10-Q 1 a14-14070_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 June 30, 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 (Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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 June 30, 2014

Common Stock, $0.01 par value per share

 

647,969,147 shares

 

This document (excluding exhibits) contains 79 pages.

The table of contents is set forth on page 2.

The exhibit index begins on page 76.

 

 

 



Table of Contents

 

3M COMPANY

Form 10-Q for the Quarterly Period Ended June 30, 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

11

 

Note 4.

Supplemental Equity and Comprehensive Income Information

13

 

Note 5.

Income Taxes

18

 

Note 6.

Marketable Securities

19

 

Note 7.

Long-Term Debt and Short-Term Borrowings

21

 

Note 8.

Pension and Postretirement Benefit Plans

22

 

Note 9.

Derivatives

24

 

Note 10.

Fair Value Measurements

33

 

Note 11.

Commitments and Contingencies

37

 

Note 12.

Stock-Based Compensation

45

 

Note 13.

Business Segments

49

 

Report of Independent Registered Public Accounting Firm

51

 

 

 

ITEM 2.

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

 

 

Index to Management’s Discussion and Analysis:

 

 

Overview

52

 

Results of Operations

55

 

Performance by Business Segment

59

 

Financial Condition and Liquidity

65

 

Cautionary Note Concerning Factors That May Affect Future Results

71

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

71

 

 

 

ITEM 4.

Controls and Procedures

72

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

73

 

 

 

ITEM 1A.

Risk Factors

73

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

75

 

 

 

ITEM 3.

Defaults Upon Senior Securities

75

 

 

 

ITEM 4.

Mine Safety Disclosures

75

 

 

 

ITEM 5.

Other Information

75

 

 

 

ITEM 6.

Exhibits

76

 

2



Table of Contents

 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended June 30, 2014

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(Millions, except per share amounts)

 

2014

 

2013

 

2014

 

2013

 

Net sales

 

$

8,134

 

$

7,752

 

$

15,965

 

$

15,386

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

4,184

 

4,013

 

8,215

 

7,982

 

Selling, general and administrative expenses

 

1,646

 

1,610

 

3,278

 

3,199

 

Research, development and related expenses

 

448

 

427

 

900

 

857

 

Total operating expenses

 

6,278

 

6,050

 

12,393

 

12,038

 

Operating income

 

1,856

 

1,702

 

3,572

 

3,348

 

 

 

 

 

 

 

 

 

 

 

Interest expense and income

 

 

 

 

 

 

 

 

 

Interest expense

 

45

 

41

 

82

 

80

 

Interest income

 

(9

)

(10

)

(18

)

(20

)

Total interest expense — net

 

36

 

31

 

64

 

60

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

1,820

 

1,671

 

3,508

 

3,288

 

Provision for income taxes

 

537

 

458

 

1,000

 

928

 

Net income including noncontrolling interest

 

$

1,283

 

$

1,213

 

$

2,508

 

$

2,360

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

16

 

16

 

34

 

34

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,267

 

$

1,197

 

$

2,474

 

$

2,326

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — basic

 

652.0

 

688.2

 

656.7

 

689.6

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.94

 

$

1.74

 

$

3.77

 

$

3.37

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — diluted

 

664.6

 

699.1

 

669.6

 

700.6

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

1.91

 

$

1.71

 

$

3.70

 

$

3.32

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per 3M common share

 

$

0.855

 

$

0.635

 

$

1.71

 

$

1.27

 

 

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

 

3



Table of Contents

 

3M Company and Subsidiaries

Consolidated Statement of Comprehensive Income

(Unaudited)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(Millions)

 

2014

 

2013

 

2014

 

2013

 

Net income including noncontrolling interest

 

$

1,283

 

$

1,213

 

$

2,508

 

$

2,360

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

127

 

(279

)

147

 

(677

)

Defined benefit pension and postretirement plans adjustment

 

60

 

91

 

121

 

176

 

Debt and equity securities, unrealized gain (loss)

 

1

 

(4

)

2

 

(4

)

Cash flow hedging instruments, unrealized gain (loss)

 

(9

)

8

 

(7

)

32

 

Total other comprehensive income (loss), net of tax

 

179

 

(184

)

263

 

(473

)

Comprehensive income (loss) including noncontrolling interest

 

1,462

 

1,029

 

2,771

 

1,887

 

