10-Q 1 a14-9645_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2014

 

Commission file number:  1-3285

 

3M COMPANY

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

41-0417775

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

3M Center, St. Paul, Minnesota

 

55144

(Address of principal executive offices)

 

(Zip Code)

 

(651) 733-1110

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at March 31, 2014

Common Stock, $0.01 par value per share

 

654,278,447 shares

 

This document (excluding exhibits) contains 70 pages.

The table of contents is set forth on page 2.

The exhibit index begins on page 67.

 

 

 


 


Table of Contents

 

3M COMPANY

Form 10-Q for the Quarterly Period Ended March 31, 2014

TABLE OF CONTENTS

 

 

 

BEGINNING
PAGE

PART I

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements

 

 

 

 

 

Index to Financial Statements:

 

 

Consolidated Statement of Income

3

 

Consolidated Statement of Comprehensive Income

4

 

Consolidated Balance Sheet

5

 

Consolidated Statement of Cash Flows

6

 

Notes to Consolidated Financial Statements

 

 

Note 1.

Significant Accounting Policies

7

 

Note 2.

Acquisitions and Divestitures

9

 

Note 3.

Goodwill and Intangible Assets

10

 

Note 4.

Supplemental Equity and Comprehensive Income Information

12

 

Note 5.

Income Taxes

15

 

Note 6.

Marketable Securities

16

 

Note 7.

Pension and Postretirement Benefit Plans

18

 

Note 8.

Derivatives

19

 

Note 9.

Fair Value Measurements

26

 

Note 10.

Commitments and Contingencies

30

 

Note 11.

Stock-Based Compensation

38

 

Note 12.

Business Segments

42

 

Report of Independent Registered Public Accounting Firm

44

 

 

 

ITEM 2.

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

 

 

Index to Management’s Discussion and Analysis:

 

 

Overview

45

 

Results of Operations

48

 

Performance by Business Segment

51

 

Financial Condition and Liquidity

57

 

Cautionary Note Concerning Factors That May Affect Future Results

62

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

62

 

 

 

ITEM 4.

Controls and Procedures

63

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

64

 

 

 

ITEM 1A.

Risk Factors

64

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

66

 

 

 

ITEM 3.

Defaults Upon Senior Securities

66

 

 

 

ITEM 4.

Mine Safety Disclosures

66

 

 

 

ITEM 5.

Other Information

66

 

 

 

ITEM 6.

Exhibits

67

 

2


 


Table of Contents

 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended March 31, 2014

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

 

 

 

Three months ended
March 31,

 

(Millions, except per share amounts)

 

2014

 

2013

 

Net sales

 

$

7,831

 

$

7,634

 

Operating expenses

 

 

 

 

 

Cost of sales

 

4,031

 

3,969

 

Selling, general and administrative expenses

 

1,632

 

1,589

 

Research, development and related expenses

 

452

 

430

 

Total operating expenses

 

6,115

 

5,988

 

Operating income

 

1,716

 

1,646

 

 

 

 

 

 

 

Interest expense and income

 

 

 

 

 

Interest expense

 

37

 

39

 

Interest income

 

(9

)

(10

)

Total interest expense — net

 

28

 

29

 

 

 

 

 

 

 

Income before income taxes

 

1,688

 

1,617

 

Provision for income taxes

 

463

 

470

 

Net income including noncontrolling interest

 

$

1,225

 

$

1,147

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

18

 

18

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,207

 

$

1,129

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — basic

 

661.5

 

691.1

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.83

 

$

1.63

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — diluted

 

674.5

 

702.1

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

1.79

 

$

1.61

 

 

 

 

 

 

 

Cash dividends paid per 3M common share

 

$

0.855

 

$

0.635

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.

 

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3M Company and Subsidiaries

Consolidated Statement of Comprehensive Income

(Unaudited)

 

 

 

Three months ended
March 31,

 

(Millions)

 

2014

 

2013

 

Net income including noncontrolling interest

 

$

1,225

 

$

1,147

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Cumulative translation adjustment

 

20

 

(398

)

Defined benefit pension and postretirement plans adjustment

 

61

 

85

 

Debt and equity securities, unrealized gain (loss)

 

1

 

 

Cash flow hedging instruments, unrealized gain (loss)

 

2

 

24

 

Total other comprehensive income (loss), net of tax

 

84

 

(289

)

Comprehensive income (loss) including noncontrolling interest

 

1,309

 

858

 

Comprehensive (income) loss attributable to noncontrolling interest

 

(30

)

20

 

Comprehensive income (loss) attributable to 3M

 

$

1,279

 

$

878

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.

 

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3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

 

 

March 31,

 

December 31,

 

(Dollars in millions, except per share amount)

 

2014

 

2013

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,954

 

$

2,581

 

Marketable securities — current

 

860

 

756

 

Accounts receivable — net

 

4,598

 

4,253

 

Inventories

 

 

 

 

 

Finished goods

 

1,846

 

1,790

 

Work in process

 

1,170

 

1,139

 

Raw materials and supplies

 

956

 

935

 

Total inventories

 

3,972

 

3,864

 

Other current assets

 

1,378

 

1,279

 

Total current assets

 

12,762

 

12,733

 

Marketable securities — non-current

 

1,360

 

1,453

 

Investments

 

120

 

122

 

Property, plant and equipment

 

23,241

 

23,068

 

Less: Accumulated depreciation

 

(14,611

)

(14,416

)

Property, plant and equipment — net

 

8,630

 

8,652

 

Goodwill

 

7,357

 

7,345

 

Intangible assets — net

 

1,631

 

1,688

 

Prepaid pension benefits

 

624

 

577

 

Other assets

 

1,063

 

980

 

Total assets

 

$

33,547

 

$

33,550

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

Short-term borrowings and current portion of long-term debt

 

$

2,176

 

$

1,683

 

Accounts payable

 

1,866

 

1,799

 

Accrued payroll

 

491

 

708

 

Accrued income taxes

 

481

 

417

 

Other current liabilities

 

2,436

 

2,891

 

Total current liabilities

 

7,450

 

7,498

 

Long-term debt

 

4,401

 

4,326

 

Pension and postretirement benefits

 

1,809

 

1,794

 

Other liabilities

 

1,963

 

1,984

 

Total liabilities

 

$

15,623

 

$

15,602

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

3M Company shareholders’ equity:

 

 

 

 

 

Common stock par value, $.01 par value, 944,033,056 shares issued

 

$

9

 

$

9

 

Additional paid-in capital

 

4,545

 

4,375

 

Retained earnings

 

33,312

 

32,416

 

Treasury stock, at cost: 289,754,609 shares at March 31, 2014; 280,736,817 shares at December 31, 2013

 

(16,577

)

(15,385

)

Accumulated other comprehensive income (loss)

 

(3,841

)

(3,913

)

Total 3M Company shareholders’ equity

 

17,448

 

17,502

 

Noncontrolling interest

 

476

 

446

 

Total equity

 

$

17,924

 

$

17,948

 

Total liabilities and equity

 

$

33,547

 

$

33,550

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.

