organic sales declined in drug delivery systems. Operating income margins were 30.2 percent, down 0.8 percentage points.
·In Electronics and Energy, total sales decreased 4.5 percent, while organic local currency sales increased 4.1 percent. Electronics-related total sales increased 2.1 percent, or 3.2 percent on an organic local currency basis, with increases in both electronics materials solutions and display materials and systems. Energy-related total sales decreased 22.7 percent, while organic sales increased 4.5 percent, driven by growth in electrical markets. Operating income margins were 29.5 percent, up 3.5 percentage points, with 1.9 percentage points of this increase related to the impact of the divestiture of the Communication Markets Division.
·In Consumer, total sales increased 0.1 percent, or 1.9 percent on an organic local currency basis. Organic sales grew in home improvement and stationery and office, while home care, and consumer health care declined. Operating income margins
were 21.3 percent, down 1.1 percentage points, which included an increase of 0.5 percentage points related to 2017 portfolio and footprint actions that were not repeated in 2018.

Year 2018 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, 2018 and 2017. Refer to the section entitled “Performance by Business Segment” later in MD&A for additional discussion concerning both 2018 versus 2017 results and 2017 versus 2016 results, including Corporate and Unallocated. Refer to Note 18 for additional information on business segments, including Elimination of Dual Credit.

2018 vs 2017
20182017% change
Net% ofOper.Net% ofOper.NetOper.
(Dollars in millions)SalesTotalIncomeSalesTotalIncomeSalesIncome
Business Segments
Industrial$12,26737.4%$2,737$11,86637.5%$2,4903.4%9.9%
Safety and Graphics6,82720.81,7206,23519.72,0669.5(16.7)
Health Care6,02118.41,7995,85318.51,7642.92.0
Electronics and Energy5,47216.72,0555,50117.41,377(0.5)49.3
Consumer4,79614.61,0274,73114.91,0041.42.4
Corporate and Unallocated500.2(1,465)3—(395)——
Elimination of Dual Credit(2,668)(8.1)(666)(2,532)(8.0)(614)——
Total Company$32,765100.0%$7,207$31,657100.0%$7,6923.5%(6.3)%
Year ended December 31, 2018
Worldwide Sales ChangeOrganic local-Total sales
By Business Segmentcurrency salesAcquisitionsDivestituresTranslationchange
Industrial3.2%—%(0.1)%0.3%3.4%
Safety and Graphics5.17.3(3.1)0.29.5
Health Care2.6——0.32.9
Electronics and Energy3.3—(4.2)0.4(0.5)
Consumer1.5——(0.1)1.4
Total Company3.2%1.4%(1.3)%0.2%3.5%

Fourth-quarter 2018 sales results by geographic area/business segment:

Percent change information compares the fourth quarter 2018 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, 2018
Europe,Latin
UnitedAsiaMiddle EastAmerica/Other
StatesPacific& AfricaCanadaUnallocatedWorldwide
Net sales (millions)$3,183$2,453$1,577$735$(3)$7,945
% of worldwide sales40.1%30.9%19.8%9.2%—100.0%
Components of net sales change:
Volume — organic3.1%1.4%(0.6)%2.2%—1.6%
Price1.30.61.92.8—1.4
Organic local-currency sales4.42.01.35.0—3.0
Divestitures(1.1)(0.4)(2.9)(1.4)—(1.3)
Translation—(2.4)(4.8)(6.4)—(2.3)
Total sales change3.3%(0.8)%(6.4)%(2.8)%—(0.6)%
Total sales change:
Industrial4.1%(2.0)%(3.1)%(4.8)%—(0.3)%
Safety and Graphics4.6%(5.8)%(0.9)%1.4%—0.3%
Health Care2.8%6.9%—%(1.1)%—2.4%
Electronics and Energy(7.3)%2.3%(39.5)%(13.8)%—(4.5)%
Consumer5.3%(7.4)%(10.7)%(2.0)%—0.1%
Organic local-currency sales change:
Industrial4.1%0.8%1.9%2.3%—2.5%
Safety and Graphics5.0%(2.5)%4.5%7.1%—3.3%
Health Care2.8%10.6%4.6%5.5%—4.8%
Electronics and Energy5.7%4.7%(7.0)%7.2%—4.1%
Consumer5.3%(4.9)%(6.9)%6.2%—1.9%

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

·In the Asia Pacific geographic area, China/Hong Kong total sales decreased 3 percent, driven by foreign currency translation impacts, while organic local-currency sales increased 1 percent. In Japan, total sales and organic local-currency sales were flat.
·In the EMEA geographic area, West Europe total sales decreased 7 percent due to the impact of lost sales from divested businesses in addition to foreign currency translation impacts, while organic local-currency sales were flat.
·In the Latin America/Canada geographic area, total sales increased 1 percent in Mexico, or 5 percent on an organic local currency basis. In Canada, total sales were flat, as organic local currency sales growth of 5 percent was offset by foreign currency translation impacts and lost sales from divested businesses. In Brazil, total sales decreased 11 percent, as organic local-currency sales growth of 5 percent was more than offset by foreign currency translation impacts.

Foreign currency translation decreased year-on-year sales by 2.3 percent, with the translation-related sales decreases in Latin America/Canada, EMEA and Asia Pacific. Selling prices increased by 1.4 percent year-on-year for the fourth quarter of 2018, with strong price growth in Latin America/Canada, EMEA and the U.S. In Asia Pacific, price increases were lower compared to other geographic areas, as strong volume growth in electronics had a negative impact on price.

Year 2018 sales results by geographic area/business segment:

Percent change information compares the full year 2018 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, 2018
Europe,Latin
UnitedAsiaMiddle EastAmerica/Other
StatesPacific& AfricaCanadaUnallocatedWorldwide
Net sales (millions)$12,840$10,254$6,654$3,024$(7)$32,765
% of worldwide sales39.2%31.3%20.3%9.2%—100.0%
Components of net sales change:
Volume — organic2.1%3.5%—%2.1%—2.1%
Price1.10.31.72.0—1.1
Organic local-currency sales3.23.81.74.1—3.2
Acquisitions1.90.52.20.7—1.4
Divestitures(1.3)(0.6)(2.5)(1.4)—(1.3)
Translation—0.81.7(3.7)—0.2
Total sales change3.8%4.5%3.1%(0.3)%—3.5%
Total sales change:
Industrial3.6%4.4%4.2%(1.8)%—3.4%
Safety and Graphics11.2%7.0%12.9%2.6%—9.5%
Health Care(0.2)%10.2%3.8%2.0%—2.9%
Electronics and Energy(3.2)%3.6%(19.0)%(9.8)%—(0.5)%
Consumer3.7%(2.2)%(2.1)%(0.8)%—1.4%
Organic local-currency sales change:
Industrial3.6%3.3%2.5%3.1%—3.2%
Safety and Graphics5.4%4.9%5.4%4.7%—5.1%
Health Care(0.3)%9.5%1.9%5.6%—2.6%
Electronics and Energy4.6%3.9%(3.4)%2.5%—3.3%
Consumer3.7%(3.0)%(3.9)%4.5%—1.5%

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

·In the Asia Pacific geographic area, China/Hong Kong total sales increased 10 percent and organic local-currency sales increased 8 percent. In Japan, total sales and organic local currency sales decreased 2 percent.
·In the EMEA geographic area, West Europe total sales grew 4 percent, driven by foreign currency translation impacts, while organic local-currency sales were flat.
·In the Latin America/Canada geographic area, total sales increased 1 percent in Mexico, as organic local-currency sales increases of 4 percent were partially offset by lost sales from divested businesses and foreign currency translation impacts. In Canada, total sales and organic local currency increased 5 percent. In Brazil, total sales decreased 8 percent, as organic local-currency sales growth of 5 percent was more than offset by foreign currency translation impacts.

Foreign currency translation increased year-on-year sales by 0.2 percent, with the translation-related sales increase in EMEA and Asia Pacific partially offset by the decreases in Latin America/Canada. Selling prices increased by 1.1 percent year-on-year for 2018, with strong price growth in Latin America/Canada, EMEA and the U.S. In Asia Pacific, price grew slightly, as strong volume growth in electronics had a negative impact on price.