Comprehensive (income) loss attributable to noncontrolling interest

 

(20

)

3

 

(50

)

23

 

Comprehensive income (loss) attributable to 3M

 

$

1,442

 

$

1,032

 

$

2,721

 

$

1,910

 

 

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

 

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Table of Contents

 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

 

 

June 30,

 

December 31,

 

(Dollars in millions, except per share amount)

 

2014

 

2013

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

2,125

 

$

2,581

 

Marketable securities — current

 

884

 

756

 

Accounts receivable — net

 

4,759

 

4,253

 

Inventories

 

 

 

 

 

Finished goods

 

1,898

 

1,790

 

Work in process

 

1,220

 

1,139

 

Raw materials and supplies

 

975

 

935

 

Total inventories

 

4,093

 

3,864

 

Other current assets

 

1,332

 

1,279

 

Total current assets

 

13,193

 

12,733

 

 

 

 

 

 

 

Marketable securities — non-current

 

1,204

 

1,453

 

Investments

 

113

 

122

 

Property, plant and equipment

 

23,447

 

23,068

 

Less: Accumulated depreciation

 

(14,762

)

(14,416

)

Property, plant and equipment — net

 

8,685

 

8,652

 

Goodwill

 

7,422

 

7,345

 

Intangible assets — net

 

1,603

 

1,688

 

Prepaid pension benefits

 

672

 

577

 

Other assets

 

1,078

 

980

 

Total assets

 

$

33,970

 

$

33,550

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

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

 

$

1,650

 

$

1,683

 

Accounts payable

 

1,844

 

1,799

 

Accrued payroll

 

656

 

708

 

Accrued income taxes

 

478

 

417

 

Other current liabilities

 

2,412

 

2,891

 

Total current liabilities

 

7,040

 

7,498

 

 

 

 

 

 

 

Long-term debt

 

5,323

 

4,326

 

Pension and postretirement benefits

 

1,829

 

1,794

 

Other liabilities

 

1,932

 

1,984

 

Total liabilities

 

$

16,124

 

$

15,602

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

3M Company shareholders’ equity:

 

 

 

 

 

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

 

$

9

 

$

9

 

Additional paid-in capital

 

4,641

 

4,375

 

Retained earnings

 

33,836

 

32,416

 

Treasury stock, at cost: 296,063,909 shares at June 30, 2014; 280,736,817 shares at December 31, 2013

 

(17,466

)

(15,385

)

Accumulated other comprehensive income (loss)

 

(3,666

)

(3,913

)

Total 3M Company shareholders’ equity

 

17,354

 

17,502

 

Noncontrolling interest

 

492

 

446

 

Total equity

 

$

17,846

 

$

17,948

 

 

 

 

 

 

 

Total liabilities and equity

 

$

33,970

 

$

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)

 

 

 

Six months ended

 

 

 

June 30,

 

(Millions)

 

2014

 

2013

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income including noncontrolling interest

 

$

2,508

 

$

2,360

 

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

 

 

 

 

 

Depreciation and amortization

 

708

 

671

 

Company pension and postretirement contributions

 

(77

)

(171

)

Company pension and postretirement expense

 

196

 

275

 

Stock-based compensation expense

 

174

 

150

 

Deferred income taxes

 

(36

)

37

 

Excess tax benefits from stock-based compensation

 

(97

)

(51

)

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

(484

)

(628

)

Inventories

 

(242

)

(167

)

Accounts payable

 

57

 

199

 

Accrued income taxes (current and long-term)

 

16

 

166

 

Product and other insurance receivables and claims

 

13

 

19

 

Other — net

 

(4

)

(187

)

Net cash provided by operating activities

 

2,732

 

2,673

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

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

 

(634

)

(718

)

Proceeds from sale of PP&E and other assets

 

38

 

18

 

Acquisitions, net of cash acquired

 

(94

)

 

Purchases of marketable securities and investments

 

(849

)

(3,000

)

Proceeds from maturities and sale of marketable securities and investments

 

982

 

2,948

 

Proceeds from sale of businesses

 

 

8

 

Other investing

 

(22

)

4

 

Net cash used in investing activities

 

(579

)

(740

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Change in short-term debt — net

 

62

 

(12

)

Repayment of debt (maturities greater than 90 days)

 

(119

)

(12

)

Proceeds from debt (maturities greater than 90 days)

 

1,078

 

11

 

Purchases of treasury stock

 

(3,134

)

(1,995

)

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

 

585

 

1,103

 

Dividends paid to shareholders

 

(1,122

)

(876

)

Excess tax benefits from stock-based compensation

 

97

 

51

 

Other — net

 

(31

)

3

 

Net cash used in financing activities

 

(2,584

)

(1,727

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(25

)

(147

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(456

)

59

 

Cash and cash equivalents at beginning of year

 

2,581

 

2,883

 

Cash and cash equivalents at end of period

 

$

2,125

 

$

2,942

 

 

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

 

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Table of Contents

 

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.