 

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3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

Three months ended

 

 

 

March 31,

 

(Millions)

 

2014

 

2013

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income including noncontrolling interest

 

$

1,225

 

$

1,147

 

Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

350

 

336

 

Company pension and postretirement contributions

 

(42

)

(68

)

Company pension and postretirement expense

 

98

 

138

 

Stock-based compensation expense

 

122

 

103

 

Deferred income taxes

 

(83

)

61

 

Excess tax benefits from stock-based compensation

 

(51

)

(34

)

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

(347

)

(447

)

Inventories

 

(131

)

(28

)

Accounts payable

 

84

 

97

 

Accrued income taxes (current and long-term)

 

135

 

99

 

Product and other insurance receivables and claims

 

(25

)

(8

)

Other — net

 

(243

)

(402

)

Net cash provided by operating activities

 

1,092

 

994

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

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

 

(293

)

(324

)

Proceeds from sale of PP&E and other assets

 

3

 

10

 

Purchases of marketable securities and investments

 

(601

)

(1,767

)

Proceeds from maturities and sale of marketable securities and investments

 

599

 

1,671

 

Other investing

 

5

 

5

 

Net cash used in investing activities

 

(287

)

(405

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Change in short-term debt — net

 

466

 

(13

)

Repayment of debt (maturities greater than 90 days)

 

(64

)

(5

)

Proceeds from debt (maturities greater than 90 days)

 

172

 

9

 

Purchases of treasury stock

 

(1,708

)

(805

)

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

 

267

 

738

 

Dividends paid to shareholders

 

(566

)

(440

)

Excess tax benefits from stock-based compensation

 

51

 

34

 

Other — net

 

(17

)

(4

)

Net cash used in financing activities

 

(1,399

)

(486

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(33

)

(58

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(627

)

45

 

Cash and cash equivalents at beginning of year

 

2,581

 

2,883

 

Cash and cash equivalents at end of period

 

$

1,954

 

$

2,928

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.

 

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3M Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1.  Significant Accounting Policies

 

Basis of Presentation

 

The interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair statement of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. These adjustments consist of normal, recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year. The interim consolidated financial statements and notes are presented as permitted by the requirements for Quarterly Reports on Form 10-Q.

 

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its 2013 Annual Report on Form 10-K. However, as described in Note 12, effective in the first quarter of 2014, the Company transferred a product line between divisions within different business segments and made other changes within business segments in its continuing effort to improve the alignment of its businesses around markets and customers. The Company has begun to report comparative results under the new business segment structure with the filing of this Quarterly Report on Form 10-Q. In the second quarter of 2014, the Company plans to revise its business segment disclosures in its 2013 Annual Report on Form 10-K via a Current Report on Form 8-K to reflect these realignments.

 

Foreign Currency Translation

 

Local currencies generally are considered the functional currencies outside the United States. Assets and liabilities for operations in local-currency environments are translated at month-end exchange rates of the period reported. Income and expense items are translated at month-end exchange rates of each applicable month. Cumulative translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in shareholders’ equity.

 

Although local currencies are typically considered as the functional currencies outside the United States, under Accounting Standards Codification (ASC) 830, Foreign Currency Matters, the reporting currency of a foreign entity’s parent is assumed to be that entity’s functional currency when the economic environment of a foreign entity is highly inflationary—generally when its cumulative inflation is approximately 100 percent or more for the three years that precede the beginning of a reporting period. 3M has a subsidiary in Venezuela with operating income representing less than 1.0 percent of 3M’s consolidated operating income for 2013. 3M has determined that the cumulative inflation rate of Venezuela has exceeded, and continues to exceed, 100 percent since November 2009. Accordingly, since January 1, 2010, the financial statements of the Venezuelan subsidiary have been remeasured as if its functional currency were that of its parent.

 

The Venezuelan government sets official rates of exchange and conditions precedent to purchase foreign currency at these rates with local currency. Such rates and conditions are subject to change. For the periods presented through January 2013, this rate was set under the Transaction System for Foreign Currency Denominated Securities (SITME). In February 2013, the Venezuelan government announced a devaluation of its currency and the elimination of the SITME market. As a result, the official exchange rate controlled by the Commission for the Administration of Foreign Exchange (CADIVI) changed to a rate less favorable than the previous SITME rate.

 

In January 2014, the Venezuelan government announced that a new agency, the National Center for Foreign Commerce (CENCOEX), had assumed the previous role of CADIVI with respect to the continuation of the existing official exchange rate; significantly expanded the use of a second foreign exchange mechanism called the Complementary System for Foreign Currency Acquirement (or SICAD1); and issued exchange regulations indicating the SICAD1 rate of exchange would be used for payments related to international investments. The SICAD1 exchange mechanism, a complementary currency auction system, had previously been created for purchases of foreign currency by only certain eligible importers and tourists. The government had begun publishing the SICAD1 rate resulting from currency auctions in December 2013. In late March 2014, the Venezuelan government launched a third foreign exchange mechanism, SICAD2, which relies on U.S. dollar cash and U.S. dollar denominated bonds offered by the Venezuelan Central Bank, PDVSA (the Venezuelan national oil and gas company) and certain private companies. SICAD2 was announced as being available to all industry sectors and that its use would not be restricted as to purpose.

 

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Since January 1, 2010, as discussed above, the financial statements of 3M’s Venezuelan subsidiary have been remeasured as if its functional currency were that of its parent. For the periods presented, this remeasurement utilized the SITME rate through January 2013, the official CADIVI/CENCOEX rate through February 2014, and the SICAD1 rate beginning in March 2014. 3M’s use of SICAD1 was based upon evaluation of a number of factors including, but not limited to, the exchange rate the Company’s Venezuelan subsidiary may legally use to convert currency, settle transactions or pay dividends; the probability of accessing and obtaining currency by use of a particular rate or mechanism; and the Company’s intent and ability to use a particular exchange mechanism. Other factors notwithstanding, the elimination of the SITME rate and use of the CADIVI/CENCOEX exchange rate beginning in February 2013 and use of the SICAD1 rate beginning in March 2014 did not have a material impact on 3M’s consolidated results of operations or financial condition.

 

The Company continues to monitor circumstances relative to its Venezuelan subsidiary. Changes in applicable exchange rates or exchange mechanisms may continue in the future. These changes could impact the rate of exchange applicable to remeasure the Company’s net monetary assets (liabilities) denominated in Venezuelan Bolivars (VEF). As of March 31, 2014, the Company had a balance of net monetary liabilities denominated in VEF of less than 135 million VEF and the SICAD1 and SICAD2 exchange rates were approximately 11 VEF and 50 VEF per U.S. dollar, respectively. Had 3M utilized the SICAD2 rate rather than the SICAD1 rate of exchange for remeasurement of such items as of March 31, 2014, the differential would not have had a material impact on 3M’s consolidated results of operations or financial condition.