Year 2017 sales results by geographic area/business segment:

Percent change information compares the full year 2017 with the full year 2016, 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
UnitedAsiaMiddle EastAmerica/Other
StatesPacific& AfricaCanadaUnallocatedWorldwide
Net sales (millions)$12,372$9,809$6,456$3,033$(13)$31,657
% of worldwide sales39.1%31.0%20.4%9.5%—100.0%
Components of net sales change:
Volume — organic2.8%11.5%2.5%2.5%—5.2%
Price(0.3)(0.3)0.71.1——
Organic local-currency sales2.511.23.23.6—5.2
Acquisitions0.50.20.70.2—0.4
Divestitures(1.5)(0.4)(0.8)(1.4)—(1.0)
Translation—(0.1)1.72.2—0.5
Total sales change1.5%10.9%4.8%4.6%—5.1%
Total sales change:
Industrial3.1%8.7%6.5%6.8%—5.8%
Safety and Graphics1.3%10.0%8.3%0.6%—4.8%
Health Care3.7%8.5%1.5%9.1%—4.4%
Electronics and Energy1.2%17.2%2.2%3.1%—11.7%
Consumer0.2%12.4%2.2%7.1%—3.3%
Organic local-currency sales change:
Industrial3.9%9.3%5.1%5.3%—5.8%
Safety and Graphics4.2%11.6%6.5%2.5%—6.3%
Health Care3.7%8.4%0.3%6.8%—3.9%
Electronics and Energy2.2%17.3%0.1%1.4%—11.6%
Consumer0.2%11.7%0.4%4.3%—2.7%

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, 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.

Financial condition:

3M generated $6.4 billion of operating cash flow in 2018, an increase of $199 million when compared to 2017. This followed a decrease of $422 million when comparing 2017 to 2016. Refer to the section entitled “Financial Condition and Liquidity” later in MD&A for a discussion of items impacting cash flows. In November 2018, 3M’s Board of Directors authorized the repurchase of up to $10 billion of 3M’s outstanding common stock, which replaced the Company’s February 2016 repurchase program. This program has no pre-established end date. In 2018, the Company purchased $4.9 billion of its own stock, compared to purchases of $2.1 billion in 2017 and $3.8 billion in 2016. The Company expects to purchase $2.0 billion to $4.0 billion of its own stock in 2019. In February 2019, 3M’s Board of Directors declared a first-quarter 2019 dividend of $1.44 per share, an increase of 6 percent. This marked the 61st 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 2018, the Company experienced raw material price inflation across most material markets worldwide. In response, the Company continued to deploy productivity projects to minimize the impact of raw material inflation and market supply challenges, including input management, reformulations, and multi-sourcing activities. These succeeded in partially offsetting the overall raw material headwinds experienced throughout the year. 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 89 percent funded at year-end 2018. The primary U.S. qualified pension plan, which is approximately 67 percent of the worldwide pension obligation, was 96 percent funded and the international pension plans were 89 percent funded. The U.S. non-qualified pension plan is not funded due to tax considerations and other factors. Asset returns in 2018 for the primary U.S. qualified pension plan were -0.5%, 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 2019 is 7.00%. The primary U.S. qualified pension plan year-end 2018 discount rate was 4.36%, up 0.68 percentage points from the year-end 2017 discount rate of 3.68%. The increase in U.S. discount rates resulted in a decrease valuation of the projected benefit obligation (PBO). The primary U.S. qualified pension plan’s funded status increased 2 percentage points in 2018 due to the lower PBO resulting from the significant discount rate increase and a $200 million contribution to the plan. Additional detail and discussion of international plan asset returns and discount rates is provided in Note 13 (Pension and Postretirement Benefit Plans).

3M expects to contribute approximately $100 million to $200 million of cash to its global defined benefit pension and postretirement plans in 2019. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2019. 3M expects global defined benefit pension and postretirement expense in 2019 (before settlements, curtailments, special termination benefits and other) to decrease by approximately $130 million pre-tax when compared to 2018. Refer to “Critical Accounting Estimates” within MD&A and Note 13 (Pension and Postretirement Benefit Plans) for additional information concerning 3M’s pension and post-retirement plans.

2019 closed acquisitions:

In February 2019, 3M completed the acquisition of the technology business of MModal for cash of approximately $0.7 billion, subject to closing and other adjustments, and assumption of approximately $0.3 billion of MModal’s debt. Based in Pittsburgh, Pennsylvania, M*Modal is a leading healthcare technology provider of cloud-based, conversational artificial intelligence-powered systems that help physicians efficiently capture and improve the patient narrative. The transaction will be reflected within the Company’s Health Care business.

RESULTS OF OPERATIONS

Net Sales:

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

Operating Expenses:

2018 versus2017 versus
(Percent of net sales)20182017201620172016
Cost of sales50.9%50.8%50.2%0.1%0.6%
Selling, general and administrative expenses23.220.921.02.3(0.1)
Research, development and related expenses5.65.95.9(0.3)—
Gain on sale of businesses(1.7)(1.9)(0.4)0.2(1.5)
Operating income margin22.0%24.3%23.3%(2.3)%1.0%

Operating income margins decreased in 2018 versus 2017, driven primarily by the charge related to the Minnesota NRD resolution (as discussed in the Selling, General and Administrative Expenses section below). A number of factors impact the various income statement line items, such as raw material cost management, portfolio and footprint actions, divestitures, foreign currency, cost management, and pension and postretirement service cost effects. Expanded discussion of each of the income statement line items follows in the various sections below. Pension and postretirement service cost expense is recorded in cost of sales; selling, general and administrative expenses (SG&A); and research, development and related expenses (R&D). In total, 3M’s defined benefit pension and postretirement service cost expense increased $21 million in 2018, compared to an increase of $16 million in 2017. Refer to Note 13 (Pension and Postretirement Plans) for the service cost components of net periodic benefit costs.

The Company is investing in an initiative called business transformation, with these investments impacting cost of sales, SG&A, and R&D. Business transformation encompasses the ongoing multi-year phased implementation of an enterprise resource planning (ERP) system on a worldwide basis, as well as changes in processes and internal/external service delivery across 3M.

Cost of Sales:

Cost of sales includes manufacturing, engineering and freight costs.

Cost of sales, measured as a percent of sales, increased during 2018 primarily due to foreign currency effects (net of hedge losses). Additionally, cost of sales for full year 2018 were increased by the second quarter 2018 and fourth quarter 2018 Communication Markets Division related restructuring charges as discussed in Note 5. This increase was partially offset by 2017 portfolio and supply chain footprint optimization charges that did not repeat in 2018, and selling price increases. Selling prices increased net sales year-on-year by 1.1 percent for full year 2018. These were partially offset by raw material cost increases and higher defined benefit pension and postretirement service cost expense and defined contribution expense.

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

Selling, General and Administrative Expenses:

SG&A in dollars increased 14.7 percent for full year 2018 when compared to the same period last year. The increase is primarily associated with the Communication Markets Division-related restructuring charges (as discussed in Note 5) and the charge related to the Minnesota NRD resolution (as discussed earlier in the “Operating income, operating income margin, income before taxes, net income, earnings per share, and effective tax rate adjusted for impacts of the Minnesota NRD resolution and the measurement period adjustment to the impact of the enactment of the Tax Cuts and Jobs Act (TCJA) - (non-GAAP measures)” section and further in Note 16). This increase was partially offset by 2017 portfolio and supply chain footprint optimization charges that did not repeat in 2018.

Research, Development and Related Expenses:

R&D in dollars decreased $49 million for full year 2018 when compared to the same period last year. The decrease primarily relates to R&D no longer incurred related to the Communication Markets Division, which was primarily divested in the second quarter of 2018 and completed in the fourth quarter of 2018. 3M continued to invest in its key initiatives, including R&D aimed at disruptive innovation programs with the potential to create entirely new markets and disrupt existing markets. R&D, measured as a percent of sales, was 5.6 percent in 2018, compared to 5.9 percent in 2017 and 2016.

Gain on Sale of Businesses:

In the first quarter of 2018, 3M closed on the sale of certain personal safety product offerings primarily focused on noise, environmental, and heat stress monitoring. In addition, 3M divested a polymer additives compounding business, formerly part of the Company’s Industrial business, and reflected a gain on final closing adjustments from a prior divestiture which, in aggregate, were not material. These divestitures resulted in a gain on sale of businesses of $24 million. 3M also divested an abrasives glass products business, formerly part of the Company’s Industrial business, which resulted in a gain on sale of less than $15 million in the second quarter of 2018. Also, 3M reflected an immaterial gain from an earnout on a previous divestiture in the fourth quarter of 2018.

In June 2018, 3M completed the sale of substantially all of its Communication Markets Division to Corning Incorporated. This business, with annual sales of approximately $400 million, consists of optical fiber and copper passive connectivity solutions for the telecommunications industry including 3M’s xDSL, FTTx, and structured cabling solutions and, in certain countries, telecommunications system integration services. This divestiture resulted in a gain on sale of $494 million. In December 2018, the Company completed the sale of the remaining telecommunications system integration services portion of the business based in Germany, resulting in a pre-tax gain of $15 million. Both the June 2018 and December 2018 divestiture impacts were reported within the Company’s Electronics and Energy business.

Refer to Note 3 for additional detail on these divestitures. 3M also divested certain businesses in 2017 and 2016, resulting in gains of $586 million and $111 million, respectively. Refer to Note 3 for additional detail on these divestitures.

Operating Income Margin:

3M uses operating income as one of its primary business segment performance measurement tools. Refer to the table below for a reconciliation of operating income margins for 2018 and 2017.