 

As described in 3M’s Current Report on Form 8-K dated May 15, 2014 (which updated 3M’s 2013 Annual Report on Form 10-K) and 3M’s Quarterly Report on Form 10-Q for the period ended March 31, 2014, 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 (refer to Note 13 herein). Segment information presented herein reflects the impact of these changes for all periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its Current Report on Form 8-K dated May 15, 2014.

 

Also, effective in the second quarter of 2014, within the Electronics and Energy business segment, 3M combined three existing divisions into two new divisions. A large portion of both the Electronics Markets Materials Division and the Electronic Solutions Division were combined to form the Electronics Materials Solutions Division, which focuses on semiconductor and electronics materials and assembly solutions. The Optical Systems Division, the remaining portion of the Electronic Solutions Division and a portion of the Electronics Markets Materials Division were combined to form the Display Materials and Systems Division, which focuses on delivering light, color and user interface solutions.

 

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.

 

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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.

 

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 beginning in February 2013, the SICAD1 rate beginning in March 2014, and the SICAD2 rate beginning in June 2014. 3M’s use of SICAD1 and subsequently SICAD2 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, use of the SICAD1 rate beginning in March 2014, and use of the SICAD2 rate beginning in June 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 June 30, 2014, the Company had a balance of net monetary liabilities denominated in VEF of less than 115 million VEF and the SICAD1 and SICAD2 exchange rates were approximately 10 VEF and 50 VEF per U.S. dollar, respectively. Had 3M utilized the SICAD1 rate rather than the SICAD2 rate of exchange for remeasurement of such items as of June 30, 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 (3.1 million average options for the three months ended June 30, 2014; 2.7 million average options for the six months ended June 30, 2014; 3.7 million average options for the three months ended June 30, 2013; and 3.9 million average options for the six months ended June 30, 2013). The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(Amounts in millions, except per share amounts)

 

2014

 

2013

 

2014

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,267

 

$

1,197

 

$

2,474

 

$

2,326

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — basic

 

652.0

 

688.2

 

656.7

 

689.6

 

 

 

 

 

 

 

 

 

 

 

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

 

12.6

 

10.9

 

12.9

 

11.0

 

 

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — diluted

 

664.6

 

699.1

 

669.6

 

700.6

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.94

 

$

1.74

 

$

3.77

 

$

3.37

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

1.91

 

$

1.71

 

$

3.70

 

$

3.32

 

 

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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 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.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle the ASU includes provisions within a five step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) an entity satisfies a performance obligation. The standard also specifies the accounting for some costs to obtain or fulfill a contract with a customer and requires expanded disclosures about revenue recognition. The standard provides for either full retrospective adoption or a modified retrospective adoption by which it is applied only to the most current period presented. For 3M, this ASU is effective January 1, 2017. The Company is currently assessing this ASU’s impact on 3M’s consolidated results of operations and financial condition.

 

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.

 

During the six months ended June 30, 2014, the purchase price paid for business combinations (net of cash acquired) was $94 million, which related to 3M’s acquisition of Treo Solutions LLC (discussed below).

 

In April 2014, 3M (Health Care Business) purchased all of the outstanding equity interests of Treo Solutions LLC, headquartered in Troy, New York. Treo Solutions LLC is a provider of data analytics and business intelligence to

 

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healthcare payers and providers. The allocation of purchase price related to this acquisition is considered preliminary, largely with respect to intangible assets, and tax-related assets and liabilities.

 

Purchased identifiable finite-lived intangible assets related to the acquisition which closed in the first six months ended of 2014 totaled $34 million and will be amortized on a straight-line basis over a weighted-average life of six years (lives ranging from three to 10 years). Acquired in-process research and development and identifiable intangible assets for which significant assumed renewals or extensions of underlying arrangements impacted the determination of their useful lives were not material. Pro forma information related to acquisitions was not included because the impact on the Company’s consolidated results of operations was not considered to be material.