 

Earnings Per Share

 

The difference in the weighted average 3M shares outstanding for calculating basic and diluted earnings per share attributable to 3M common shareholders is a result of the dilution associated with the Company’s stock-based compensation plans. Certain options outstanding under these stock-based compensation plans were not included in the computation of diluted earnings per share attributable to 3M common shareholders because they would not have had a dilutive effect (2.3 million average options for the three months ended March 31, 2014 and 4.1 million average options for the three months ended March 31, 2013). The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 

 

 

Three months ended

 

 

 

March 31,

 

(Amounts in millions, except per share amounts)

 

2014

 

2013

 

Numerator:

 

 

 

 

 

Net income attributable to 3M

 

$

1,207

 

$

1,129

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — basic

 

661.5

 

691.1

 

 

 

 

 

 

 

Dilution associated with the Company’s stock-based compensation plans

 

13.0

 

11.0

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — diluted

 

674.5

 

702.1

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.83

 

$

1.63

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

1.79

 

$

1.61

 

 

New Accounting Pronouncements

 

In March 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This standard provides additional guidance with respect to the reclassification into income of the cumulative translation adjustment (CTA) recorded in accumulated other comprehensive income associated with a foreign entity of a parent company. The ASU differentiates between transactions occurring within a foreign entity and transactions/events affecting an investment in a foreign entity. For transactions within a foreign entity, the full CTA associated with the foreign entity would be reclassified into income only when the sale of a subsidiary or group of net assets within the foreign entity represents the substantially complete liquidation of that foreign entity. For transactions/events affecting an investment in a foreign entity (for example, control or ownership of shares in a foreign entity), the full CTA associated with the foreign entity would be reclassified into income only if the parent no longer has a controlling interest in that foreign entity as a result of the transaction/event. In addition, acquisitions of a foreign

 

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entity completed in stages will trigger release of the CTA associated with an equity method investment in that entity at the point a controlling interest in the foreign entity is obtained. For 3M, this ASU was effective prospectively beginning January 1, 2014. This ASU had no immediate impact on 3M’s consolidated results of operations and financial condition as the Company had no event/transaction as described above.

 

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. This standard will have the impact of reducing the frequency of disposals reported as discontinued operations, by requiring such a disposal to represent a strategic shift that has or will have a major effect on an entity’s operations and financial results. However, existing provisions that prohibit an entity from reporting a discontinued operation if it has certain continuing cash flows or involvement with the component after disposal are eliminated by this standard. The ASU also expands the disclosures for discontinued operations and requires new disclosures related to individually significant disposals that do not qualify as discontinued operations. For 3M, this ASU is effective prospectively beginning January 1, 2015. Early adoption is, however, permitted. This ASU would impact 3M’s consolidated results of operations and financial condition only in the instance of a disposal as described above.

 

NOTE 2.  Acquisitions and Divestitures

 

3M makes acquisitions of certain businesses from time to time that the Company feels align with its strategic intent with respect to, among other factors, growth markets and adjacent product lines or technologies. Goodwill resulting from business combinations is largely attributable to the existing workforce of the acquired businesses and synergies expected to arise after 3M’s acquisition of these businesses. In addition to business combinations, 3M periodically acquires certain tangible and/or intangible assets and purchases interests in certain enterprises that do not otherwise qualify for accounting as business combinations. These transactions are largely reflected as additional asset purchase and investment activity.

 

There were no business combinations that closed during the three months ended March 31, 2014. Refer to Note 2 in 3M’s 2013 Annual Report on Form 10-K for more information on 3M’s acquisitions and divestitures.

 

In April 2014, 3M (Health Care Business) completed its purchase of Treo Solutions LLC, headquartered in Troy, New York. Treo Solutions LLC is a provider of data analytics and business intelligence to healthcare payers and providers.

 

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NOTE 3.  Goodwill and Intangible Assets

 

There were no acquisitions that closed during the first three months of 2014. The amounts in the “Translation and other” column in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balances by business segment as of December 31, 2013 and March 31, 2014, follow:

 

Goodwill

 

 

 

December 31, 2013

 

Acquisition

 

Translation

 

March 31, 2014

 

(Millions)

 

Balance

 

activity

 

and other

 

Balance

 

Industrial

 

$

2,166

 

$

 

$

6

 

$

2,172

 

Safety and Graphics

 

1,740

 

 

2

 

1,742

 

Electronics and Energy

 

1,612

 

 

1

 

1,613

 

Health Care

 

1,596

 

 

2

 

1,598

 

Consumer

 

231

 

 

1

 

232

 

Total Company

 

$

7,345

 

$

 

$

12

 

$

7,357

 

 

Accounting standards require that goodwill be tested for impairment annually and between annual tests in certain circumstances such as a change in reporting units or the testing of recoverability of a significant asset group within a reporting unit. At 3M, reporting units generally correspond to a division.

 

As discussed in Note 12, effective in the first quarter of 2014, the Company transferred a product line between divisions within different business segments and made other changes within business segments in its continuing effort to improve the alignment of its businesses around markets and customers. 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 2014, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.

 

Acquired Intangible Assets

 

3M did not complete any business combinations during the three months ended March 31, 2014. As a result, gross balances of acquired intangible assets were primarily impacted by changes in foreign currency exchange rates. The carrying amount and accumulated amortization of acquired finite-lived intangible assets, in addition to the balance of non-amortizable intangible assets, as of March 31, 2014, and December 31, 2013, follow:

 

 

 

March 31,

 

December 31,

 

(Millions)

 

2014

 

2013

 

Patents

 

$

602

 

$

602

 

Other amortizable intangible assets (primarily tradenames and customer related intangibles)

 

2,436

 

2,445

 

Total gross carrying amount

 

$

3,038

 

$

3,047

 

 

 

 

 

 

 

Accumulated amortization — patents

 

(466

)

(458

)

Accumulated amortization — other

 

(1,070

)

(1,030

)

Total accumulated amortization

 

$

(1,536

)

$

(1,488

)

 

 

 

 

 

 

Total finite-lived intangible assets — net

 

$

1,502

 

$

1,559

 

 

 

 

 

 

 

Non-amortizable intangible assets (primarily tradenames)

 

129

 

129

 

Total intangible assets — net

 

$

1,631

 

$

1,688

 

 

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Table of Contents

 

Amortization expense for acquired intangible assets for the three months ended March 31, 2014 and 2013 follows:

 

 

 

Three months ended

 

 

 

March 31,

 

(Millions)

 

2014

 

2013

 

Amortization expense

 

$

57

 

$

60

 

 

The table below shows expected amortization expense for acquired amortizable intangible assets recorded as of March 31, 2014:

 

 

 

Remainder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

 

 

 

 

 

 

After

 

(Millions)

 

2014

 

2015

 

2016

 

2017

 

2018

 

2019

 

2019

 

Amortization expense

 

$

161

 

$

201

 

$

188

 

$

172

 

$

156

 

$

144

 

$

480

 

 

The expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible assets and other events. 3M expenses the costs incurred to renew or extend the term of intangible assets.

 

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NOTE 4.  Supplemental Equity and Comprehensive Income Information

Consolidated Statement of Changes in Equity

 

Three months ended March 31, 2014

 

 

 

 

 

3M Company Shareholders

 

 

 

(Millions)

 

Total

 

Common
Stock and
Additional
Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehensive
Income
(Loss)

 

Non-controlling
Interest

 

Balance at December 31, 2013

 

$

17,948

 

$

4,384

 

$

32,416

 

$

(15,385

)

$

(3,913

)

$

446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,225

 

 

 

1,207

 

 

 

 

 

18

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

20

 

 

 

 

 

 

 

8

 

12

 

Defined benefit pension and post-retirement plans adjustment

 

61

 

 

 

 

 

 

 

61

 

 

Debt and equity securities - unrealized gain (loss)

 

1

 

 

 

 

 

 

 

1

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

2

 

 

 

 

 

 

 

2

 

 

Total other comprehensive income (loss), net of tax

 

84

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

1

 

 

 

1

 

 

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

170

 

170

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(1,773

)

 

 

 

 

(1,773

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

269

 

 

 

(312

)

581

 

 

 

 

 

Balance at March 31, 2014

 

$

17,924

 

$

4,554

 

$

33,312

 

$

(16,577

)

$

(3,841

)

$

476

 

 

Three months ended March 31, 2013

 

 

 

 

 