Three months endedYear ended
(Percent of net sales)December 31, 2018December 31, 2018December 31, 2017
Same period last year22.4%24.3%23.3%
Increase/(decrease) in operating income margin, due to:
2017 divestiture of identity management business—(1.3)1.3
Organic volume/productivity and other1.00.9(0.3)
Acquisitions/other divestiture gains(1.2)(0.1)0.1
Selling price and raw material impact0.20.10.4
Foreign exchange impacts0.1(0.2)(0.5)
Legal-related charges—(0.2)—
2018 divestiture of Communication Markets Division, net of related restructuring actions(0.1)1.2—
Current period, excluding MN Natural Resource Damages (NRD) resolution22.4%24.7%24.3%
MN NRD resolution—(2.7)—
Current period22.4%22.0%24.3%

Year 2018 and fourth quarter operating income:

Operating income margins were flat in the fourth quarter of 2018 when compared to the fourth quarter of 2017, and declined 2.3 percentage points in full year 2018 when compared to full year 2017.

Additional discussion related to the components of the year-on-year change in operating income margins follows:

2017 divestiture of identity management business:

·Operating income margins decreased year-on-year due to the gain on the May 2017 divestiture of the Company’s former identity management business.

Organic volume/productivity and other:

·Operating income margins increased year-on-year due to benefits from organic local-currency growth and productivity, in addition to lower year-on-year portfolio and supply chain footprint optimization charges.
·Operating income margins decreased year-on-year due to higher defined benefit pension and postretirement service cost expense and defined contribution expense.

Acquisitions/other divestiture gains:

·Acquisition impacts (primarily related to Scott Safety), in addition to lower year-on-year divestiture gains (excluding the identity management business and Communication Markets), decreased operating margins year-on-year.
·Remaining stranded costs to be addressed from the divestiture of the Communication Markets Division reduced operating margins year-on-year.
·Operating income margins increased year-on-year due to the lost lower-margin operating income from divested businesses.

Selling price and raw material impact:

·Higher selling prices, partially offset by raw material cost increases, benefited operating income margins year-on-year.

Foreign exchange impacts:

·Foreign currency effects (net of hedge gains) increased operating margins year-on-year for the fourth quarter of 2018, but decreased operating income margins year-on-year for the full year 2018.

Legal-related charges:

·In the second quarter of 2018, 3M reached agreements in principle on a number of respiratory mask/asbestos claims and an oral care product liability matter, the implications of which resulted in an increase in certain legal accruals. Refer to Note 16 for further details.

2018 divestiture of Communication Markets Division, net of related restructuring actions:

·In June 2018, 3M completed the sale of substantially all of its Communication Markets Division and reflected a pre-tax gain of $494 million as a result of this divestiture. Additionally in December 2018, completed the sale of the remaining telecommunications system integration services portion of the business based in Germany and reflected a pre-tax gain of $15 million as a result of this divestiture. Both divestitures were reported within the Company’s Electronics and Energy business. During the second quarter and fourth quarter of 2018, management approved and committed to undertake certain restructuring actions related to addressing corporate functional costs following the Communication Markets Division divestiture. These actions resulted in a second quarter 2018 pre-tax charge of $105 million and a fourth quarter 2018 pre-tax charge of $22 million, net of adjustments for reductions in cost estimates.

MN NRD Resolution:

·Operating income margins for full year 2018 decreased 2.3 percentage points year-on-year. Excluding the first quarter 2018 impact of the Minnesota NRD resolution (as discussed earlier in the “Operating income, operating income margin, income before taxes, net income, earnings per share, and effective tax rate adjusted for impacts of the Minnesota NRD resolution and the measurement period adjustment to the impact of the enactment of the Tax Cuts and Jobs Act (TCJA) - (non-GAAP measures)” section and further in Note 14), operating margins increased 0.4 percentage points year-on-year for full year 2018.

Year 2017 operating income:

Operating income margins increased 1.0 percentage points for the full year 2017 when compared to the same period last year.

2017 divestiture of identity management business:

·Operating income margins increased year-on-year due to the gain on the May 2017 divestiture of the Company’s former identity management business.

Organic volume/productivity and other:

·Operating income benefited from higher organic local-currency sales growth and productivity, partially offset by actuarial adjustments to the Company’s respirator mask/asbestos liability accrual.
·Operating income margins decreased year-on-year due to higher year-on-year defined benefit pension service cost expense.
·Operating margins also decreased due to incremental strategic investments in growth, productivity and portfolio actions, in addition to charges related to 3M’s optimization of its portfolio and supply chain footprint.

Acquisitions/other divestiture gains:

·Acquisitions and divestitures consist of the transactions and integration costs, net of income, that relate to the acquisition of Scott Safety, in addition to the year-on-year divestiture gains (other than identity management business, refer to Note 3) and non-repeating operating losses from divested businesses, which combined, benefited operating income margins for the full year 2017.

Selling price and raw material impact:

·3M benefited from raw material sourcing cost reduction projects year-on-year.

Foreign exchange impacts:

·Foreign currency effects (net of hedge gains) decreased operating income margins year-on-year.

Other Expense (Income), Net:

See Note 6 for a detailed breakout of this line item.

Interest expense increased during 2018 and 2017 due to higher average debt balances and higher U.S. borrowing costs. In addition, in October 2017, via cash tender offers, 3M repurchased $305 million aggregate principal amount of its outstanding notes. The Company recorded an early debt extinguishment charge of $96 million in the fourth quarter of 2017, which was included within interest expense. Capitalized interest related to property, plant and equipment construction in progress is recorded as a reduction to interest expense.

Interest income increased year-on-year in both 2018 and 2017 due to higher average interest rates.

Effective January 1, 2018, in conjunction with 3M’s adoption of ASU No. 2017-07, all pension and postretirement net periodic benefit cost components (except the service cost component) are reported within other expense (income), net. For additional details, refer to Note 1 (Significant Accounting Policies). Year-on-year pension and postretirement net periodic benefit non-service costs increased $55 million and $68 million for the year 2018 and 2017, respectively. The year-on-year increases were primarily due to an increase in the net actuarial amortization expense.

Provision for Income Taxes:

(Percent of pre-tax income)201820172016
Effective tax rate23.4%35.5%28.3%

The effective tax rate for 2018 was 23.4 percent, compared to 35.5 percent in 2017, a decrease of 12.1 percentage points. The effective tax rate for 2017 was 35.5 percent, compared to 28.3 percent in 2016, an increase of 7.2 percentage points. The changes in the tax rates between years were impacted by many factors, including the enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017 as further described in the Overview, “Income, earnings per share, and effective tax rate adjusted for impacts of the Tax Cuts and Jobs Act (TCJA) -(non-GAAP measures)” section and in Note 10. During the fourth quarter of 2017, 3M recorded a net tax expense of $762 million related to the enactment of the TCJA. As a result of finalizing estimates related to TCJA, the Company recorded additional net charges in the amount of $176 million as measurement period adjustments in 2018. 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.

The TCJA establishes new tax laws that affected 2018 and will affect future periods, including, but not limited to: 1) reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent, 2) the creation of a new provision designed to tax global intangible low-taxed income (GILTI), 3) addition of provisions incentivizing foreign-derived intangible income (FDII), 4) significant change to the U.S. federal tax implications of dividends, 5) limitations on the deductibility of certain executive compensation, and 6) the repeal of the domestic production activity deduction. Considering the impacts of the TCJA and other factors, the Company currently estimates its effective tax rate for 2019 will be approximately 20 to 22 percent. The tax rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, changes in tax laws, and employee share-based payment accounting; as well as recurring factors, such as the geographic mix of income before taxes.

Refer to Note 10 for further discussion of income taxes.

Net Income Attributable to Noncontrolling Interest:

(Millions)201820172016
Net income attributable to noncontrolling interest$14$11$8

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

Currency Effects:

3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by $42 million and $111 million in 2018 and 2017, respectively. These estimates include the effect of translating profits from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks. 3M estimates that year-on-

year derivative and other transaction gains and losses decreased pre-tax income by approximately $92 million and $152 million in 2018 and 2017, respectively. Refer to Note 14 in the Consolidated Financial Statements for additional information concerning 3M’s hedging activities.

PERFORMANCE BY BUSINESS SEGMENT

For a detailed discussion of the markets served and types of products offered by 3M’s business segments, see Item 1, Business Segments. Financial information and other disclosures are provided in the Notes to the Consolidated Financial Statements. Effective in the first quarter of 2018, as part of 3M’s continuing effort to improve the alignment of its businesses around markets and customers, the Company made the following changes:

Consolidation of customer account activity within international countries – expanding dual credit reporting

·The Company consolidated its customer account activity in each country into centralized sales districts for certain countries that make up approximately 70 percent of 3M’s 2017 international net sales. Expansion of these initiatives, which previously had been deployed only in the U.S., reduces the complexity for customers when interacting with multiple 3M businesses. 3M business segment reporting measures include dual credit to business segments for certain sales and related operating income. This dual credit is based on which business segment provides customer account activity with respect to a particular product sold in a specific country. The expansion of alignment of customer accounts within additional countries increased the attribution of dual credit across 3M’s business segments. Additionally, certain sales and operating income results for electronic bonding product lines that were previously equally divided between the Electronics and Energy business segment and the Industrial business segment are now reported similarly to dual credit.