 

Refer to Note 2 in 3M’s Current Report on Form 8-K dated May 15, 2014 (which updated 3M’s 2013 Annual Report on Form 10-K) for information on 3M’s 2011 through 2013 acquisitions and divestitures.

 

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NOTE 3.  Goodwill and Intangible Assets

 

Purchased goodwill related to the acquisition which closed during the first six months of 2014 totaled $65 million, none of which is deductible for tax purposes. 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 June 30, 2014, are as follows:

 

Goodwill

 

 

 

December 31, 2013

 

Acquisition

 

Translation

 

June 30, 2014

 

(Millions)

 

Balance

 

activity

 

and other

 

Balance

 

Industrial

 

$

2,166

 

$

 

$

10

 

$

2,176

 

Safety and Graphics

 

1,740

 

 

(2

)

1,738

 

Electronics and Energy

 

1,612

 

 

1

 

1,613

 

Health Care

 

1,596

 

65

 

1

 

1,662

 

Consumer

 

231

 

 

2

 

233

 

Total Company

 

$

7,345

 

$

65

 

$

12

 

$

7,422

 

 

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 13, effective in the first quarter of 2014, the Company transferred a product line between divisions within different business segments and in both the first and second quarters of 2014 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 and second quarters 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

 

For the six months ended June 30, 2014, gross intangible assets (excluding goodwill) acquired through business combinations increased the gross carrying amount, with this impact partially offset 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 June 30, 2014, and December 31, 2013, follow:

 

 

 

June 30,

 

December 31,

 

(Millions)

 

2014

 

2013

 

Customer related intangible assets

 

$

1,409

 

$

1,411

 

Patents

 

601

 

602

 

Other technology-based intangible assets

 

422

 

406

 

Definite-lived tradenames

 

410

 

411

 

Other amortizable intangible assets

 

225

 

217

 

Total gross carrying amount

 

$

3,067

 

$

3,047

 

 

 

 

 

 

 

Accumulated amortization — customer related

 

(563

)

(514

)

Accumulated amortization — patents

 

(474

)

(458

)

Accumulated amortization — other technology-based

 

(203

)

(179

)

Accumulated amortization — definite-lived tradenames

 

(187

)

(178

)

Accumulated amortization — other

 

(166

)

(159

)

Total accumulated amortization

 

$

(1,593

)

$

(1,488

)

 

 

 

 

 

 

Total finite-lived intangible assets — net

 

$

1,474

 

$

1,559

 

 

 

 

 

 

 

Non-amortizable intangible assets (primarily tradenames)

 

129

 

129

 

Total intangible assets — net

 

$

1,603

 

$

1,688

 

 

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Table of Contents

 

Amortization expense for acquired intangible assets for the three-month and six-month periods ended June 30, 2014 and 2013 follows:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(Millions)

 

2014

 

2013

 

2014

 

2013

 

Amortization expense

 

$

57

 

$

60

 

$

114

 

$

120

 

 

The table below shows expected amortization expense for acquired amortizable intangible assets recorded as of June 30, 2014:

 

 

 

Remainder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

 

 

 

 

 

 

After

 

(Millions)

 

2014

 

2015

 

2016

 

2017

 

2018

 

2019

 

2019

 

Amortization expense

 

$

109

 

$

206

 

$

193

 

$

177

 

$

160

 

$

148

 

$

481

 

 

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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Table of Contents

 

NOTE 4.  Supplemental Equity and Comprehensive Income Information

Consolidated Statement of Changes in Equity

 

Three months ended June 30, 2014

 

 

 

 

 

3M Company Shareholders

 

 

 

(Millions)

 

Total

 

Common
Stock and
Additional
Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehen-
sive Income
(Loss)

 

Non-
controlling
Interest

 

Balance at March 31, 2014

 

$

17,924

 

$

4,554

 

$

33,312

 

$

(16,577

)

$

(3,841

)

$

476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,283

 

 

 

1,267

 

 

 

 

 

16

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

127

 

 

 

 

 

 

 

123

 

4

 

Defined benefit pension and post-retirement plans adjustment

 

60

 

 

 

 

 

 