3M Company Shareholders

 

 

 

(Millions)

 

Total

 

Common
Stock and
Additional
Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehensive
Income
(Loss)

 

Non-controlling
Interest

 

Balance at December 31, 2012

 

$

18,040

 

$

4,053

 

$

30,679

 

$

(12,407

)

$

(4,750

)

$

465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,147

 

 

 

1,129

 

 

 

 

 

18

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(398

)

 

 

 

 

 

 

(360

)

(38

)

Defined benefit pension and post-retirement plans adjustment

 

85

 

 

 

 

 

 

 

85

 

 

Debt and equity securities - unrealized gain (loss)

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

24

 

 

 

 

 

 

 

24

 

 

Total other comprehensive income (loss), net of tax

 

(289

)

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

(440

)

 

 

(440

)

 

 

 

 

 

 

Sale of subsidiary shares

 

8

 

7

 

 

 

 

 

 

 

1

 

Stock-based compensation, net of tax impacts

 

128

 

128

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(807

)

 

 

 

 

(807

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

741

 

 

 

(295

)

1,036

 

 

 

 

 

Balance at March 31, 2013

 

$

18,528

 

$

4,188

 

$

31,073

 

$

(12,178

)

$

(5,001

)

$

446

 

 

3M has historically declared and paid dividends in the same quarter. In December 2013, 3M’s Board of Directors declared a first-quarter 2014 dividend of $0.855 per share (paid in March 2014). This reduced 3M’s stockholders equity and increased other current liabilities as of December 31, 2013 by $567 million. This resulted in total year 2013 declared dividends of $3.395 per share, with $2.54 per share paid in 2013 and the additional $0.855 per share paid in March 2014.

 

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Changes in Accumulated Other Comprehensive Income (Loss) Attributable to 3M by Component

 

Three months ended March 31, 2014

 

(Millions)

 

Cumulative
Translation
Adjustment

 

Defined Benefit
Pension and
Postretirement
Plans
Adjustment

 

Debt and
Equity
Securities,
Unrealized
Gain (Loss)

 

Cash Flow
Hedging
Instruments,
Unrealized
Gain (Loss)

 

Total
Accumulated
Other
Comprehensive Income
(Loss)

 

Balance at December 31, 2013, net of tax

 

$

(188

)

$

(3,715

)

$

(2

)

$

(8

)

$

(3,913

)

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

5

 

 

2

 

9

 

16

 

Amounts reclassified out

 

 

91

 

 

(6

)

85

 

Total other comprehensive income (loss), before tax

 

5

 

91

 

2

 

3

 

101

 

Tax effect

 

3

 

(30

)

(1

)

(1

)

(29

)

Total other comprehensive income (loss), net of tax

 

8

 

61

 

1

 

2

 

72

 

Balance at March 31, 2014, net of tax

 

$

(180

)

$

(3,654

)

$

(1

)

$

(6

)

$

(3,841

)

 

Three months ended March 31, 2013

 

(Millions)

 

Cumulative
Translation
Adjustment

 

Defined Benefit
Pension and
Postretirement
Plans
Adjustment

 

Debt and
Equity
Securities,
Unrealized
Gain (Loss)

 

Cash Flow
Hedging
Instruments,
Unrealized
Gain (Loss)

 

Total
Accumulated
Other
Comprehensive Income
(Loss)

 

Balance at December 31, 2012, net of tax

 

$

230

 

$

(4,955

)

$

(2

)

$

(23

)

$

(4,750

)

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

(324

)

 

 

(35

)

(359

)

Amounts reclassified out

 

 

143

 

 

73

 

216

 

Total other comprehensive income (loss), before tax

 

(324

)

143

 

 

38

 

(143

)

Tax effect

 

(36

)

(58

)

 

(14

)

(108

)

Total other comprehensive income (loss), net of tax

 

(360

)

85

 

 

24

 

(251

)

Balance at March 31, 2013, net of tax

 

$

(130

)

$

(4,870

)

$

(2

)

$

1

 

$

(5,001

)

 

Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation does include impacts from items such as net investment hedge transactions. Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income.

 

The previously reported before-tax amounts of other comprehensive income before reclassifications and amounts reclassified out of other comprehensive income for the three months ended March 31, 2013 relative to foreign currency forward contracts in the table above and below were impacted by the immaterial revisions discussed in Note 8.

 

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Reclassifications out of Accumulated Other Comprehensive Income Attributable to 3M

 

 

 

Amount Reclassified from

 

 

 

(Millions)

 

Accumulated Other Comprehensive Income

 

 

 

Details about Accumulated Other
Comprehensive Income Components

 

Three months ended
March 31, 2014

 

Three months ended
March 31, 2013

 

Location on Income Statement

 

Gains (losses) associated with, defined benefit pension and postretirement plans amortization

 

 

 

 

 

 

 

 

 

Transition asset

 

$

 

$

1

 

See Note 7

 

Prior service benefit

 

15

 

20

 

See Note 7

 

Net actuarial loss

 

(106

)

(164

)

See Note 7

 

Total before tax

 

(91

)

(143

)

 

 

Tax effect

 

30

 

58

 

Provision for income taxes

 

Net of tax

 

$

(61

)

$

(85

)

 

 

 

 

 

 

 

 

 

 

Debt and equity security gains (losses)

 

 

 

 

 

 

 

Sales or impairments
of securities

 

$

 

$

 

Selling, general and administrative expenses

 

Total before tax

 

 

 

 

 

Tax effect

 

 

 

Provision for income taxes

 

Net of tax

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments gains (losses)

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

$

4

 

$

(6

)

Cost of sales

 

Foreign currency forward contracts

 

 

(66

)

Interest expense

 

Commodity price swap contracts

 

2

 

(1

)

Cost of sales

 

Total before tax

 

6

 

(73

)

 

 

Tax effect

 

(2

)

26

 

Provision for income taxes

 

Net of tax

 

$

4

 

$

(47

)

 

 

Total reclassifications for the period, net of tax

 

$

(57

)

$

(132

)

 

 

 

Sale of Subsidiary Shares

 

In March 2013, 3M sold shares in 3M India Limited, a subsidiary of the Company, in return for $8 million. The noncontrolling interest shares of this subsidiary trade on a public exchange in India. This sale of shares complied with an amendment to Indian securities regulations that required 3M India Limited, as a listed company, to achieve a minimum public shareholding of at least 25 percent. As a result of this transaction, 3M’s ownership in 3M India Limited was reduced from 76 percent to 75 percent. The $8 million received in the first quarter of 2013 was classified as other financing activity in the consolidated statement of cash flows. Because the Company retained its controlling interest, the sale resulted in an increase in 3M Company shareholders’ equity of $7 million and an increase in noncontrolling interest of $1 million.

 

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Table of Contents

 

NOTE 5.  Income Taxes

 

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2005.