Centralization of manufacturing and supply technology platforms

·Certain shared film manufacturing and supply technology platform resources formerly reflected within the Electronics and Energy business segment were combined with other shared and centrally managed material resource centers of expertise within Corporate and Unallocated.

In addition, as discussed in Note 1, 3M adopted ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, effective January 1, 2018 on a retrospective basis. As a result, operating income for 3M’s business segments has been revised to reflect non-service components of pension and postretirement net periodic benefit costs within other expense (income), net.

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

Corporate and Unallocated:

In addition to these five business segments, 3M assigns certain costs to “Corporate and Unallocated,” which is presented separately in the preceding business segments table and in Note 18. Corporate and Unallocated includes a variety of miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the Company determines not to allocate directly to its business segments. Corporate and Unallocated also includes sales, costs, and income from contract manufacturing, transition services and other arrangements with the acquirer of the Communication Markets Division following its divestiture in 2018. Because this category includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.

Corporate and Unallocated operating expenses increased by $1.1 billion in full year 2018 when compared to full year 2017. Beginning in the second quarter of 2018, the operating income from contractual manufacturing and other arrangements described in the paragraph above were included in Corporate and Unallocated. In addition, in the second quarter and fourth quarter of 2018, operating expenses included the restructuring charge of $105 million and $22 million, net of adjustments for reductions in cost estimates, respectively, as discussed in Note 5 related to addressing corporate functional costs following the Communication Markets Division divestiture. In the first quarter of 2018, the Minnesota NRD resolution ($897 million), inclusive of legal fees and other related

obligations, was reflected in Corporate and Unallocated. In addition, 3M’s defined benefit pension and postretirement service-cost expense allocation to Corporate and Unallocated increased year-on-year.

Corporate and Unallocated operating expenses increased by $74 million in 2017 when compared to 2016. In both the first and second quarters of 2017, a portion of the severance actions were reflected in Corporate and Unallocated. In the fourth quarter, an incremental $58 million was reflected within Corporate and Unallocated related to the Company’s actuarial adjustments to its respirator mask/asbestos liability accrual. In addition, 3M’s defined benefit pension and postretirement service cost expense allocation to Corporate and Unallocated increased by approximately $30 million in 2017.

Operating Business Segments:

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

The following discusses total year results for 2018 compared to 2017 and 2017 compared to 2016, for each business segment. Refer to the preceding year 2018 and 2017 sales results by geographic area/business segment sections for additional sales change information.

Industrial Business (37.4% of consolidated sales):

201820172016
Sales (millions)$12,267$11,866$11,217
Sales change analysis:
Organic local-currency3.2%5.8%
Divestitures(0.1)(0.5)
Translation0.30.5
Total sales change3.4%5.8%
Operating income (millions)$2,737$2,490$2,528
Percent change9.9%(1.5)%
Percent of sales22.3%21.0%22.5%

Year 2018 results:

Sales in Industrial totaled $12.3 billion, up 3.4 percent in U.S. dollars. Organic local-currency sales increased 3.2 percent, divestitures decreased sales by 0.1 percent, and foreign currency translation increased sales by 0.3 percent.

On an organic local-currency sales basis:

·Sales growth increased in advanced materials, separation and purification, industrial adhesives and tapes, automotive and aerospace, and abrasives. Benefits included 3M’s automotive OEM’s increased penetration across applications such as structural tapes, adhesives, acoustics, light-weighting and electronics solutions.
·Automotive aftermarket sales were flat, as growth in products and solutions for retail car care was offset by softening of the collision repair market.

Acquisitions and divestitures:

·In January 2016, 3M completed its sale of its pressurized polyurethane foam adhesives business (formerly known as Polyfoam).
·In October 2016, 3M sold the assets of its temporary protective films business.
·In the first quarter of 2018, 3M completed the sale of its polymer additives compounding business.
·In May 2018, 3M divested an abrasives glass products business.

Operating income:

·Operating income margins increased 1.3 percentage points, helped by organic sales growth across most of the portfolio in addition to benefiting from expenses related to portfolio and footprint actions taken in 2017 that were not repeated in 2018.

Year 2017 results:

Sales in Industrial totaled $11.9 billion, up 5.8 percent in U.S. dollars. Organic local-currency sales increased 5.8 percent, divestitures reduced sales by 0.5 percent, and foreign currency translation increased sales by 0.5 percent.

On an organic local-currency sales basis:

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

Acquisitions and divestitures:

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

Operating income:

·Operating income margins decreased 1.5 percentage points, as divestiture impacts related to the first quarter 2016 sale of the Polyfoam business resulted in a net year-on-year operating income margin reduction of 0.6 percentage points. In addition, incremental strategic investments decreased margins by 1.0 percentage points.

Safety and Graphics Business (20.8% of consolidated sales):

201820172016
Sales (millions)$6,827$6,235$5,948
Sales change analysis:
Organic local-currency5.1%6.3%
Acquisitions7.32.2
Divestitures(3.1)(4.2)
Translation0.20.5
Total sales change9.5%4.8%
Operating income (millions)$1,720$2,066$1,403
Percent change(16.7)%47.2%
Percent of sales25.2%33.1%23.6%

Year 2018 results:

Sales in Safety and Graphics totaled $6.8 billion, up 9.5 percent in U.S. dollars. Organic local-currency sales increased 5.1 percent, acquisitions increased sales by 7.3 percent, divestitures reduced sales by 3.1 percent, and foreign currency translation increased sales by 0.2 percent.

On an organic local-currency sales basis:

·Sales increased in personal safety, commercial solutions, and transportation safety.
·Sales declined in roofing granules, as production slowed within the shingle manufacturing industry when compared to prior year.

Acquisitions and divestitures:

·Acquisition sales growth in 2018 reflects the acquisition of Scott Safety in October 2017. Scott Safety is a premier manufacturer of innovative products, including self-contained breathing apparatus systems, gas and flame detection instruments and other safety devices.
·2017 divestitures include the sale of its safety prescription eyewear business (first quarter 2017), the sale of 3M’s identity management business and tolling and automated license/number plate business (both in second quarter 2017) and electronic monitoring business (fourth quarter 2017).
·In February 2018, 3M closed on the sale of certain personal safety product offerings primarily focused on noise, environmental, and heat stress monitoring.

Operating income:

·Operating income margins decreased 7.9 percentage points, which primarily related to the impact on operating margins from the 2017 gain on sale of the identify management and electronic monitoring businesses in addition to the impact from the Scott Safety acquisition.

Year 2017 results:

Sales in Safety and Graphics totaled $6.2 billion, up 4.8 percent in U.S. dollars. Organic local-currency sales increased 6.3 percent, acquisitions increased sales by 2.2 percent, divestitures reduced sales by 4.2 percent, and foreign currency translation increased sales by 0.5 percent.

On an organic local-currency sales basis:

·Sales growth was led by personal safety and roofing granules.
·Transportation safety showed positive growth, while the commercial solutions business was flat.

Acquisitions and divestitures:

·In January 2017, 3M sold its safety prescription eyewear business.
·In the second quarter of 2017, 3M finalized the sale of its identity management business and tolling and automated license/number plate recognition business.
·In October 2017, 3M completed the acquisition of Scott Safety.
·Also in October 2017, 3M completed the sale of its electronic monitoring business.

Operating income:

·Operating income margins increased 9.5 percentage points, largely driven by year-on-year divestiture gains that were partially offset by acquisition charges and incremental strategic investments, which combined resulted in a net operating income margin benefit of 8.5 percentage points.

Health Care Business (18.4% of consolidated sales):

201820172016
Sales (millions)$6,021$5,853$5,606
Sales change analysis:
Organic local-currency2.6%3.9%
Translation0.30.5
Total sales change2.9%4.4%
Operating income (millions)$1,799$1,764$1,731
Percent change2.0%1.9%
Percent of sales29.9%30.1%30.9%

Year 2018 results:

Sales in Health Care totaled $6.0 billion, up 2.9 percent in U.S. dollars. Organic local-currency sales increased 2.6 percent, and foreign currency translation increased sales by 0.3 percent.

On an organic local-currency sales basis:

·Sales growth was led by food safety, health information systems, and medical solutions.
·Oral care sales also increased, with continued positive growth internationally, particularly in developing economies.
·Sales declined in drug delivery systems.

Acquisitions:

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

Operating income:

·Operating income margins decreased 0.2 percentage points year-on-year due to continued investment in priority growth platforms.