 

60

 

 

Debt and equity securities - unrealized gain (loss)

 

1

 

 

 

 

 

 

 

1

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

(9

)

 

 

 

 

 

 

(9

)

 

Total other comprehensive income (loss), net of tax

 

179

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

(556

)

 

 

(556

)

 

 

 

 

 

 

Purchase of subsidiary shares

 

(5

)

(1

)

 

 

 

 

 

 

(4

)

Stock-based compensation, net of tax impacts

 

97

 

97

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(1,382

)

 

 

 

 

(1,382

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

306

 

 

 

(187

)

493

 

 

 

 

 

Balance at June 30, 2014

 

$

17,846

 

$

4,650

 

$

33,836

 

$

(17,466

)

$

(3,666

)

$

492

 

 

Six months ended June 30, 2014

 

 

 

 

 

3M Company Shareholders

 

 

 

(Millions)

 

Total

 

Common
Stock and
Additional
Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehen-
sive Income
(Loss)

 

Non-
controlling
Interest

 

Balance at December 31, 2013

 

$

17,948

 

$

4,384

 

$

32,416

 

$

(15,385

)

$

(3,913

)

$

446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

2,508

 

 

 

2,474

 

 

 

 

 

34

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

147

 

 

 

 

 

 

 

131

 

16

 

Defined benefit pension and post-retirement plans adjustment

 

121

 

 

 

 

 

 

 

121

 

 

Debt and equity securities - unrealized gain (loss)

 

2

 

 

 

 

 

 

 

2

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

(7

)

 

 

 

 

 

 

(7

)

 

Total other comprehensive income (loss), net of tax

 

263

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

(555

)

 

 

(555

)

 

 

 

 

 

 

Purchase of subsidiary shares

 

(5

)

(1

)

 

 

 

 

 

 

(4

)

Stock-based compensation, net of tax impacts

 

267

 

267

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(3,155

)

 

 

 

 

(3,155

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

575

 

 

 

(499

)

1,074

 

 

 

 

 

Balance at June 30, 2014

 

$

17,846

 

$

4,650

 

$

33,836

 

$

(17,466

)

$

(3,666

)

$

492

 

 

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Table of Contents

 

Three months ended June 30, 2013

 

 

 

 

 

3M Company Shareholders

 

 

 

(Millions)

 

Total

 

Common
Stock and
Additional
Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehen-
sive Income
(Loss)

 

Non-
controlling
Interest

 

Balance at March 31, 2013

 

$

18,528

 

$

4,188

 

$

31,073

 

$

(12,178

)

$

(5,001

)

$

446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,213

 

 

 

1,197

 

 

 

 

 

16

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(279

)

 

 

 

 

 

 

(260

)

(19

)

Defined benefit pension and post-retirement plans adjustment

 

91

 

 

 

 

 

 

 

91

 

 

Debt and equity securities - unrealized gain (loss)

 

(4

)

 

 

 

 

 

 

(4

)

 

Cash flow hedging instruments - unrealized gain (loss)

 

8

 

 

 

 

 

 

 

8

 

 

Total other comprehensive income (loss), net of tax

 

(184

)

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

(436

)

 

 

(436

)

 

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

64

 

64

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(1,232

)

 

 

 

 

(1,232

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

366

 

 

 

(118

)

484

 

 

 

 

 

Balance at June 30, 2013

 

$

18,319

 

$

4,252

 

$

31,716

 

$

(12,926

)

$

(5,166

)

$

443

 

 

Six months ended June 30, 2013

 

 

 

 

 

3M Company Shareholders

 

 

 

(Millions)

 

Total

 

Common
Stock and
Additional
Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehen-
sive Income
(Loss)

 

Non-
controlling
Interest

 

Balance at December 31, 2012

 

$

18,040

 

$

4,053

 

$

30,679

 

$

(12,407

)

$

(4,750

)

$

465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

2,360

 

 

 

2,326

 

 

 

 

 

34

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(677

)

 

 

 

 

 

 

(620

)

(57

)

Defined benefit pension and post-retirement plans adjustment

 

176

 

 

 

 

 

 

 

176

 

 

Debt and equity securities - unrealized gain (loss)

 

(4

)

 

 

 

 

 

 

(4

)

 

Cash flow hedging instruments - unrealized gain (loss)

 

32

 

 

 

 

 

 

