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.
One key aspect of any Supply Chain design strategic analysis is to evaluate whether your Supply
Chain footprint i.e. the location of your Plants, Warehouses etc. is optimal.
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.
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.
The Company’s future results are subject to fluctuations in the costs and availability of
purchased components, compounds, raw materials and energy, including oil and natural gas and
their derivatives, due to shortages, increased demand, supply interruptions, currency exchange
risks, natural disasters and other factors. The Company depends on various components,
compounds, raw materials, and energy (including oil and natural gas and their derivatives)
supplied by others for the manufacturing of its products. It is possible that any of its supplier
relationships could be interrupted due to natural and other disasters and other events, or be
terminated in the future. Any sustained interruption in the Company’s receipt of adequate
supplies could have a material adverse effect on the Company. In addition, while the Company
has a process to minimize volatility in component and material pricing, no assurance can be
given that the Company will be able to successfully manage price fluctuations or that future price
fluctuations or shortages will not have a material adverse effect on the Company.
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.
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.
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.
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.
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.
Commodity Prices Risk: The Company manages commodity price risks through negotiated
supply contracts, price protection agreements and commodity price swaps. The related mark-to-
market gain or loss on qualifying hedges was included in other comprehensive income to the
extent effective, and reclassified into cost of sales in the period during which the hedged
transaction affected earnings. The Company may enter into other commodity price swaps to
offset, in part, fluctuation and costs associated with the use of certain commodities and 52
precious metals. These instruments are not designated in hedged relationships and the extent to
which they were outstanding at December 31, 2018 was not material.
The effective tax rate for 2017 was 35.5 percent, compared to 28.3 percent in 2016, an increase
of 7.2 percentage points, impacted by several factors. Primary factors that increased the
Company’s effective tax rate included the impacts due to the TCJA being enacted in 2017 (see
further information below) and remeasurements and establishment of 3M’s uncertain tax
positions. The increase was partially offset by actions which related to international taxes that
were impacted by increasing benefits from the Company’s supply chain centers of expertise,
changes to the geographic mix of income before taxes and prior year cash optimization actions,
higher year on-year excess tax benefit for employee share-based payment, increased benefits
from the R&D tax credit, a reduction of state taxes, and other items
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. This change
resulted in a decrease in previously reported net sales and an increase in operating income for
total year 2017 of $1 million and $42 million, respectively, in the Electronics and Energy
segment, offset by a corresponding increase in net sales and decrease in operating income within
Corporate and Unallocated. In addition, as discussed in Note 1, 3M adopted ASU N0. 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 cost related pension and postretirement
net periodic benefit costs within other expense (income), net. The financial information
presented herein reflects the impact of the preceding business segment reporting changes for all
periods presented.
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.

NOTE 19. Geographic Areas

Geographic area information is used by the Company as a secondary performance measure to
manage its businesses. Export sales and certain income and expense items are generally reported
within the geographic area where the final sales to 3M customers are made.
Asia Pacific included China/Hong Kong net sales to customers of $3.574 billion, $3.255 billion
and $2.799 billion in 2018, 2017, and 2016, respectively. China/Hong Kong net property, plant
and equipment (PP&E) was $542 million and $541 million at December 31, 2018 and 2017,
respectively.