 

The IRS completed its field examination of the Company’s U.S. federal income tax returns for the years 2005 through 2007 in the fourth quarter of 2009. The Company protested certain IRS positions within these tax years and entered into the administrative appeals process with the IRS during the first quarter of 2010. During the first quarter of 2010, the IRS completed its field examination of the Company’s U.S. federal income tax return for the 2008 year. The Company protested certain IRS positions for 2008 and entered into the administrative appeals process with the IRS during the second quarter of 2010. During the first quarter of 2011, the IRS completed its field examination of the Company’s U.S. federal income tax return for the 2009 year. The Company protested certain IRS positions for 2009 and entered into the administrative appeals process with the IRS during the second quarter of 2011. During the first quarter of 2012, the IRS completed its field examination of the Company’s U.S. federal income tax return for the 2010 year. The Company protested certain IRS positions for 2010 and entered into the administrative appeals process with the IRS during the second quarter of 2012. In December 2012, the Company received a statutory notice of deficiency for the 2006 year. The Company filed a petition in Tax Court in the first quarter of 2013 relating to the 2006 tax year. During the first quarter of 2014, the IRS completed its field examination of the Company’s U.S. federal income tax return for the 2011 and 2012 years. The Company protested certain IRS positions for 2011 and 2012 and entered into the administrative appeals process with the IRS during the first quarter of 2014.

 

Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2013 and 2014. It is anticipated that the IRS will complete its examination of the Company for 2013 by the end of the first quarter of 2015 and for 2014 by the end of the first quarter of 2016. As of March 31, 2014, the IRS has not proposed any significant adjustments to the Company’s tax positions for which the Company is not adequately reserved.

 

During the first quarter of 2010, the Company paid the agreed upon assessments for the 2005 tax year. During the second quarter of 2010, the Company paid the agreed upon assessments for the 2008 tax year. During the second quarter of 2011, the Company received a refund from the IRS for the 2004 tax year. During the first quarter of 2012, the Company paid the agreed upon assessments for the 2010 tax year. During the first quarter of 2014, the Company received refunds from the IRS for the 2005, 2007, 2008, and 2009 tax years. In addition, during the first quarter of 2014, the Company paid the agreed upon assessments for the 2011 and 2012 tax years. Payments or refunds relating to other proposed assessments arising from the 2005 through 2014 examinations may not be made until a final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also limited audit activity in several U.S. state and foreign jurisdictions.

 

3M anticipates changes to the Company’s uncertain tax positions due to the closing of various audit years mentioned above. Currently, the Company is not able to reasonably estimate the amount by which the liability for unrecognized tax benefits will increase or decrease during the next 12 months as a result of the ongoing income tax authority examinations. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2014 and December 31, 2013 are $192 million and $262 million, respectively. The change in unrecognized benefits that would affect the effective tax rate is mainly a result of the payments and refunds made and received in the first quarter of 2014 as noted above.

 

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized in the consolidated statement of income on a gross basis approximately $15 million of benefit and $4 million of expense for the three months ended March 31, 2014 and March 31, 2013, respectively. At March 31, 2014 and December 31, 2013, accrued interest and penalties in the consolidated balance sheet on a gross basis were $43 million and $62 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

 

The effective tax rate for the first quarter of 2014 was 27.4 percent, compared to 29.1 percent in the first quarter of 2013, a decrease of 1.7 percentage points. Factors which decreased the Company’s effective tax rate on a combined basis by 3.4 percentage points year-on-year included the restoration of tax basis on certain assets for which depreciation deductions were previously limited, adjustments to 3M’s income tax reserves for the first quarter of 2014 when compared

 

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Table of Contents

 

to the same period in 2013, international taxes as a result of changes to the geographic mix of income before taxes, and other items. This benefit was partially offset by factors that increased the effective tax rate by 1.7 percentage points, which largely related to the lapse of the research and development credit.

 

The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exits. As of March 31, 2014 and December 31, 2013, the Company had valuation allowances of $24 million and $23 million on its deferred tax assets, respectively.

 

NOTE 6.  Marketable Securities

 

The Company invests in agency securities, corporate securities, asset-backed securities, treasury securities and other securities. The following is a summary of amounts recorded on the Consolidated Balance Sheet for marketable securities (current and non-current).

 

 

 

March 31,

 

December 31,

 

(Millions)

 

2014

 

2013

 

 

 

 

 

 

 

U.S. government agency securities

 

$

106

 

$

103

 

Foreign government agency securities

 

60

 

30

 

Corporate debt securities

 

141

 

143

 

Commercial paper

 

1

 

60

 

Certificates of deposit/time deposits

 

19

 

20

 

U.S. municipal securities

 

 

2

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

365

 

287

 

Credit card related

 

114

 

52

 

Equipment lease related

 

35

 

30

 

Other

 

19

 

29

 

Asset-backed securities total

 

533

 

398

 

 

 

 

 

 

 

Current marketable securities

 

$

860

 

$

756

 

 

 

 

 

 

 

U.S. government agency securities

 

$

115

 

$

131

 

Foreign government agency securities

 

60

 

95

 

Corporate debt securities

 

674

 

638

 

Certificates of deposit/time deposits

 

10

 

20

 

U.S. treasury securities

 

49

 

49

 

Auction rate securities

 

12

 

11

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

230

 

298

 

Credit card related

 

127

 

128

 

Equipment lease related

 

34

 

37

 

Other

 

49

 

46

 

Asset-backed securities total

 

440

 

509

 

 

 

 

 

 

 

Non-current marketable securities

 

$

1,360

 

$

1,453

 

 

 

 

 

 

 

Total marketable securities

 

$

2,220

 

$

2,209

 

 

Classification of marketable securities as current or non-current is dependent upon management’s intended holding period, the security’s maturity date and liquidity considerations based on market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current. At March 31, 2014, gross unrealized losses totaled approximately $2 million (pre-tax), while gross unrealized gains totaled approximately $2 million (pre-tax). At December 31, 2013, gross unrealized losses totaled approximately $5 million (pre-tax), while gross unrealized gains totaled approximately $1 million (pre-tax). Refer to Note 4 for a table that provides the net realized gains (losses) related to sales or impairments of debt and equity securities, which includes marketable securities. The gross amounts of the realized gains or losses were not material. Cost of securities sold use the first in, first

 

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Table of Contents

 

out (FIFO) method. Since these marketable securities are classified as available-for-sale securities, changes in fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into earnings upon sale or “other-than-temporary” impairment.

 

3M reviews impairments associated with its marketable securities in accordance with the measurement guidance provided by ASC 320, Investments-Debt and Equity Securities, when determining the classification of the impairment as “temporary” or “other-than-temporary”. A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income component of shareholders’ equity. Such an unrealized loss does not reduce net income attributable to 3M for the applicable accounting period because the loss is not viewed as other-than-temporary. The factors evaluated to differentiate between temporary and other-than-temporary include the projected future cash flows, credit ratings actions, and assessment of the credit quality of the underlying collateral, as well as other factors.

 

The balances at March 31, 2014 for marketable securities by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

(Millions)

 

March 31, 2014

 

 

 

 

 

Due in one year or less

 

$

285

 

Due after one year through five years

 

1,915

 

Due after five years through ten years

 

20

 

Due after ten years

 

 

 

 

 

 

Total marketable securities

 

$

2,220

 

 

3M has a diversified marketable securities portfolio with a fair market value of $2.220 billion as of March 31, 2014. Within this portfolio, current and long-term asset-backed securities (estimated fair value of $973 million) primarily include interests in automobile loans, credit cards and equipment leases. 3M’s investment policy allows investments in asset-backed securities with minimum credit ratings of Aa2 by Moody’s Investors Service or AA by Standard & Poor’s or Fitch Ratings. At March 31, 2014, all asset-backed security investments were in compliance with this policy. Approximately 97.7 percent of all asset-backed security investments were rated AAA or A-1+ by Standard & Poor’s and/or Aaa or P-1 by Moody’s Investors Service and/or AAA or F1+ by Fitch Ratings.