As discussed in Note 3, in February 2019, 3M acquired the technology business of MModal. MModal is a leading healthcare technology provider of cloud-based, conversational artificial intelligence-powered systems that help physicians efficiently capture and improve the patient narrative.

Year 2017 results:

Sales in Health Care totaled $5.9 billion, up 4.4 percent in U.S. dollars. Organic local-currency sales increased 3.9 percent and foreign currency translation increased sales by 0.5 percent.

On an organic local-currency sales basis:

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

Acquisitions:

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

Operating income:

·Operating income margins decreased 0.8 percent year-on-year, as incremental strategic investments, primarily related to accelerating future growth opportunities, reduced margins by 0.7 percentage points.

Electronics and Energy Business (16.7% of consolidated sales):

201820172016
Sales (millions)$5,472$5,501$4,926
Sales change analysis:
Organic local-currency3.3%11.6%
Divestitures(4.2)(0.2)
Translation0.40.3
Total sales change(0.5)%11.7%
Operating income (millions)$2,055$1,377$1,145
Percent change49.3%20.3%
Percent of sales37.6%25.0%23.2%

Year 2018 results:

Sales in Electronics and Energy totaled $5.5 billion, down 0.5 percent in U.S. dollars. Organic local-currency sales increased 3.3 percent, divestitures reduced sales by 4.2 percent, and foreign currency translation increased sales by 0.4 percent.

Total sales within the electronics-related and energy-related businesses increased 3 percent and decreased 10 percent, respectively. Total sales increased 4 percent in Asia Pacific.

On an organic local-currency sales basis:

·Sales increased 3 percent in 3M’s electronics-related businesses, driven by increases in electronics materials solutions. Sales were flat in display materials and systems due to softness in consumer electronics.
·Sales increased 5 percent in 3M’s energy-related businesses, driven by electrical markets.
·Sales increased 4 percent in Asia Pacific, where 3M’s electronics business is concentrated.

Divestitures:

·In the fourth quarter of 2017, 3M sold the assets of its electrical marking/labeling business.
·In June 2018, 3M completed the sale of substantially all of its Communication Markets Division and recorded a pre-tax gain of approximately $494 million. In December 2018, the Company completed the sale of the remaining telecommunications system integration services portion of the business based in Germany and recorded a pre-tax gain of $15 million. Refer to Note 3 for additional details.

Operating income:

·Operating income margins increased 12.6 percentage points, primarily driven by the Communication Markets Division divestiture gain.

Year 2017 results:

Sales in Electronics and Energy totaled $5.5 billion, up 11.7 percent in U.S. dollars. Organic local-currency sales increased 11.6 percent, divestitures reduced sales by 0.2 percent, and foreign currency translation increased sales by 0.3 percent.

Total sales within the electronics-related businesses were up 17 percent while energy-related businesses were up 2 percent.

On an organic local-currency sales basis:

·Sales increased 17 percent in 3M’s electronics-related businesses, with increases in both display materials and systems and electronics materials solutions, as the businesses drove increased penetration on OEM platforms in addition to strengthened end-market demand in consumer electronics.
·Sales increased 1 percent in 3M’s energy-related businesses, as sales growth in electrical markets was partially offset by declines in telecommunications.

Divestitures:

·In the fourth quarter of 2017, 3M sold the assets of its electrical marking/labeling business.
·In December 2016, 3M sold the assets of its cathode battery technology out-licensing business.

Operating income:

·Operating income margins increased 1.8 percentage points, as benefits from higher organic volume were partially offset by 2017 footprint and portfolio actions and year-on-year divestiture impacts. These actions resulted in a year-on-year operating income margin reduction of 2.2 percentage points.

Consumer Business (14.6% of consolidated sales):

201820172016
Sales (millions)$4,796$4,731$4,578
Sales change analysis:
Organic local-currency1.5%2.7%
Translation(0.1)0.6
Total sales change1.4%3.3%
Operating income (millions)$1,027$1,004$1,054
Percent change2.4%(4.8)%
Percent of sales21.4%21.2%23.0%

Year 2018 results:

Sales in Consumer totaled $4.8 billion, an increase of 1.4 percent in U.S. dollars. Organic local-currency sales increased 1.5 percent and foreign currency translation decreased sales by 0.1 percent.

On an organic local-currency sales basis:

·Sales grew in home improvement, building on a track record of strong performance over the past several years.
·Stationery and office supplies and home care were flat, while consumer health care declined.

Operating income:

·Operating income margins increased 0.2 percentage points year-on-year, benefiting from expenses related to portfolio and footprint actions taken in 2017 that were not repeated in 2018.

Year 2017 results:

Sales in Consumer totaled $4.7 billion, up 3.3 percent in U.S. dollars. Organic local-currency sales increased 2.7 percent, while foreign currency translation increased sales by 0.6 percent.

On an organic local-currency sales basis:

·Sales grew in consumer health care, home improvement, and home care.
·The stationery and office supplies business declined due to channel inventory adjustments, primarily in the U.S. office retail and wholesale market.

Operating income:

·Operating income margins declined 1.8 percentage points year-on-year, in part due to incremental strategic investments, which reduced margins by 1.8 percentage points.

PERFORMANCE BY GEOGRAPHIC AREA

While 3M manages its businesses globally and believes its business segment results are the most relevant measure of performance, the Company also utilizes geographic area data as a secondary performance measure. Export sales are generally reported within the geographic area where the final sales to 3M customers are made. A portion of the products or components sold by 3M’s operations to its customers are exported by these customers to different geographic areas. As customers move their operations from one geographic area to another, 3M’s results will follow. Thus, net sales in a particular geographic area are not indicative of end-user consumption in that geographic area. Financial information related to 3M operations in various geographic areas is provided in Note 19.

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

Geographic Area Supplemental Information

Property, Plant and
Equipment - net
Employees as of December 31,Capital Spendingas of December 31,
(Millions, except Employees)20182017201620182017201620182017
United States37,41236,95835,748$994$852$834$4,915$4,891
Asia Pacific18,97118,28318,1242382092281,6241,672
Europe, Middle East and Africa20,88420,86920,2032952562941,7511,798
Latin America and Canada16,24915,42617,509505664448505
Total Company93,51691,53691,584$1,577$1,373$1,420$8,738$8,866

Employment:

Employment increased 1,980 positions in 2018 and decreased by 48 positions in 2017.

Capital Spending/Net Property, Plant and Equipment:

Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. In 2018, 63% of 3M’s capital spending was within the United States, followed by Europe, Middle East and Africa; Asia Pacific; and Latin America/Canada. 3M is increasing its investment in manufacturing and sourcing capability in order to more closely align its product capability with its sales in major geographic areas in order to best serve its customers throughout the world with proprietary, automated, efficient, safe and sustainable processes. Capital spending is discussed in more detail later in MD&A in the section entitled “Cash Flows from Investing Activities.”

CRITICAL ACCOUNTING ESTIMATES

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

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

Legal Proceedings:

The categories of claims for which the Company has a probable and estimable liability, the amount of its liability accruals, and the estimates of its related insurance receivables are critical accounting estimates related to legal proceedings. Please refer to the section entitled “Process for Disclosure and Recording of Liabilities and Insurance Receivables Related to Legal Proceedings” (contained in “Legal Proceedings” in Note 16) for additional information about such estimates.

Pension and Postretirement Obligations:

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

appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. See Note 13 for additional discussion of actuarial assumptions used in determining defined benefit pension and postretirement health care liabilities and expenses.

Pension benefits associated with these plans are generally based primarily on each participant’s years of service, compensation, and age at retirement or termination. The benefit obligation represents the present value of the benefits that employees are entitled to in the future for services already rendered as of the measurement date. The Company measures the present value of these future benefits by projecting benefit payment cash flows for each future period and discounting these cash flows back to the December 31 measurement date, using the yields of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. Service cost and interest cost are measured separately using the spot yield curve approach applied to each corresponding obligation. Service costs are determined based on duration-specific spot rates applied to the service cost cash flows. The interest cost calculation is determined by applying duration-specific spot rates to the year-by-year projected benefit payments. The spot yield curve approach does not affect the measurement of the total benefit obligations as the change in service and interest costs offset in the actuarial gains and losses recorded in other comprehensive income.

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

U.S. Qualified PensionInternational Pension (weighted average)U.S. Postretirement Medical
December 31, 2018 Liability:
Benefit obligation4.36%2.50%4.28%
2019 Net Periodic Benefit Cost Components:
Service cost4.47%2.36%4.45%
Interest cost4.04%2.26%3.93%

Another significant element in determining the Company’s pension expense in accordance with ASC 715 is the expected return on plan assets, which is based on strategic asset allocation of the plan, long-term capital market return expectations, and expected performance from active investment management. For the primary U.S. qualified pension plan, the expected long-term rate of return on an annualized basis for 2019 is 7.00%, a decrease from 7.25% in 2018. Refer to Note 13 for information on how the 2018 rate was determined. Return on assets assumptions for international pension and other post-retirement benefit plans are calculated on a plan-by-plan basis using plan asset allocations and expected long-term rate of return assumptions. The weighted average expected return for the international pension plan is 4.90% for 2019, compared to 5.02% for 2018.