 

32

 

 

Total other comprehensive income (loss), net of tax

 

(473

)

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

(876

)

 

 

(876

)

 

 

 

 

 

 

Sale of subsidiary shares

 

8

 

7

 

 

 

 

 

 

 

1

 

Stock-based compensation, net of tax impacts

 

192

 

192

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(2,039

)

 

 

 

 

(2,039

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

1,107

 

 

 

(413

)

1,520

 

 

 

 

 

Balance at June 30, 2013

 

$

18,319

 

$

4,252

 

$

31,716

 

$

(12,926

)

$

(5,166

)

$

443

 

 

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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Table of Contents

 

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

 

Three months ended June 30, 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
Comprehen-
sive Income
(Loss)

 

Balance at March 31, 2014, net of tax

 

$

(180

)

$

(3,654

)

$

(1

)

$

(6

)

$

(3,841

)

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

128

 

 

1

 

(21

)

108

 

Amounts reclassified out

 

 

92

 

 

5

 

97

 

Total other comprehensive income (loss), before tax

 

128

 

92

 

1

 

(16

)

205

 

Tax effect

 

(5

)

(32

)

 

7

 

(30

)

Total other comprehensive income (loss), net of tax

 

123

 

60

 

1

 

(9

)

175

 

Balance at June 30, 2014, net of tax

 

$

(57

)

$

(3,594

)

$

 

$

(15

)

$

(3,666

)

 

Six months ended June 30, 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
Comprehen-
sive 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

 

134

 

 

3

 

(12

)

125

 

Amounts reclassified out

 

 

183

 

 

(1

)

182

 

Total other comprehensive income (loss), before tax

 

134

 

183

 

3

 

(13

)

307

 

Tax effect

 

(3

)

(62

)

(1

)

6

 

(60

)

Total other comprehensive income (loss), net of tax

 

131

 

121

 

2

 

(7

)

247

 

Balance at June 30, 2014, net of tax

 

$

(57

)

$

(3,594

)

$

 

$

(15

)

$

(3,666

)

 

15



Table of Contents

 

Three months ended June 30, 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
Comprehen-
sive Income
(Loss)

 

Balance at March 31, 2013, net of tax

 

$

(130

)

$

(4,870

)

$

(2

)

$

1

 

$

(5,001

)

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

(260

)

 

(6

)

(79

)

(345

)

Amounts reclassified out

 

 

144

 

 

91

 

235

 

Total other comprehensive income (loss), before tax

 

(260

)

144

 

(6

)

12

 

(110

)

Tax effect

 

 

(53

)

2

 

(4

)

(55

)

Total other comprehensive income (loss), net of tax

 

(260

)

91

 

(4

)

8

 

(165

)

Balance at June 30, 2013, net of tax

 

$

(390

)

$

(4,779

)

$

(6

)

$

9

 

$

(5,166

)

 

Six months ended June 30, 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
Comprehen-
sive 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

 

(584

)

 

(6

)

(114

)

(704

)

Amounts reclassified out

 

 

287

 

 

164

 

451

 

Total other comprehensive income (loss), before tax

 

(584

)

287

 

(6

)

50

 

(253

)

Tax effect

 

(36

)

(111

)

2

 

(18

)

(163

)

Total other comprehensive income (loss), net of tax

 

(620

)

176

 

(4

)

32

 

(416

)

Balance at June 30, 2013, net of tax

 

$

(390

)

$

(4,779

)

$

(6

)

$

9

 

$

(5,166

)

 

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 and six months ended June 30, 2013 relative to foreign currency forward contracts in the table above and below were impacted by the immaterial revisions discussed in Note 9.

 

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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

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

Comprehensive Income Components

 

2014

 

2013

 

2014

 

2013

 

Location on Income Statement

 

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

 

 

 

 

 

 

 

 

 

 

 

Transition asset

 

$

 

$

 

$

 

$

1

 

See Note 8

 

Prior service benefit

 

15

 

20

 

30

 

40

 

See Note 8

 

Net actuarial loss

 

(107

)

(164

)

(213

)

(328

)

See Note 8

 

Total before tax

 

(92

)

(144

)

(183

)

(287

)

 

 

Tax effect

 

32

 

53

 

62

 

111

 

Provision for income taxes

 

Net of tax

 

$

(60

)

$

(91

)

$

(121

)