 

3M’s marketable securities portfolio includes auction rate securities that represent interests in investment grade credit default swaps; however, currently these holdings comprise less than one percent of this portfolio. The estimated fair value of auction rate securities was $12 million at March 31, 2014 and $11 million at December 31, 2013. Gross unrealized losses within accumulated other comprehensive income related to auction rate securities totaled $1 million (pre-tax) at March 31, 2014 and $2 million (pre-tax) at December 31, 2013. As of March 31, 2014, auction rate securities associated with these balances have been in a loss position for more than 12 months. Since the second half of 2007, these auction rate securities failed to auction due to sell orders exceeding buy orders. Liquidity for these auction-rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 7, 28, 35, or 90 days. The funds associated with failed auctions will not be accessible until a successful auction occurs or a buyer is found outside of the auction process. Refer to Note 9 for a table that reconciles the beginning and ending balances of auction rate securities.

 

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Table of Contents

 

NOTE 7.  Pension and Postretirement Benefit Plans

 

Net periodic benefit cost is recorded in cost of sales, selling, general and administrative expenses, and research, development and related expenses. Components of net periodic benefit cost and other supplemental information for the three months ended March 31, 2014 and 2013 follow:

 

Benefit Plan Information

 

 

 

Three months ended March 31,

 

 

 

Qualified and Non-qualified

 

 

 

 

 

 

 

Pension Benefits

 

Postretirement

 

 

 

United States

 

International

 

Benefits

 

(Millions)

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

Net periodic benefit cost (benefit)

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

60

 

$

64

 

$

36

 

$

36

 

$

16

 

$

20

 

Interest cost

 

169

 

150

 

64

 

61

 

24

 

22

 

Expected return on plan assets

 

(261

)

(261

)

(79

)

(75

)

(22

)

(22

)

Amortization of transition (asset) obligation

 

 

 

 

(1

)

 

 

Amortization of prior service cost (benefit)

 

1

 

1

 

(4

)

(4

)

(12

)

(17

)

Amortization of net actuarial (gain) loss

 

61

 

100

 

31

 

40

 

14

 

24

 

Net periodic benefit cost (benefit)

 

$

30

 

$

54

 

$

48

 

$

57

 

$

20

 

$

27

 

Settlements, curtailments, special termination benefits and other

 

 

 

 

 

 

 

Net periodic benefit cost (benefit) after settlements, curtailments, special termination benefits and other

 

$

30

 

$

54

 

$

48

 

$

57

 

$

20

 

$

27

 

 

For the three months ended March 31, 2014, contributions totaling $40 million were made to the Company’s U.S. and international pension plans and $2 million to its postretirement plans. For total year 2014, the Company expects to contribute approximately $100 million to $200 million of cash to its global pension and postretirement plans. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2014. Therefore, the amount of future discretionary pension contributions could vary significantly depending on the U.S. plans’ funded status and the anticipated tax deductibility of the contributions. Future contributions will also depend on market conditions, interest rates and other factors. 3M’s annual measurement date for pension and postretirement assets and liabilities is December 31 each year, which is also the date used for the related annual measurement assumptions.

 

3M was informed during the first quarter of 2009 that the general partners of WG Trading Company, in which 3M’s benefit plans hold limited partnership interests, are the subject of a criminal investigation as well as civil proceedings by the SEC and CFTC (Commodity Futures Trading Commission). In March 2011, over the objections of 3M and six other limited partners of WG Trading Company, the district court judge ruled in favor of the court appointed receiver’s proposed distribution plan (and in April 2013, the United States Court of Appeals for the Second Circuit affirmed the district court’s ruling). The benefit plan trustee holdings of WG Trading Company interests were adjusted to reflect the decreased estimated fair market value, inclusive of estimated insurance proceeds, as of the annual measurement dates. The Company has insurance that it believes, based on what is currently known, will result in the recovery of a portion of the decrease in original asset value. As of the 2013 measurement date these holdings represented less than one percent of 3M’s fair value of total plan assets. 3M currently believes that the resolution of these events will not have a material adverse effect on the consolidated financial position of the Company.

 

In addition, the Company also sponsors employee savings plans under Section 401(k) of the Internal Revenue Code, as discussed in Note 10 in 3M’s 2013 Annual Report on Form 10-K.

 

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NOTE 8.  Derivatives

 

The Company uses interest rate swaps, currency swaps, commodity price swaps, and forward and option contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. The information that follows explains the various types of derivatives and financial instruments used by 3M, how and why 3M uses such instruments, how such instruments are accounted for, and how such instruments impact 3M’s financial position and performance.

 

Additional information with respect to the impacts on other comprehensive income of nonderivative hedging and derivative instruments is included in Note 4. Additional information with respect to the fair value of derivative instruments is included in Note 9. References to information regarding derivatives and/or hedging instruments associated with the Company’s long-term debt are also made in Note 9 in 3M’s 2013 Annual Report on Form 10-K.

 

Types of Derivatives/Hedging Instruments and Inclusion in Income/Other Comprehensive Income

 

Cash Flow Hedges:

 

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

 

Cash Flow Hedging - Foreign Currency Forward and Option Contracts: The Company enters into foreign exchange forward and option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies. These transactions are designated as cash flow hedges. The settlement or extension of these derivatives will result in reclassifications (from accumulated other comprehensive income) to earnings in the period during which the hedged transactions affect earnings. Generally, 3M dedesignates these cash flow hedge relationships in advance of the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction occurs. Changes in the value of derivative instruments after dedesignation are recorded in earnings and are included in the Derivatives Not Designated as Hedging Instruments section below. Hedge ineffectiveness and the amount excluded from effectiveness testing recognized in income on cash flow hedges were not material for the three months ended March 31, 2014 and 2013. The maximum length of time over which 3M hedges its exposure to the variability in future cash flows for a majority of the forecasted transactions is 12 months and, accordingly, at March 31, 2014, the majority of the Company’s open foreign exchange forward and option contracts had maturities of one year or less. The dollar equivalent gross notional amount of the Company’s foreign exchange forward and option contracts designated as cash flow hedges at March 31, 2014 was approximately $1.6 billion.

 

Cash Flow Hedging - Commodity Price Management: The Company manages commodity price risks through negotiated supply contracts, price protection agreements and forward physical contracts. The Company uses commodity price swaps relative to natural gas as cash flow hedges of forecasted transactions to manage price volatility. The related mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of sales in the period during which the hedged transaction affects earnings. Generally, the length of time over which 3M hedges its exposure to the variability in future cash flows for its forecasted natural gas transactions is 12 months. No significant commodity cash flow hedges were discontinued and hedge ineffectiveness was not material for the three months ended March 31, 2014 and 2013. The dollar equivalent gross notional amount of the Company’s natural gas commodity price swaps designated as cash flow hedges at March 31, 2014 was $20 million.

 

Cash Flow Hedging — Forecasted Debt Issuance: In August 2011, in anticipation of the September 2011 issuance of $1 billion in five-year fixed rate notes, 3M executed a pre-issuance cash flow hedge on a notional amount of $400 million by entering into a forward-starting five-year floating-to-fixed interest rate swap. Upon debt issuance in September 2011, 3M terminated the floating-to-fixed interest rate swap. The termination of the swap resulted in a $7 million pre-tax loss ($4 million after-tax) that is amortized over the five-year life of the note and, when material, is included in the tables below as part of the loss recognized in income on the effective portion of derivatives as a result of reclassification from accumulated other comprehensive income.

 

As of March 31, 2014, the Company had a balance of $6 million associated with the after-tax net unrealized loss associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This includes a $2 million balance (loss) related to a floating-to-fixed interest rate swap (discussed in the preceding paragraph), which is

 

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being amortized over the five-year life of the note. 3M expects to reclassify a majority of the remaining balance to earnings over the next 12 months (with the impact offset by cash flows from underlying hedged items).

 

The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to derivative instruments designated as cash flow hedges are provided in the following table. Reclassifications of amounts from accumulated other comprehensive income into income include accumulated gains (losses) on dedesignated hedges at the time earnings are impacted by the forecasted transaction.

 

The Company revised amounts previously presented in the tables below for the pretax gain (loss) recognized in other comprehensive income on effective portion of derivative (“Gain Recognized in OCI”) and the pretax gain (loss) recognized in income on effective portion of derivative as a result of reclassification from accumulated other comprehensive income (“Gain Reclassified into Income”) for the three months ended March 31, 2013 relative to foreign currency forward contracts. These immaterial corrections increased both the previously presented amounts of the Gain Recognized in OCI and the Gain Reclassified into Income in the disclosure tables below by $35 million in 2013. The revisions had no impact on the Company’s consolidated results of operations or financial condition.

 

Three months ended March 31, 2014

 

(Millions)

 

Pretax Gain (Loss)
Recognized in Other
Comprehensive
Income on Effective
Portion of Derivative

 

Pretax Gain (Loss) Recognized in
Income on Effective Portion of
Derivative as a Result of
Reclassification from
Accumulated Other
Comprehensive Income

 

Ineffective Portion of Gain
(Loss) on Derivative and
Amount Excluded from
Effectiveness Testing
Recognized in Income

 

Derivatives in Cash Flow Hedging Relationships

 

Amount

 

Location

 

Amount

 

Location

 

Amount

 

Foreign currency forward/option contracts

 

$

7

 

Cost of sales

 

$

4

 

Cost of sales

 

$

 

Commodity price swap contracts

 

2

 

Cost of sales

 

2

 

Cost of sales

 

 

Total

 

$

9

 

 

 

$

6

 

 

 

$

 

 

Three months ended March 31, 2013

 

(Millions)

 

Pretax Gain (Loss)
Recognized in Other
Comprehensive
Income on Effective
Portion of Derivative

 

Pretax Gain (Loss) Recognized in

Income on Effective Portion of
Derivative as a Result of
Reclassification from
Accumulated Other
Comprehensive Income

 

Ineffective Portion of Gain
(Loss) on Derivative and
Amount Excluded from
Effectiveness Testing
Recognized in Income

 

Derivatives in Cash Flow Hedging Relationships

 

Amount

 

Location

 

Amount

 

Location

 

Amount

 

Foreign currency forward/option contracts

 

$

31

 

Cost of sales

 

$

(6

)

Cost of sales

 

$

 

Foreign currency forward contracts

 

(68

)

Interest expense

 

(66

)

Interest expense

 

 

Commodity price swap contracts

 

2

 

Cost of sales

 

(1

)

Cost of sales

 

 

Total

 

$

(35

)

 

 

$

(73

)

 

 

$

 

 

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Table of Contents

 

Fair Value Hedges:

 

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.

 

Fair Value Hedging - Interest Rate Swaps: The Company manages interest expense 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 mark-to-market of these fair value hedges is recorded as gains or losses in interest expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest expense. These fair value hedges are highly effective and, thus, there is no impact on earnings due to hedge ineffectiveness. The dollar equivalent (based on inception date foreign currency exchange rates) gross notional amount of the Company’s interest rate swaps at March 31, 2014 was $745 million.

 

At March 31, 2014, the Company had interest rate swaps designated as fair value hedges of underlying fixed rate obligations. In July 2007, in connection with the issuance of a seven-year Eurobond for an amount of 750 million Euros, the Company completed a fixed-to-floating interest rate swap on a notional amount of 400 million Euros as a fair value hedge of a portion of the fixed interest rate Eurobond obligation. In August 2010, the Company terminated 150 million Euros of the notional amount of this swap. As a result, a gain of 18 million Euros, recorded as part of the balance of the underlying debt, is amortized as an offset to interest expense over this debt’s remaining life. Prior to termination of the applicable portion of the interest rate swap, the mark-to-market of the hedge instrument was recorded as gains or losses in interest expense and was offset by the gain or loss on carrying value of the underlying debt instrument. Consequently, the subsequent amortization of the 18 million Euros recorded as part of the underlying debt balance is not part of the gain on hedged items recognized in income in the tables below.

 

In November 2013, 3M issued an eight-year 1.875% fixed rate Eurobond for a face amount of 600 million Euros. Upon debt issuance, 3M completed a fixed-to-floating interest rate swap on a notional amount of 300 million Euros as a fair value hedge of a portion of the fixed interest rate Eurobond obligation.

 

The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments designated as fair value hedges and similar information relative to the hedged items are as follows:

 

Three months ended March 31, 2014

 

Gain (Loss) on Derivative

 

Gain (Loss) on Hedged Item

 

(Millions)

 

Recognized in Income

 

Recognized in Income

 

Derivatives in Fair Value Hedging Relationships

 

Location

 

Amount

 

Location

 

Amount

 

Interest rate swap contracts

 

Interest expense

 

$

7

 

Interest expense

 

$

(7

)

Total

 

 

 

$

7

 

 

 

$

(7

)

 

Three months ended March 31, 2013

 

Gain (Loss) on Derivative

 

Gain (Loss) on Hedged Item

 

(Millions)

 

Recognized in Income

 

Recognized in Income

 

Derivatives in Fair Value Hedging Relationships

 

Location

 

Amount

 

Location

 

Amount

 

Interest rate swap contracts

 

Interest expense

 

$

(5

)

Interest expense

 

$

5

 

Total

 

 

 

$

(5

)

 

 

$

5

 

 

Net Investment Hedges:

 

As circumstances warrant, the Company uses cross currency swaps, forwards and foreign currency denominated debt to hedge portions of the Company’s net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in cumulative translation within other comprehensive income. The remainder of the change in value of such instruments is recorded in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. At March 31, 2014, there were no cross currency swaps and foreign currency forward contracts designated as net investment hedges.

 

In addition to the derivative instruments used as hedging instruments in net investment hedges, 3M also uses foreign currency denominated debt as nonderivative hedging instruments in certain net investment hedges. In July and December 2007, the Company issued seven-year fixed rate Eurobond securities for amounts of 750 million Euros and 275 million Euros, respectively. In November 2013, the Company issued eight-year fixed rate Eurobond securities for 600 million Euros. 3M designated each of these Eurobond issuances as hedging instruments of the Company’s net investment in its European subsidiaries.

 

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In anticipation of the November 2013 Eurobond issuance, the Company entered into foreign currency forward contracts with notional amounts totaling 594 million Euros. These forward contracts were designated as hedging instruments of the Company’s net investment in its European subsidiaries. These contracts matured in November 2013.

 

The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to derivative and nonderivative instruments designated as net investment hedges are as follows. There were no reclassifications of the effective portion of net investment hedges out of accumulated other comprehensive income into income for the periods presented in the table below.