For the year ended December 31, 2018, the Company recognized consolidated defined benefit pre-tax pension and postretirement service cost expense of $483 million and a benefit of $73 million related to all non-service pension and postretirement net benefit costs (after settlements, curtailments, special termination benefits and other) for a total consolidated defined benefit pre-tax pension and postretirement expense of $410 million, up from $334 million in 2017.

In 2019, defined benefit pension and postretirement service cost expense is anticipated to total approximately $420 million while non-service pension and postretirement net benefit costs (before settlements, curtailments, special termination benefits and other) is anticipated to be a benefit of approximately $140 million, for a total consolidated defined benefit pre-tax pension and postretirement expense of $280 million, a decrease of approximately $130 million compared to 2018.

The table below summarizes the impact on 2019 pension expense for the U.S. and international pension plans of a 0.25 percentage point increase/decrease in the expected long-term rate of return on plan assets and discount rate assumptions used to measure plan liabilities and 2018 net periodic benefit cost. The table assumes all other factors are held constant, including the slope of the discount rate yield curves.

Increase (Decrease) in Net Periodic Benefit Cost
Discount RateExpected Return on Assets
(Millions)-0.25%+0.25%-0.25%+0.25%
U.S. pension plans$31$(34)$37$(37)
International pension plans21(17)15(15)

Asset Impairments:

As of December 31, 2018, net property, plant and equipment totaled $8.7 billion and net identifiable intangible assets totaled $2.7 billion. Management makes estimates and assumptions in preparing the consolidated financial statements for which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed in the business, including assets of acquired businesses. These estimates and assumptions are closely monitored by management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or an impairment recorded based on a change in the expected use of the asset or performance of the related asset group.

Of the $2.7 billion in net identifiable intangible assets, $0.6 billion relates to indefinite-lived tradenames, primarily Capital Safety, whose tradenames ($520 million at acquisition date) have been in existence for over 55 years (refer to Note 4 for more detail). The primary valuation technique used in estimating the fair value of indefinite lived intangible assets (tradenames) is a discounted cash flow approach. Specifically, a relief of royalty rate is applied to estimated sales, with the resulting amounts then discounted using an appropriate market/technology discount rate. The relief of royalty rate is the estimated royalty rate a market participant would pay to acquire the right to market/produce the product. If the resulting discounted cash flows are less than the book value of the indefinite lived intangible asset, impairment exists, and the asset value must be written down. Based on impairment testing in the third quarter of 2018, no impairment was indicated. The discounted cash flows related to the Capital Safety tradenames exceeded its book value by more than 20 percent in aggregate.

3M goodwill totaled approximately $10.1 billion as of December 31, 2018. 3M’s annual goodwill impairment testing is performed in the fourth quarter of each year. Impairment testing for goodwill is done at a reporting unit level, with all goodwill assigned to a reporting unit. Reporting units are one level below the business segment level, but are required to be combined when reporting units within the same segment have similar economic characteristics. At 3M, reporting units correspond to a division. 3M did not combine any of its reporting units for impairment testing.

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

As described in Note 18, effective in the first quarter of 2018, 3M made business segment reporting changes. For any product moves that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill of the associated reporting units. During the first quarter of 2018, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed. The discussion that follows relates to the separate fourth quarter 2018 annual impairment test and is in the context of the reporting unit structure that existed at that time.

As of October 1, 2018, 3M had 24 primary reporting units, with ten reporting units accounting for approximately 89 percent of the goodwill. These ten reporting units were comprised of the following divisions: Advanced Materials, Display Materials and Systems, Electronics Materials Solutions, Health Information Systems, Industrial Adhesives and Tapes, Infection Prevention, Oral Care Solutions, Personal Safety, Separation and Purification, and Transportation Safety. The estimated fair value for all reporting units was in excess of carrying value by approximately 79 percent or more. 3M’s market value at both December 31, 2018, and September 30, 2018, was significantly in excess of its shareholders’ equity of approximately $10 billion.

As discussed in Note 3, 3M sold its Communication Markets division in 2018, which comprised substantially all of the $272 million reduction in goodwill associated with divestitures during 2018.

In 2018, 3M determined fair values using either an industry price-earnings ratio approach or a discounted cash flows analysis. Where applicable, 3M used a weighted-average discounted cash flow analysis for certain divisions, using projected cash flows that were

weighted based on different sales growth and terminal value assumptions, among other factors. The weighting was based on management’s estimates of the likelihood of each scenario occurring.

3M is a highly integrated enterprise, where businesses share technology and leverage common fundamental strengths and capabilities, thus many of 3M’s businesses could not easily be sold on a stand-alone basis. 3M’s focus on research and development has resulted in a portion of 3M’s value being comprised of internally developed businesses that have no goodwill associated with them. Based on the annual test in the fourth quarter of 2018, no goodwill impairment was indicated for any of the reporting units.

Factors which could result in future impairment charges include, among others, changes in worldwide economic conditions, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk factors are discussed in Item 1A, “Risk Factors,” of this document. In addition, changes in the weighted average cost of capital could also impact impairment testing results. As indicated above, during the first quarter of 2018, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by changes between reporting units and determined that no impairment existed. Long-lived assets with a definite life are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. If future non-cash asset impairment charges are taken, 3M would expect that only a portion of the long-lived assets or goodwill would be impaired. 3M will continue to monitor its reporting units and asset groups in 2019 for any triggering events or other indicators of impairment.

Income Taxes:

The extent of 3M’s operations involves dealing with uncertainties and judgments in the application of complex tax regulations in a multitude of jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes will be due. The Company follows guidance provided by ASC 740, Income Taxes, regarding uncertainty in income taxes, to record these liabilities (refer to Note 10 for additional information). The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current estimate of the tax liabilities. If the Company’s estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary.

Starting in the fourth quarter of 2017 and continuing into 2018, 3M recorded a net tax expense related to the enactment of the Tax Cuts and Jobs Act (TCJA). The expense is primarily related to the TCJA’s transition tax on previously unremitted earnings of non-U.S. subsidiaries and remeasurement of 3M’s deferred tax assets and liabilities. As discussed in Note 10, this expense was finalized in the fourth quarter of 2018.

NEW ACCOUNTING PRONOUNCEMENTS

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

FINANCIAL CONDITION AND LIQUIDITY

The strength and stability of 3M’s business model and strong free cash flow capability, together with proven capital markets access, positions the Company to be able to add further leverage to its capital structure. Investing in 3M’s businesses to drive organic growth remains the first priority for capital deployment, including research and development, capital expenditures, and commercialization capability. Investment in organic growth will be supplemented by complementary acquisitions. 3M will also continue to return cash to shareholders through dividends and share repurchases. Sources for cash availability in the United States, such as ongoing cash flow from operations and access to capital markets, have historically been sufficient to fund dividend payments to shareholders, as well as funding U.S. acquisitions and other items as needed. The TCJA creates additional repatriation opportunities for 3M to access international cash positions on a continual and on-going basis and will help support U.S. capital deployments needs. For those international earnings still considered to be reinvested indefinitely, the Company currently has no plans or intentions to repatriate these funds for U.S. operations. See Note 10 for further information on earnings considered to be reinvested indefinitely.

3M’s primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances. 3M believes it will have continuous access to the commercial paper market. 3M’s commercial paper program permits the Company to have a maximum of $5 billion outstanding with a maximum maturity of 397 days from date of issuance. At December 31, 2018, there was approximately $435 million in commercial paper issued and outstanding.

Total Debt:

The strength of 3M’s capital structure and significant ongoing cash flows provide 3M proven access to capital markets. Additionally, the Company’s maturity profile is staggered to help ensure refinancing needs in any given year are reasonable in proportion to the total portfolio. 3M currently has an AA- credit rating with a stable outlook from Standard & Poor’s and has an A1 credit rating with a stable outlook from Moody’s Investors Service.

The Company’s total debt was $0.7 billion higher at December 31, 2018 when compared to December 31, 2017. Increases in debt related to September 2018 debt issuances of $2.25 billion along with the net impact of repayments and borrowings of international subsidiaries along with foreign currency effects. These were partially offset by August 2018 and November 2018 maturation of $450 million and 500 million Euro, respectively, aggregate principal amount of medium-term notes in addition to commercial paper of $435 million outstanding at year end 2018 compared to $745 million outstanding at year end 2017. For discussion of repayments of and proceeds from debt refer to the following “Cash Flows from Financing Activities” section.