$

(176

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(6

)

$

(3

)

$

(2

)

$

(9

)

Cost of sales

 

Foreign currency forward contracts

 

 

(89

)

 

(155

)

Interest expense

 

Commodity price swap contracts

 

1

 

1

 

3

 

 

Cost of sales

 

Total before tax

 

(5

)

(91

)

1

 

(164

)

 

 

Tax effect

 

2

 

32

 

 

59

 

Provision for income taxes

 

Net of tax

 

$

(3

)

$

(59

)

$

1

 

$

(105

)

 

 

Total reclassifications for the period, net of tax

 

$

(63

)

$

(150

)

$

(120

)

$

(281

)

 

 

 

Purchase and Sale of Subsidiary Shares

 

In April 2014, 3M purchased the remaining noncontrolling interest in a consolidated 3M subsidiary for an immaterial amount, which was classified as other financing activity in the consolidated statement of cash flows.

 

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 sales resulted in an increase in 3M Company shareholder’s equity of $7 million and an increase in noncontrolling interest of $1 million.

 

In July 2014, 3M announced that it will acquire (via Sumitomo 3M Limited) Sumitomo Electric Industries, Ltd.’s 25 percent interest in 3M’s consolidated Sumitomo 3M Limited subsidiary for 90 billion Japanese Yen (approximately $885 million at announcement date exchange rates). Upon completion of the transaction, 3M will own 100 percent of Sumitomo 3M Limited. The transaction is expected to close on September 1, 2014 and will be reflected as a financing activity in the consolidated statement of cash flows.

 

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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 June 30, 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 June 30, 2014 and December 31, 2013, respectively, are $202 million and $262 million.

 

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 $2 million of expense and $1 million of expense for the three months ended June 30, 2014 and June 30, 2013, respectively, and approximately $13 million in benefit and $5 million of expense for the six months ended June 30, 2014 and June 30, 2013, respectively. At June 30, 2014 and December 31, 2013, accrued interest and penalties in the consolidated balance sheet on a gross basis were $45 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 second quarter of 2014 was 29.5 percent, compared to 27.4 percent in the second quarter of 2013, an increase of 2.1 percentage points. Factors that increased the Company’s effective tax rate on a combined basis by 2.1 percentage points year-on-year included the 2013 restoration of tax basis on certain assets for which depreciation was previously limited, international taxes as a result of changes to the geographic mix of income before taxes, lapse of

 

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the U.S. research and development credit as of January 1, 2014, adjustments to the Company’s income tax reserves, and other items.

 

The effective tax rate for the first six months of 2014 was 28.5 percent, compared to 28.2 percent in the first six months of 2013, an increase of 0.3 percentage points. Factors which increased the Company’s effective tax rate by 1.1 percentage points for the first six months of 2014 when compared to the same period for 2013 included the lapse of the U.S. research and development credit as of January 1, 2014, and international taxes as a result of changes to the geographic mix of income before taxes. This increase was partially offset by a 0.8 percentage point decrease as the result of adjustments to the Company’s reserves and the restoration of tax basis on certain assets for which depreciation was previously limited.

 

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 exists. As of June 30, 2014 and December 31, 2013, the Company had valuation allowances of $28 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).

 

 

 

June 30,

 

December 31,

 

(Millions)

 

2014

 

2013

 

 

 

 

 

 

 

U.S. government agency securities

 

$

78

 

$

103

 

Foreign government agency securities

 

70

 

30

 

Corporate debt securities

 

182

 

143

 

Commercial paper

 

 

60

 

Certificates of deposit/time deposits

 

38

 

20

 

U.S. municipal securities

 

 

2

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

297

 

287

 

Credit card related

 

137

 

52

 

Equipment lease related

 

63

 

30

 

Other

 

19

 

29

 

Asset-backed securities total

 

516

 

398

 

 

 

 

 

 

 

Current marketable securities

 

$

884

 

$

756

 

 

 

 

 

 

 

U.S. government agency securities

 

$

70

 

$

131

 

Foreign government agency securities

 

50

 

95

 

Corporate debt securities

 

614

 

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

 

240

 

298

 

Credit card related

 

85

 

128

 

Equipment lease related

 

25

 

37

 

Other

 

49

 

46

 

Asset-backed securities total

 

399

 

509

 

 

 

 

 

 

 

Non-current marketable securities