 

Three months ended March 31, 2014

 

Derivative and Nonderivative Instruments in Net Investment Hedging
Relationships

 

Pretax Gain (Loss)
Recognized as Cumulative
Translation within Other
Comprehensive Income
on Effective Portion of
Instrument

 

Ineffective Portion of Gain
(Loss) on Instrument and
Amount Excluded from
Effectiveness Testing
Recognized in Income

 

(Millions)

 

Amount

 

Location

 

Amount

 

Foreign currency denominated debt

 

$

(9

)

N/A

 

$

 

Total

 

$

(9

)

 

 

$

 

 

Three months ended March 31, 2013

 

Derivative and Nonderivative Instruments in Net Investment Hedging
Relationships

 

Pretax Gain (Loss)
Recognized as Cumulative
Translation within Other
Comprehensive Income
on Effective Portion of
Instrument

 

Ineffective Portion of Gain
(Loss) on Instrument and
Amount Excluded from
Effectiveness Testing
Recognized in Income

 

(Millions)

 

Amount

 

Location

 

Amount

 

Foreign currency denominated debt

 

$

41

 

N/A

 

$

 

Total

 

$

41

 

 

 

$

 

 

Derivatives Not Designated as Hedging Instruments:

 

Derivatives not designated as hedging instruments include dedesignated foreign currency forward and option contracts that formerly were designated in cash flow hedging relationships (as referenced in the preceding Cash Flow Hedges section). In addition, 3M enters into foreign currency forward contracts and commodity price swaps to offset, in part, the impacts of certain intercompany activities (primarily associated with intercompany licensing arrangements) and fluctuations in costs associated with the use of certain precious metals, respectively. These derivative instruments are not designated in hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings. The dollar equivalent gross notional amount of these forward, option and swap contracts not designated as hedging instruments totaled $7.5 billion as of March 31, 2014. The Company does not hold or issue derivative financial instruments for trading purposes.

 

The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments not designated as hedging instruments are as follows:

 

 

 

Three months ended March 31, 2014

 

Derivatives Not Designated as Hedging Instruments

 

Gain (Loss) on Derivative Recognized in Income

 

(Millions)

 

Location

 

Amount

 

Foreign currency forward/option contracts

 

Cost of sales

 

$

(1

)

Foreign currency forward contracts

 

Interest expense

 

33

 

Total

 

 

 

$

32

 

 

 

 

Three months ended March 31, 2013

 

Derivatives Not Designated as Hedging Instruments

 

Gain (Loss) on Derivative Recognized in Income

 

(Millions)

 

Location

 

Amount

 

Foreign currency forward/option contracts

 

Cost of sales

 

$

10

 

Foreign currency forward contracts

 

Interest expense

 

21

 

Total

 

 

 

$

31

 

 

22


 

 


Table of Contents

 

Location and Fair Value Amount of Derivative Instruments

 

The following tables summarize the fair value of 3M’s derivative instruments, excluding nonderivative instruments used as hedging instruments, and their location in the consolidated balance sheet. Additional information with respect to the fair value of derivative instruments is included in Note 9.

 

March 31, 2014

 

 

 

 

 

 

 

 

 

(Millions)

 

Assets

 

Liabilities

 

Fair Value of Derivative Instruments

 

Location

 

Amount

 

Location

 

Amount

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

Other current assets

 

$

17

 

Other current liabilities

 

$

20

 

Commodity price swap contracts

 

Other current assets

 

2

 

Other current liabilities

 

 

Interest rate swap contracts

 

Other assets

 

9

 

Other liabilities

 

 

Total derivatives designated as hedging instruments

 

 

 

$

28

 

 

 

$

20

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

Other current assets

 

$

48

 

Other current liabilities

 

$

36

 

Total derivatives not designated as hedging instruments

 

 

 

$

48

 

 

 

$

36

 

 

 

 

 

 

 

 

 

 

 

Total derivative instruments

 

 

 

$

76

 

 

 

$

56

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

(Millions)

 

Assets

 

Liabilities

 

Fair Value of Derivative Instruments

 

Location

 

Amount

 

Location

 

Amount

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

Other current assets

 

$

24

 

Other current liabilities

 

$

35

 

Commodity price swap contracts

 

Other current assets

 

1

 

Other current liabilities

 

 

Interest rate swap contracts

 

Other assets

 

8

 

Other liabilities

 

7

 

Total derivatives designated as hedging instruments

 

 

 

$

33

 

 

 

$

42

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

Other current assets

 

$

51

 

Other current liabilities

 

$

68

 

Total derivatives not designated as hedging instruments

 

 

 

$

51

 

 

 

$

68

 

 

 

 

 

 

 

 

 

 

 

Total derivative instruments

 

 

 

$

84

 

 

 

$

110

 

 

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Table of Contents

 

Credit Risk and Offsetting of Assets and Liabilities of Derivative Instruments

 

The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps, currency swaps, commodity price swaps, and forward and option contracts. However, the Company’s risk is limited to the fair value of the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counterparties. 3M enters into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow each counterparty to net settle amounts owed between a 3M entity and the counterparty as a result of multiple, separate derivative transactions. As of March 31, 2014, 3M has International Swaps and Derivatives Association (ISDA) agreements with 12 applicable banks and financial institutions which contain netting provisions. In addition to a master agreement with 3M supported by a primary counterparty’s parent guarantee, 3M also has associated credit support agreements in place with 11 of its primary derivative counterparties which, among other things, provide the circumstances under which either party is required to post eligible collateral (when the market value of transactions covered by these agreements exceeds specified thresholds or if a counterparty’s credit rating has been downgraded to a predetermined rating). The Company does not anticipate nonperformance by any of these counterparties.

 

3M has elected to present the fair value of derivative assets and liabilities within the Company’s consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. However, the following tables provide information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default or termination as stipulated by the terms of netting arrangements with each of the counterparties. For each counterparty, if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period based on the 3M entity that is a party to the transactions. Derivatives not subject to master netting agreements are not eligible for net presentation. As of the applicable dates presented below, no cash collateral had been received or pledged related to these derivative instruments.

 

Offsetting of Financial Assets/Liabilities under Master Netting Agreements with Derivative Counterparties

 

March 31, 2014

 

 

 

Gross Amount of

 

Gross Amounts not Offset in the
Consolidated Balance Sheet that are Subject
to Master Netting Agreements

 

 

 

(Millions)

 

Derivative Assets
Presented in the
Consolidated
Balance Sheet

 

Gross Amount of
Eligible Offsetting
Recognized
Derivative Liabilities

 

Cash Collateral
Received

 

Net Amount of
Derivative Assets

 

Derivatives subject to master netting agreements

 

$

74

 

$

29

 

$

 

$

45

 

Derivatives not subject to master netting agreements

 

2

 

 

 

 

 

2

 

Total

 

$

76

 

 

 

 

 

$

47

 

 

March 31, 2014

 

 

 

Gross Amount of

 

Gross Amounts not Offset in the
Consolidated Balance Sheet that are Subject
to Master Netting Agreements

 

 

 

(Millions)

 

Derivative Liabilities
Presented in the
Consolidated
Balance Sheet

 

Gross Amount of
Eligible Offsetting
Recognized
Derivative Assets

 

Cash Collateral
Pledged

 

Net Amount of
Derivative Liabilities

 

Derivatives subject to master netting agreements

 

$

55

 

$

29

 

$

 

$

26

 

Derivatives not subject to master netting agreements

 

1

 

 

 

 

 

1

 

Total

 

$

56

 

 

 

 

 

$

27

 

 

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Table of Contents

 

December 31, 2013

 

 

 

Gross Amount of