Effective February 24, 2017, the Company updated its “well-known seasoned issuer” (WKSI) shelf registration statement, which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M’s previous shelf registration dated May 16, 2014. In May 2016, in connection with the WKSI shelf, 3M entered into an amended and restated distribution agreement relating to the future issuance and sale (from time to time) of the Company’s medium-term notes program (Series F), up to the aggregate principal amount of $18 billion, which was an increase from the previous aggregate principal amount up to $9 billion of the same Series.

As of December 31, 2018, the total amount of debt issued as part of the medium-term notes program (Series F), inclusive of debt issued in 2011, 2012, 2014, 2015, 2016, 2017 and the 2018 debt referenced above, is approximately $15.3 billion (utilizing the foreign exchange rates applicable at the time of issuance for the Euro denominated debt). Information with respect to long-term debt issuances and maturities for the periods presented is included in Note 12.

In March 2016, 3M amended and restated its existing $2.25 billion five-year revolving credit facility expiring in August 2019 to a $3.75 billion five-year revolving credit facility expiring in March 2021. This credit agreement includes a provision under which 3M may request an increase of up to $1.25 billion (at lenders’ discretion), bringing the total facility up to $5.0 billion. This revolving credit facility is undrawn at December 31, 2018. Under the $3.75 billion credit agreement, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the same period. At December 31, 2018, this ratio was approximately 25 to 1. Debt covenants do not restrict the payment of dividends. Apart from the committed facilities, an additional $243 million in stand-alone letters of credit and bank guarantees were also issued and outstanding at December 31, 2018. These instruments are utilized in connection with normal business activities.

Cash, Cash Equivalents and Marketable Securities:

At December 31, 2018, 3M had $3.3 billion of cash, cash equivalents and marketable securities, of which approximately $3.1 billion was held by the Company’s foreign subsidiaries and approximately $160 million was held by the United States. These balances are invested in bank instruments and other high-quality fixed income securities. At December 31, 2017, cash, cash equivalents and marketable securities held by the Company’s foreign subsidiaries and by the United States totaled approximately $3.975 billion and $180 million, respectively. Specifics concerning marketable securities investments are provided in Note 11.

Net Debt (non-GAAP measure):

Net debt is not defined under U.S. GAAP and may not be computed the same as similarly titled measures used by other companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term marketable securities. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be important indicators of liquidity and financial position. The following table provides net debt as of December 31, 2018 and 2017.

December 31,2018 versus
(Millions)201820172017
Total debt$14,622$13,949$673
Less: Cash, cash equivalents and marketable securities3,2704,156(886)
Net debt (non-GAAP measure)$11,352$9,793$1,559

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

Balance Sheet:

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

The Company uses working capital measures that place emphasis and focus on certain working capital assets, such as accounts receivable and inventory activity.

Working Capital (non-GAAP measure):

December 31,2018 versus
(Millions)201820172017
Current assets$13,709$14,277$(568)
Less: Current liabilities7,2447,687(443)
Working capital (non-GAAP measure)$6,465$6,590$(125)

Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. Working capital is not defined under U.S. generally accepted accounting principles and may not be computed the same as similarly titled measures used by other companies. The Company defines working capital as current assets minus current liabilities. 3M believes working capital is meaningful to investors as a measure of operational efficiency and short-term financial health.

Working capital decreased $125 million compared with December 31, 2017. Current asset balance changes decreased working capital by $568 million, driven by decreases in cash and cash equivalents and marketable securities, partially offset by increases in accounts receivable and inventories (discussed further below). Current liability balance changes increased working capital by $443 million, primarily due to decreases in short-term debt.

Accounts receivable increased $109 million from December 31, 2017, primarily due to increased sales. Foreign currency impacts decreased December 31, 2018 accounts receivable by $166 million and divestitures, net of acquisitions, decreased accounts receivable by $29 million. Inventory increased $332 million from December 31, 2017, impacted by maintenance of additional inventory during

the deployment in the U.S. of the Company’s ERP system. Foreign currency impacts decreased December 31, 2018 inventory by $154 million and divestitures, net of acquisitions, decreased inventory by $23 million.

Return on Invested Capital (non-GAAP measure):

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

In 2018, ROIC of 22.2 percent was higher than 2017. The increase in 2018 when compared to 2017 was negatively impacted by the measurement period adjustments taken in 2018 to the expense recorded in December 2017 from the enactment of the TCJA, the impact from the resolution of the Minnesota natural resource damages (NRD) resolution, and the impact from the gain on sale of the Communication Markets Division, net of restructuring actions related to addressing corporate functional costs following the divestiture, which combined reduced ROIC by 2 percentage points in 2018.

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

Years ended December 31
(Millions)201820172016
Return on Invested Capital (non-GAAP measure)
Net income including non-controlling interest$5,363$4,869$5,058
Interest expense (after-tax) (1)268208143
Adjusted net income (Return)$5,631$5,077$5,201
Average shareholders' equity (including non-controlling interest) (2)$10,407$11,627$11,316
Average short-term and long-term debt (3)14,91212,15611,725
Average invested capital$25,318$23,783$23,041
Return on invested capital (non-GAAP measure)22.2%21.3%22.6%
(1) Effective income tax rate used for interest expense23.4%35.5%28.3%
(2) Calculation of average equity (includes non-controlling interest)
Ending total equity as of:
March 31$11,039$11,040$11,495
June 3010,42811,64411,658
September 3010,31112,20211,769
December 319,84811,62210,343
Average total equity$10,407$11,627$11,316
(3) Calculation of average debt
Ending short-term and long-term debt as of:
March 31$15,660$11,711$11,139
June 3014,51911,30111,749
September 3014,84611,66312,361
December 3114,62213,94911,650
Average short-term and long-term debt$14,912$12,156$11,725

Cash Flows:

Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts in the Consolidated Statement of Cash Flows exclude the effects of acquisitions, divestitures and exchange rate impacts on cash and cash equivalents, which are presented separately in the cash flows. Thus, the amounts presented in the following operating, investing and financing activities tables reflect changes in balances from period to period adjusted for these effects.

Cash Flows from Operating Activities:

Years Ended December 31
(Millions)201820172016
Net income including noncontrolling interest$5,363$4,869$5,058
Depreciation and amortization1,4881,5441,474
Company pension and postretirement contributions(370)(967)(383)
Company pension and postretirement expense410334250
Stock-based compensation expense302324298
Gain on sale of businesses(545)(586)(111)
Income taxes (deferred and accrued income taxes)771,074108
Accounts receivable(305)(245)(313)
Inventories(509)(387)57
Accounts payable40824148
Other — net12025676
Net cash provided by operating activities$6,439$6,240$6,662

Cash flows from operating activities can fluctuate significantly from period to period, as pension funding decisions, tax timing differences and other items can significantly impact cash flows.

In 2018, cash flows provided by operating activities increased $199 million compared to the same period last year, with the increase primarily made up of higher net income and lower year-on-year pension and postretirement contributions. The increase was partially offset primarily due to the Minnesota NRD resolution in the first quarter of 2018 and year-on-year increases in income tax payments. Additional factors that decreased operating cash flows were increases in inventory and accounts receivable. The combination of accounts receivable, inventories and accounts payable increased working capital by $406 million in 2018, compared to the working capital increases of $608 million in 2017. Additional discussion on working capital changes is provided earlier in the “Financial Condition and Liquidity” section.

In 2017, cash flows provided by operating activities decreased $422 million compared to the same period last year. Factors that decreased operating cash flows were increases in pension contributions, plus year-on-year increases in working capital. In December 2017, 3M contributed $600 million to its U.S. defined benefit pension plan, contributing to a year-on-year increase in pension and postretirement contributions of $584 million. The combination of accounts receivable, inventories and accounts payable increased working capital by $608 million in 2017, compared to working capital increases of $108 million in 2016. In 2017, year-on-year decreases in income tax payments (net of refunds) increased operating cash flows by $284 million.

Cash Flows from Investing Activities:

Years ended December 31
(Millions)201820172016
Purchases of property, plant and equipment (PP&E)$(1,577)$(1,373)$(1,420)
Proceeds from sale of PP&E and other assets2624958
Acquisitions, net of cash acquired13(2,023)(16)
Purchases and proceeds from maturities and sale of marketable securities and investments, net669(798)(163)
Proceeds from sale of businesses, net of cash sold8461,065142
Other — net9(6)(4)
Net cash provided by (used in) investing activities$222$(3,086)$(1,403)

Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. The Company expects 2019 capital spending to be approximately $1.7 billion to $1.9 billion as 3M continues to invest in its businesses.

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

Refer to Note 3 for information on acquisitions and divestitures. The Company is actively considering additional acquisitions, investments and strategic alliances, and from time to time may also divest certain businesses. Proceeds from sale of businesses in 2018 primarily relate to the sale of 3M’s Communication Markets Division and the sale of certain personal safety product offerings primarily focused on noise, environmental, and heat stress monitoring within the Safety and Graphics business segment.

Purchases of marketable securities and investments and proceeds from maturities and sale of marketable securities and investments are primarily attributable to asset-backed securities, certificates of deposit/time deposits, commercial paper, and other securities, which are classified as available-for-sale. Refer to Note 11 for more details about 3M’s diversified marketable securities portfolio. Purchases of investments include additional survivor benefit insurance, plus investments in equity securities.

Cash Flows from Financing Activities:

Years ended December 31
(Millions)201820172016
Change in short-term debt — net$(284)$578$(797)
Repayment of debt (maturities greater than 90 days)(1,034)(962)(992)
Proceeds from debt (maturities greater than 90 days)2,2511,9872,832
Total cash change in debt$933$1,603$1,043
Purchases of treasury stock(4,870)(2,068)(3,753)
Proceeds from issuances of treasury stock pursuant to stock option and benefit plans485734804
Dividends paid to stockholders(3,193)(2,803)(2,678)
Other — net(56)(121)(42)
Net cash used in financing activities$(6,701)$(2,655)$(4,626)

2018 Debt Activity:

Total debt was approximately $14.6 billion at December 31, 2018 and $13.9 billion at December 31, 2017. Increases in debt related to the third quarter 2018 issuance of $2.25 billion of medium-term notes, which was partially offset by the $450 million third quarter repayment and 500 million Euro fourth quarter repayment of maturing medium-term notes, the net impact of repayments and borrowings of international subsidiaries along with foreign currency effects, and lower year on year commercial paper balance. Outstanding commercial paper was $435 million at December 31, 2018, as compared to $745 million at December 31, 2017. Net commercial paper issuances and repayments and borrowings by international subsidiaries are largely reflected in “Change in short-term debt – net” in the preceding table. 3M’s primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances.

Proceeds from debt for 2018 primarily relate to the September 2018, issuance of $400 million aggregate principal amount of 3-year fixed rate medium-term notes due 2021 with a coupon rate of 3.00%, $300 million aggregate principal amount of 5.5-year fixed rate medium-term notes due 2024 with a coupon rate of 3.25%, $300 million aggregate principal amount of 5.5-year floating rate medium-term notes due 2024 with a rate based on a floating three-month LIBOR index, $600 million aggregate principal amount of 10-year fixed rate medium-term notes due 2028 with a coupon rate of 3.625%, and $650 million aggregate principal amount of 30-year fixed rate medium-term notes due 2048 with a coupon rate of 4.00%. Refer to Note 12 for more detail of these debt issuances.

2017 Debt Activity:

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

Proceeds from debt for 2017 primarily related to the October 2017 issuance of $650 million aggregate principal amount of 5.5-year fixed rate medium-term notes due 2023 with a coupon rate of 2.25%, $850 million aggregate principal amount of 10-year fixed rate medium-term notes due 2027 with a coupon rate of 2.875%, and $500 million aggregate principal amount of 30-year fixed rate medium-term notes due 2047 with a coupon rate of 3.625%. Refer to Note 12 for more detail of these debt issuances.

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

2016 Debt Activity:

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

Proceeds from debt for 2016 primarily related to the May 2016 issuance of 500 million Euro aggregate principal amount of 5.75-year fixed rate medium-term notes due February 2022 with a coupon rate of 0.375% and 500 million Euro aggregate principal amount of 15-year fixed rate medium-term notes due 2031 with a coupon rate of 1.50%. In September 2016, 3M issued $600 million aggregate principal amount of five-year fixed rate medium-term notes due 2021 with a coupon rate of 1.625%, $650 million aggregate principal amount of 10-year fixed rate medium-term notes due 2026 with a coupon rate of 2.250%, and $500 million aggregate principal amount of 30-year fixed rate medium-term notes due 2046 with a coupon rate of 3.125%. All of these 2016 issuances were under the medium-term notes program (Series F).

Repurchases of Common Stock:

Repurchases of common stock are made to support the Company’s stock-based employee compensation plans and for other corporate purposes. In November 2018, 3M’s Board of Directors authorized the repurchase of up to $10 billion of 3M’s outstanding common stock, which replaced the Company’s February 2016 repurchase program. This program has no pre-established end date. In 2018, the Company purchased $4.9 billion of its own stock, compared to purchases of $2.1 billion and $3.8 billion in 2017 and 2016, respectively. The Company expects full-year 2019 gross share repurchases to be between $2.0 billion to $4.0 billion. For more information, refer to the table titled “Issuer Purchases of Equity Securities” in Part II, Item 5. The Company does not utilize derivative instruments linked to the Company’s stock.

Dividends Paid to Shareholders:

Cash dividends paid to shareholders totaled $3.193 billion ($5.44 per share) in 2018, $2.803 billion ($4.70 per share) in 2017, and $2.678 billion ($4.44 per share) in 2016. 3M has paid dividends since 1916. In February 2019, 3M’s Board of Directors declared a first-quarter 2019 dividend of $1.44 per share, an increase of 6 percent. This is equivalent to an annual dividend of $5.76 per share and marked the 61st consecutive year of dividend increases.

Other cash flows from financing activities may include various other items, such as changes in cash overdraft balances, and principal payments for capital leases. In addition, in 2017, this included a payment related to the $96 million in interest expense associated with premiums and fees for the early retirement of debt. See Note 12 for additional details.

Free Cash Flow (non-GAAP measure):

Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting principles (GAAP). Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. The Company believes free cash flow and free cash flow conversion are meaningful to investors as they are useful measures of performance and the Company uses these measures as an indication of the strength of the company and its ability to generate cash. The first quarter of each year is typically 3M’s seasonal low for free cash flow and free cash flow conversion. Below find a recap of free cash flow and free cash flow conversion for 2018, 2017 and 2016.

In 2018, free cash flow conversion was impacted by the $176 million measurement period adjustment to the tax expense recorded in December 2017 from the enactment of the TCJA, the $897 million pre-tax impact related to the resolution of the Minnesota natural resource damages (NRD), and the $381 million pre-tax impact from the gain on sale of the Communication Markets Division, net of restructuring actions related to addressing corporate functional costs following the divestiture. On a combined basis, these items reduced free cash flow conversion by 2 percentage points.

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

Years ended December 31
(Millions)201820172016
Major GAAP Cash Flow Categories
Net cash provided by operating activities$6,439$6,240$6,662
Net cash provided by (used in) investing activities222(3,086)(1,403)
Net cash used in financing activities(6,701)(2,655)(4,626)
Free Cash Flow (non-GAAP measure)
Net cash provided by operating activities$6,439$6,240$6,662
Purchases of property, plant and equipment (PP&E)(1,577)(1,373)(1,420)
Free cash flow$4,862$4,867$5,242
Net income attributable to 3M$5,349$4,858$5,050
Free cash flow conversion91%100%104%

Off-Balance Sheet Arrangements and Contractual Obligations:

As of December 31, 2018, the Company has not utilized special purpose entities to facilitate off-balance sheet financing arrangements. Refer to the section entitled “Warranties/Guarantees” in Note 16 for discussion of accrued product warranty liabilities and guarantees.

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

Contractual Obligations

A summary of the Company’s significant contractual obligations as of December 31, 2018, follows:

Payments due by year
After
(Millions)Total201920202021202220232023
Total debt (Note 12)$14,622$1,211$1,330$1,698$1,165$1,328$7,890
Interest on long-term debt4,2813353313212802642,750
Operating leases (Note 16)1,11128320815312292253
Capital leases (Note 16)104181614121232
Tax Cuts and Jobs Act (TCJA) transition tax (Note 10)649—166767125374
Unconditional purchase obligations and other1,410991216131401517
Total contractual cash obligations$22,177$2,838$2,117$2,384$1,686$1,836$11,316

Long-term debt payments due in 2019 and 2020 include floating rate notes totaling $124 million and $95 million, respectively, as a result of put provisions associated with these debt instruments.

During the fourth quarter of 2017, 3M recorded a net tax expense related to the enactment of the Tax Cuts and Jobs Act (TCJA). The expense is primarily related to the TCJA’s transition tax. The transition tax is payable over 8 years at the election of the taxpayer. As discussed in Note 10, this balance was finalized in 2018.

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

Other obligations, included in the preceding table within the caption entitled “Unconditional purchase obligations and other,” include the current portion of the liability for uncertain tax positions under ASC 740, which is expected to be paid out in cash in the next 12 months, when applicable. The Company is not able to reasonably estimate the timing of the long-term payments, or the amount by which the liability will increase or decrease over time; therefore, the long-term portion of the total net tax liability of $655 million is excluded from the preceding table. In addition, the transition tax prescribed under the Tax Cuts and Jobs Act (TCJA) is separately included in the table above. Refer to Note 10 for further details.

As discussed in Note 13, the Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2019 and Company contributions to its U.S. and international pension plans are expected to be largely discretionary in future years; therefore, amounts related to these plans are not included in the preceding table.

FINANCIAL INSTRUMENTS

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

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

Previous: Item 6. Selected Financial Data. · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk.