10-Q 1 a15-7844_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, 2015

 

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 March 31, 2015

Common Stock, $0.01 par value per share

 

634,340,975 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, 2015

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

10

 

Note 3.                Goodwill and Intangible Assets

11

 

Note 4.                Supplemental Equity and Comprehensive Income Information

13

 

Note 5.                Income Taxes

16

 

Note 6.                Marketable Securities

17

 

Note 7.                Pension and Postretirement Benefit Plans

19

 

Note 8.                Derivatives

20

 

Note 9.                Fair Value Measurements

28

 

Note 10.          Commitments and Contingencies

32

 

Note 11.          Stock-Based Compensation

39

 

Note 12.          Business Segments

43

 

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, 2015

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)

 

2015

 

2014

 

Net sales

 

$

7,578

 

$

7,831

 

Operating expenses

 

 

 

 

 

Cost of sales

 

3,821

 

4,031

 

Selling, general and administrative expenses

 

1,564

 

1,632

 

Research, development and related expenses

 

463

 

452

 

Total operating expenses

 

5,848

 

6,115

 

Operating income

 

1,730

 

1,716

 

 

 

 

 

 

 

Interest expense and income

 

 

 

 

 

Interest expense

 

31

 

37

 

Interest income

 

(4

)

(9

)

Total interest expense — net

 

27

 

28

 

 

 

 

 

 

 

Income before income taxes

 

1,703

 

1,688

 

Provision for income taxes

 

502

 

463

 

Net income including noncontrolling interest

 

$

1,201

 

$

1,225

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

2

 

18

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,199

 

$

1,207

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — basic

 

636.2

 

661.5

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.88

 

$

1.83

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — diluted

 

649.2

 

674.5

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

1.85

 

$

1.79

 

 

 

 

 

 

 

Cash dividends paid per 3M common share

 

$

1.025

 

$

0.855

 

 

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

 

 

 

March 31,

 

(Millions)

 

2015

 

2014

 

Net income including noncontrolling interest

 

$

1,201

 

$

1,225

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Cumulative translation adjustment

 

(193

)

20

 

Defined benefit pension and postretirement plans adjustment

 

91

 

61

 

Debt and equity securities, unrealized gain (loss)

 

 

1

 

Cash flow hedging instruments, unrealized gain (loss)

 

70

 

2

 

Total other comprehensive income (loss), net of tax

 

(32

)

84

 

Comprehensive income (loss) including noncontrolling interest

 

1,169

 

1,309

 

Comprehensive (income) loss attributable to noncontrolling interest

 

(2

)

(30

)

Comprehensive income (loss) attributable to 3M

 

$

1,167

 

$

1,279

 

 

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

 

4



Table of Contents

 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

 

 

March 31,

 

December 31,

 

(Dollars in millions, except per share amount)

 

2015

 

2014

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,791

 

$

1,897

 

Marketable securities — current

 

1,018

 

626

 

Accounts receivable — net

 

4,408

 

4,238

 

Inventories

 

 

 

 

 

Finished goods

 

1,713

 

1,723

 

Work in process

 

1,116

 

1,081

 

Raw materials and supplies

 

875

 

902

 

Total inventories

 

3,704

 

3,706

 

Other current assets

 

1,597

 

1,298

 

Total current assets

 

12,518

 

11,765

 

 

 

 

 

 

 

Marketable securities — non-current

 

13

 

828

 

Investments

 

102

 

102

 

Property, plant and equipment

 

22,473

 

22,841

 

Less: Accumulated depreciation

 

(14,187

)

(14,352

)

Property, plant and equipment — net

 

8,286

 

8,489

 

Goodwill

 

6,934

 

7,050

 

Intangible assets — net

 

1,396

 

1,435

 

Prepaid pension benefits

 

56

 

46

 

Other assets

 

1,338

 

1,554

 

Total assets

 

$

30,643

 

$

31,269

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

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

 

$

132

 

$

106

 

Accounts payable

 

1,801

 

1,807

 

Accrued payroll

 

446

 

732

 

Accrued income taxes

 

464

 

435

 

Other current liabilities

 

2,239

 

2,918

 

Total current liabilities

 

5,082

 

5,998

 

Long-term debt

 

6,459

 

6,731

 

Pension and postretirement benefits

 

3,764

 

3,843

 

Other liabilities

 

1,386

 

1,555

 

Total liabilities

 

$

16,691

 

$

18,127

 

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

 

4,607

 

4,379

 

Retained earnings

 

35,080

 

34,317

 

Treasury stock, at cost: 309,692,081 shares at March 31, 2015; 308,898,462 shares at December 31, 2014

 

(19,458

)

(19,307

)

Accumulated other comprehensive income (loss)

 

(6,321

)

(6,289

)

Total 3M Company shareholders’ equity

 

13,917

 

13,109

 

Noncontrolling interest

 

35

 

33

 

Total equity

 

$

13,952

 

$

13,142

 

Total liabilities and equity

 

$

30,643

 

$

31,269

 

 

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

 

5



Table of Contents

 

3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

Three months ended

 

 

 

March 31,

 

(Millions)

 

2015

 

2014

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income including noncontrolling interest

 

$

1,201

 

$

1,225

 

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

 

 

 

 

 

Depreciation and amortization

 

339

 

350

 

Company pension and postretirement contributions

 

(91

)

(42

)

Company pension and postretirement expense

 

134

 

98

 

Stock-based compensation expense

 

138

 

122

 

Deferred income taxes

 

44

 

(83

)

Excess tax benefits from stock-based compensation

 

(101

)

(51

)

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

(296

)

(347

)

Inventories

 

(131

)

(131

)

Accounts payable

 

56

 

84

 

Accrued income taxes (current and long-term)

 

100

 

135

 

Other — net

 

(313

)

(268

)

Net cash provided by operating activities

 

1,080

 

1,092

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

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

 

(291

)

(293

)

Proceeds from sale of PP&E and other assets

 

4

 

3

 

Acquisitions, net of cash acquired

 

(150

)

 

Purchases of marketable securities and investments

 

(191

)

(601

)

Proceeds from maturities and sale of marketable securities and investments

 

605

 

599

 

Proceeds from sale of businesses

 

19

 

 

Other investing

 

4

 

5

 

Net cash used in investing activities

 

 

(287

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Change in short-term debt — net

 

(4

)

466

 

Repayment of debt (maturities greater than 90 days)

 

 

(64

)

Proceeds from debt (maturities greater than 90 days)

 

 

172

 

Purchases of treasury stock

 

(886

)

(1,708

)

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

 

309

 

267

 

Dividends paid to shareholders

 

(652

)

(566

)

Excess tax benefits from stock-based compensation

 

101

 

51

 

Other — net

 

(22

)

(17

)

Net cash used in financing activities

 

(1,154

)

(1,399

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(32

)

(33

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(106

)

(627

)

Cash and cash equivalents at beginning of year

 

1,897

 

2,581

 

Cash and cash equivalents at end of period

 

$

1,791

 

$

1,954

 

 

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

 

6



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. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its 2014 Annual Report on Form 10-K.

 

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 2014. 3M has determined that the applicable 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. In January 2014, the Venezuelan government announced that a new agency, the National Center for Foreign Commerce (CENCOEX), had assumed the role 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. In late March 2014, the Venezuelan government launched a third foreign exchange mechanism, SICAD2, which relied 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. In February 2015, the Venezuelan government introduced another foreign currency exchange platform called the Marginal System of Foreign Currency (SIMADI), resulting in the elimination and replacement of the SICAD2 rate. The SIMADI rate was described as being derived from daily private bidders and buyers exchanging offers through authorized agents and approved and published by the Venezuelan Central Bank.

 

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 official CENCOEX rate into March 2014, the SICAD1 rate beginning in late March 2014, the SICAD2 rate beginning in June 2014, and the SIMADI rate beginning in February 2015. 3M’s uses of these applicable exchange rates were 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 remeasurement impacts as a result of the changes in use of these exchange rates did not have material impacts on 3M’s consolidated results of operations or financial condition.

 

7



Table of Contents

 

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 March 31, 2015, the Company had a balance of net monetary assets denominated in VEF of less than 100 million VEF and the CENCOEX, SICAD (formerly SICAD1), and SIMADI exchange rates were approximately 6 VEF, 12 VEF, and 190 VEF per U.S. dollar, respectively.

 

A need to deconsolidate the Company’s Venezuelan subsidiary’s operations may result from a lack of exchangeability of VEF-denominated cash coupled with an acute degradation in the ability to make key operational decisions due to government regulations in Venezuela. 3M monitors factors such as its ability to access various exchange mechanisms; the impact of government regulations on the Company’s ability to manage its Venezuelan subsidiary’s capital structure, purchasing, product pricing, and labor relations; and the current political and economic situation within Venezuela. Based upon such factors as of March 31, 2015, the Company continues to consolidate its Venezuelan subsidiary. As of March 31, 2015, the balance of intercompany receivables due from this subsidiary is less than $20 million and its equity balance is not significant.

 

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 (3.5 million average options for the three months ended March 31, 2015 and 2.3 million average options for the three months ended March 31, 2014). 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)

 

2015

 

2014

 

Numerator:

 

 

 

 

 

Net income attributable to 3M

 

$

1,199

 

$

1,207

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — basic

 

636.2

 

661.5

 

 

 

 

 

 

 

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

 

13.0

 

13.0

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — diluted

 

649.2

 

674.5

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.88

 

$

1.83

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

1.85

 

$

1.79

 

 

New Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changed the criteria for determining which disposals can be presented as discontinued operations and modified related disclosure requirements. This standard has 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 prohibited an entity from reporting a discontinued operation if it had certain continuing cash flows or involvement with the component after disposal were 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 was effective prospectively beginning January 1, 2015. This ASU was applied to the 2015 divestiture discussed in Note 2 and had no material impact on consolidated results of operations and financial condition.

 

8



Table of Contents

 

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.

 

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which changes guidance related to both the variable interest entity (VIE) and voting interest entity (VOE) consolidation models. With respect to the VIE model, the standard changes, among other things, the identification of variable interests associated with fees paid to a decision maker or service provider, the VIE characteristics for a limited partner or similar entity, and the primary beneficiary determination. With respect to the VOE model, the ASU eliminates the presumption that a general partner controls a limited partnership or similar entity unless the presumption can otherwise be overcome. Under the new guidance, a general partner would largely not consolidate a partnership or similar entity under the VOE model. For 3M, this ASU is effective January 1, 2016, with early adoption permitted. 3M does not have significant involvement with entities subject to consolidation considerations impacted by the VIE model changes or with limited partnerships potentially impacted by the VOE model changes. As a result, 3M does not expect this ASU to have a material impact on the Company’s consolidated results of operations and financial condition.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. Under this new standard, debt issuance costs reported on the consolidated balance sheet would be reflected as a direct deduction from the related debt liability rather than as an asset. For 3M, this ASU is effective January 1, 2016, with early adoption permitted. Retrospective application to prior periods is required. As this standard impacts only the classification of certain amounts within the consolidated balance sheet, 3M does not expect this ASU to have a material impact on the Company’s consolidated results of operations and financial condition.

 

In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Arrangement, which requires a customer to determine whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for fees related to the software license element in a manner consistent with how the acquisition of other acquired software licenses is accounted. If the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. An arrangement would contain a software license element if both (1) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and (2) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. For 3M, this ASU is effective January 1, 2016, with early adoption permitted. The standard provides for adoption either fully retrospectively or prospectively to arrangements entered into, or materially modified, after the effective date. The Company is currently assessing this ASU’s impact on 3M’s consolidated results of operations and financial condition.

 

9



Table of Contents

 

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 three months ended March 31, 2015, the purchase price paid for business combinations (net of cash acquired) was $150 million, which primarily related to 3M’s acquisition of Ivera Medical Corp. (discussed below).

 

In March 2015, 3M (Health Care Business) purchased all of the outstanding shares of Ivera Medical Corp., headquartered in San Diego, California. Ivera Medical Corp., with annual sales of approximately $30 million, is a manufacturer of health care products that disinfect and protect devices used for access into a patient’s bloodstream. The allocation of purchase price related to this acquisition is considered preliminary, largely with respect to intangible assets, and tax-related assets and liabilities. In addition, in the first quarter of 2015, 3M (Industrial Business) purchased the remaining interest in a former equity method investment for an immaterial amount.

 

Purchased identifiable finite-lived intangible assets related to the Ivera Medical Corp. acquisition which closed in the three months ended March 31, 2015 totaled $52 million. The associated finite-lived intangible assets acquired will be amortized on a systematic and rational basis (generally straight line) over a weighted-average life of 13 years (lives ranging from two to 16 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.

 

In February 2015, 3M announced that it had entered into a definitive agreement with Polypore International Inc., headquartered in Charlotte, North Carolina, to acquire the assets and liabilities associated with Polypore’s Separations Media business for a total purchase price of approximately $1.0 billion. Polypore’s Separations Media business is a leading provider of microporous membranes and modules for filtration in the life sciences, industrial and specialty segments with annual sales of approximately $208 million for the 2014 fiscal year ended January 3, 2015. Separately, Asahi Kasei, a leading diversified chemical manufacturer based in Tokyo, Japan, announced that it entered into a definitive merger agreement to acquire Polypore’s Energy Storage business. Both transactions are subject to regulatory approvals and customary closing conditions. In addition, both transactions are conditioned on 3M’s transaction with Polypore closing immediately prior to the closing of Asahi Kasei’s transaction with Polypore.

 

In January 2015, 3M (Electronics and Energy Business) completed the sale of its global static control business to Desco Industries Inc., based in Chino, California. 2014 sales of this business were $46 million. This transaction was not considered material.

 

Refer to Note 2 in 3M’s 2014 Annual Report on Form 10-K for more information on 3M’s acquisitions and divestitures.

 

10



Table of Contents

 

NOTE 3.  Goodwill and Intangible Assets

 

Purchased goodwill from acquisitions totaled $96 million during the first three months of 2015, 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, 2014 and March 31, 2015, follow:

 

Goodwill

 

 

 

December 31, 2014

 

Acquisition

 

Translation

 

March 31, 2015

 

(Millions)

 

Balance

 

activity

 

and other

 

Balance

 

Industrial

 

$

2,037

 

$

1

 

$

(66

)

$

1,972

 

Safety and Graphics

 

1,650

 

 

(46

)

1,604

 

Electronics and Energy

 

1,559

 

 

(35

)

1,524

 

Health Care

 

1,589

 

95

 

(58

)

1,626

 

Consumer

 

215

 

 

(7

)

208

 

Total Company

 

$

7,050

 

$

96

 

$

(212

)

$

6,934

 

 

Acquired Intangible Assets

 

For the three months ended March 31, 2015, changes in foreign currency exchange rates decreased the gross carrying amount of intangible assets, with this impact partially offset by gross intangible assets (excluding goodwill) acquired through business combinations. 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, 2015, and December 31, 2014, follow:

 

 

 

March 31,

 

December 31,

 

(Millions)

 

2015

 

2014

 

Customer related intangible assets

 

$

1,339

 

$

1,348

 

Patents

 

561

 

581

 

Other technology-based intangible assets

 

400

 

407

 

Definite-lived tradenames

 

396

 

401

 

Other amortizable intangible assets

 

224

 

221

 

Total gross carrying amount

 

$

2,920

 

$

2,958

 

 

 

 

 

 

 

Accumulated amortization — customer related

 

(599

)

(597

)

Accumulated amortization — patents

 

(457

)

(472

)

Accumulated amortization — other technology-based

 

(218

)

(215

)

Accumulated amortization — definite-lived tradenames

 

(197

)

(195

)

Accumulated amortization — other

 

(168

)

(167

)

Total accumulated amortization

 

$

(1,639

)

$

(1,646

)

 

 

 

 

 

 

Total finite-lived intangible assets — net

 

$

1,281

 

$

1,312

 

 

 

 

 

 

 

Non-amortizable intangible assets (primarily tradenames)

 

115

 

123

 

Total intangible assets — net

 

$

1,396

 

$

1,435

 

 

11



Table of Contents

 

Amortization expense for acquired intangible assets for the three months ended March 31, 2015 and 2014 follows:

 

 

 

Three months ended

 

 

 

March 31,

 

(Millions)

 

2015

 

2014

 

Amortization expense

 

$

53

 

$

57

 

 

The table below shows expected amortization expense for acquired amortizable intangible assets recorded as of March 31, 2015:

 

 

 

Remainder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

 

 

 

 

 

 

After

 

(Millions)

 

2015

 

2016

 

2017

 

2018

 

2019

 

2020

 

2020

 

Amortization expense

 

$

150

 

$

177

 

$

155

 

$

139

 

$

127

 

$

117

 

$

416

 

 

The preceding 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.

 

12



Table of Contents

 

NOTE 4.  Supplemental Equity and Comprehensive Income Information

Consolidated Statement of Changes in Equity

 

Three months ended March 31, 2015

 

 

 

 

 

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, 2014

 

$

13,142

 

$

4,388

 

$

34,317

 

$

(19,307

)

$

(6,289

)

$

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,201

 

 

 

1,199

 

 

 

 

 

2

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(193

)

 

 

 

 

 

 

(193

)

 

Defined benefit pension and post-retirement plans adjustment

 

91

 

 

 

 

 

 

 

91

 

 

Debt and equity securities - unrealized gain (loss)

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

70

 

 

 

 

 

 

 

70

 

 

Total other comprehensive income (loss), net of tax

 

(32

)

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

(3

)

 

 

(3

)

 

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

228

 

228

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(896

)

 

 

 

 

(896

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

312

 

 

 

(433

)

745

 

 

 

 

 

Balance at March 31, 2015

 

$

13,952

 

$

4,616

 

$

35,080

 

$

(19,458

)

$

(6,321

)

$

35

 

 

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

 

 

In December 2014, 3M’s Board of Directors declared a first-quarter 2015 dividend of $1.025 per share (paid in March 2015). 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 stockholder equity and increased other current liabilities as of both December 31, 2014 and December 31, 2013, by approximately $0.6 billion.

 

13



Table of Contents

 

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

 

Three months ended March 31, 2015

 

(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, 2014, net of tax

 

$

(1,095

)

$

(5,293

)

$

 

$

99

 

$

(6,289

)

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

(44

)

24

 

 

136

 

116

 

Amounts reclassified out

 

 

124

 

 

(27

)

97

 

Total other comprehensive income (loss), before tax

 

(44

)

148

 

 

109

 

213

 

Tax effect

 

(149

)

(57

)

 

(39

)

(245

)

Total other comprehensive income (loss), net of tax

 

(193

)

91

 

 

70

 

(32

)

Balance at March 31, 2015, net of tax

 

$

(1,288

)

$

(5,202

)

$

 

$

169

 

$

(6,321

)

 

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

)

 

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.

 

14



Table of Contents

 

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, 2015

 

Three months ended
March 31, 2014

 

Location on Income Statement

 

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

 

 

 

 

 

 

 

Transition asset

 

$

 

$

 

See Note 7

 

Prior service benefit

 

18

 

15

 

See Note 7

 

Net actuarial loss

 

(159

)

(106

)

See Note 7

 

Curtailments/Settlements

 

17

 

 

See Note 7

 

Total before tax

 

(124

)

(91

)

 

 

Tax effect

 

46

 

30

 

Provision for income taxes

 

Net of tax

 

$

(78

)

$

(61

)

 

 

 

 

 

 

 

 

 

 

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

 

$

30

 

$

4

 

Cost of sales

 

Commodity price swap contracts

 

(2

)

2

 

Cost of sales

 

Interest rate swap contracts

 

(1

)

 

Interest expense

 

Total before tax

 

27

 

6

 

 

 

Tax effect

 

(10

)

(2

)

Provision for income taxes

 

Net of tax

 

$

17

 

$

4

 

 

 

Total reclassifications for the period, net of tax

 

$

(61

)

$

(57

)

 

 

 

15



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 has completed its field examination of the Company’s U.S. federal income tax returns for the years 2005 through 2013. The Company protested certain IRS positions within these tax years and entered into the administrative appeals process with the IRS. 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.

 

Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2014 and 2015. It is anticipated that the IRS will complete its examination of the Company for 2014 by the end of the first quarter of 2016 and for 2015 by the end of the first quarter of 2017. As of March 31, 2015, the IRS has not proposed any significant adjustments to the Company’s tax positions for which the Company is not adequately reserved.

 

Payments relating to other proposed assessments arising from the 2005 through 2015 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 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 and closure of statutes. Currently, the Company is not estimating a significant increase or decrease in unrecognized tax benefits as of March 31, 2015, during the next 12 months. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2015 and December 31, 2014 are $268 million and $265 million, respectively.

 

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 $15 million of benefit for the three months ended March 31, 2015 and March 31, 2014, respectively. At March 31, 2015, and December 31, 2014, accrued interest and penalties in the consolidated balance sheet on a gross basis were $46 million and $44 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 2015 was 29.5 percent, compared to 27.4 percent in the first quarter of 2014, an increase of 2.1 percentage points. Primary factors that increased the Company’s effective tax rate on a combined basis by 2.1 percentage points year-on-year included the 2014 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 2015 when compared to the same period in 2014, and international taxes, including changes in foreign currency rates and changes to the geographic mix of income before taxes.

 

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 both March 31, 2015 and December 31, 2014, the Company had valuation allowances of $22 million on its deferred tax assets.

 

16



Table of Contents

 

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)

 

2015

 

2014

 

 

 

 

 

 

 

U.S. government agency securities

 

$

67

 

$

67

 

Foreign government agency securities

 

60

 

75

 

Corporate debt securities

 

551

 

241

 

Commercial paper

 

27

 

 

Certificates of deposit/time deposits

 

24

 

41

 

U.S. municipal securities

 

3

 

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

167

 

122

 

Credit card related

 

66

 

59

 

Equipment lease related

 

7

 

21

 

Other

 

46

 

 

Asset-backed securities total

 

286

 

202

 

 

 

 

 

 

 

Current marketable securities

 

$

1,018

 

$

626

 

 

 

 

 

 

 

U.S. government agency securities

 

$

1

 

$

41

 

Foreign government agency securities

 

 

20

 

Corporate debt securities

 

 

378

 

U.S. treasury securities

 

 

38

 

U.S. municipal securities

 

12

 

15

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

 

160

 

Credit card related

 

 

103

 

Equipment lease related

 

 

27

 

Other

 

 

46

 

Asset-backed securities total

 

 

336

 

 

 

 

 

 

 

Non-current marketable securities

 

$

13

 

$

828

 

 

 

 

 

 

 

Total marketable securities

 

$

1,031

 

$

1,454

 

 

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. The classification as of March 31, 2015, was impacted by the February 2015 announcement that 3M has entered into a definitive agreement with Polypore International Inc. to acquire Polypore’s Separations Media business (discussed in Note 2).

 

At March 31, 2015, gross unrealized losses were immaterial, while gross unrealized gains totaled approximately $1 million (pre-tax). At December 31, 2014, gross unrealized losses totaled approximately $1 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 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

 

17



Table of Contents

 

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, 2015 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, 2015

 

 

 

 

 

Due in one year or less

 

$

357

 

Due after one year through five years

 

654

 

Due after five years through ten years

 

5

 

Due after ten years

 

15

 

 

 

 

 

Total marketable securities

 

$

1,031

 

 

3M has a diversified marketable securities portfolio of $1.031 billion as of March 31, 2015. Within this portfolio, current and long-term asset-backed securities (estimated fair value of $286 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 or DBRS. Asset-backed securities must be rated by at least two of the aforementioned rating agencies, one of which must be Moody’s Investors Service or Standard & Poor’s. At March 31, 2015, all asset-backed security investments were in compliance with this policy. Approximately 92.2 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. Interest rate risk and credit risk related to the underlying collateral may impact the value of investments in asset-backed securities, while factors such as general conditions in the overall credit market and the nature of the underlying collateral may affect the liquidity of investments in asset-backed securities. 3M does not currently expect risk related to its holding in asset-backed securities to materially impact its financial condition or liquidity.

 

18



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, 2015 and 2014 follow:

 

Benefit Plan Information

 

 

 

Three months ended March 31,

 

 

 

Qualified and Non-qualified

 

 

 

 

 

 

 

Pension Benefits

 

Postretirement

 

 

 

United States

 

International

 

Benefits

 

(Millions)

 

2015

 

2014

 

2015

 

2014

 

2015

 

2014

 

Net periodic benefit cost (benefit)

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

73

 

$

60

 

$

42

 

$

36

 

$

21

 

$

16

 

Interest cost

 

164

 

169

 

55

 

64

 

25

 

24

 

Expected return on plan assets

 

(267

)

(261

)

(81

)

(79

)

(22

)

(22

)

Amortization of transition (asset) obligation

 

 

 

 

 

 

 

Amortization of prior service cost (benefit)

 

(6

)

1

 

(4

)

(4

)

(8

)

(12

)

Amortization of net actuarial (gain) loss

 

102

 

61

 

38

 

31

 

19

 

14

 

Net periodic benefit cost (benefit)

 

$

66

 

$

30

 

$

50

 

$

48

 

$

35

 

$

20

 

Settlements, curtailments, special termination benefits and other

 

 

 

(17

)

 

 

 

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

 

$

66

 

$

30

 

$

33

 

$

48

 

$

35

 

$

20

 

 

For the three months ended March 31, 2015, contributions totaling $90 million were made to the Company’s U.S. and international pension plans and $1 million to its postretirement plans. For total year 2015, the Company expects to contribute approximately $200 million of cash to its global defined benefit pension and postretirement plans. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2015. Future contributions will 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 probable recovery of a portion of the decrease in original asset value. In the first quarter of 2014, 3M and certain 3M benefit plans filed a lawsuit in the U.S. District Court for the District of Minnesota against five insurers seeking insurance coverage for the WG Trading Company claim. As of the 2014 measurement date, these holdings represented less than one half of one percent of 3M’s fair value of total plan assets for the 3M pension plan. 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 March 2015, 3M Japan modified the Japan Limited Defined Benefit Corporate Pension Plan (DBCPP). Beginning July 1, 2015, eligible employees will receive a company provided contribution match of 6.12% of their eligible salary to their defined contribution plan. Employees will no longer earn additional service towards their defined benefit pension plans after July 1, 2015, except for eligible salaries above the statutory defined contribution limits. As a result of this plan modification, the Company re-measured the DBCPP, which resulted in a $17 million pre-tax curtailment gain for the period ended March 31, 2015.

 

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 2014 Annual Report on Form 10-K.

 

19



Table of Contents

 

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 2014 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. 3M may dedesignate 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, 2015 and 2014. Beginning in the second quarter of 2014 3M began extending the maximum length of time over which it hedges its exposure to the variability in future cash flows of the forecasted transactions from a previous term of 12 months to a longer term of 24 months, with certain currencies being extended further to 36 months starting in the first quarter of 2015. The dollar equivalent gross notional amount of the Company’s foreign exchange forward and option contracts designated as cash flow hedges at March 31, 2015 was approximately $2.8 billion.

 

Cash Flow Hedging - Commodity Price Management: The Company manages commodity price risks through negotiated supply contracts, price protection agreements and forward contracts. 3M discontinued the use of commodity price swaps as cash flow hedges of forecasted commodity transactions in the first quarter of 2015. The Company used commodity price swaps as cash flow hedges of forecasted commodity transactions to manage price volatility. The related mark-to-market gain or loss on qualifying hedges was included in other comprehensive income to the extent effective, and reclassified into cost of sales in the period during which the hedged transaction affected earnings.

 

Cash Flow Hedging — Interest Rate Contracts: 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 will be amortized over the five-year life of the note.

 

In the third and fourth quarters of 2014, the Company entered into forward starting interest rate swaps with notional amounts totaling 500 million Euros as a hedge against interest rate volatility associated with the forecasted issuance of fixed rate debt. Upon issuance in November 2014 of 750 million Euros aggregate principal amount of twelve-year fixed rate notes, 3M terminated these interest rate swaps. The termination resulted in a $8 million pre-tax ($5 million after-tax) loss within accumulated other comprehensive income that will be amortized over the twelve-year life of the notes.

 

20



Table of Contents

 

The amortization of losses referenced in the two preceding paragraphs 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, 2015, the Company had a balance of $169 million (as shown in Note 4) associated with the after-tax net unrealized gain associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This includes a remaining balance of $6 million (loss) related to the forward starting interest rate swaps (discussed in the preceding paragraphs), which will be amortized over the respective lives of the notes. Based on exchange rates as of March 31, 2015, 3M expects to reclassify approximately $116 million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings over the next 12 months, of which 3M expects to reclassify approximately $91 million over the remainder of 2015. 3M expects to reclassify approximately $70 million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings in 2016. This impact will be 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.

 

Three months ended March 31, 2015

 

(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

 

$

136

 

Cost of sales

 

$

30

 

Cost of sales

 

$

 

Commodity price swap contracts

 

 

Cost of sales

 

(2

)

Cost of sales

 

 

Interest rate swap contracts

 

 

Interest expense

 

(1

)

Interest expense

 

 

Total

 

$

136

 

 

 

$

27

 

 

 

$

 

 

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

 

 

 

$

 

 

21



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, 2015 was $1 billion.

 

At March 31, 2015, 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, was 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 was not part of gains on hedged items recognized in income in the tables below. The remaining interest rate swap of 250 million Euros (notional amount) matured in July 2014.

 

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.

 

In June 2014, 3M issued a five-year 1.625% fixed rate medium-term note for a face amount of $625 million. Upon debt issuance, 3M completed a fixed-to-floating interest rate swap on a notional amount of $600 million as a fair value hedge of a portion of the fixed interest rate medium-term note 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, 2015

 

 

 

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

 

$

6

 

Interest expense

 

$

(6

)

Total

 

 

 

$

6

 

 

 

$

(6

)

 

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

)

 

Net Investment Hedges:

 

The Company may use non-derivative (foreign currency denominated debt) and derivative (foreign exchange forward contracts) instruments to hedge portions of the Company’s investment in foreign subsidiaries and manage foreign exchange risk. The extent of 3M’s use of forward contracts may depend on the volume of foreign currency denominated debt already designated in net investment hedges. For instruments that are designated and qualify as hedges of net investments in foreign operations and 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. To the extent foreign currency denominated debt is not

 

22



Table of Contents

 

designated in or is dedesignated from a net investment hedge relationship, changes in value of that portion of foreign currency denominated debt due to exchange rate changes are recorded in earnings through their maturity date.

 

3M’s use of foreign exchange forward contracts designated in hedges of the Company’s net investment in European subsidiaries can vary by time period depending on when foreign currency denominated debt balances designated in such relationships are dedesignated, matured, or are newly issued and designated. Additionally, variation can occur in connection with the extent of the Company’s desired exchange risk coverage.

 

3M also began using foreign exchange forward contracts designated in hedges of the Company’s net investment in Korean subsidiaries during the first quarter of 2015.

 

At March 31, 2015, the total notional amount of foreign exchange forward contracts designated in net investment hedges was 2.45 billion Euros and approximately 275 billion South Korean Won along with a principal amount of long-term debt instruments designated in net investment hedges totaling 1.85 billion Euros (as discussed in Note 9 in 3M’s 2014 Annual Report on Form 10-K, specifically items C, D1, D2, and H). The maturity dates of these derivative and nonderivative instruments designated in net investment hedges range from 2015 to 2026.

 

The Company revised amounts previously presented in the tables below for the pretax gain (loss) recognized as cumulative translation within other comprehensive income on effective portion of instrument (“Gain Recognized as CTA”) for three months March 31, 2014 relative to foreign currency denominated debt and in total. These immaterial corrections increased the previously presented amounts of the Gain recognized as CTA in the disclosure tables below by $18 million for three months March 31, 2014. The revisions had no impact on the Company’s consolidated results of operations, financial condition, or cash flows.

 

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, 2015

 

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

 

$

240

 

N/A

 

$

 

Foreign currency forward contracts

 

157

 

Cost of Sales

 

 

Total

 

$

397

 

 

 

$

 

 

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

 

 

 

$

 

 

23



Table of Contents

 

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 Cash Flow Hedges section above). In addition, 3M enters into foreign currency forward contracts to offset, in part, the impacts of certain intercompany activities (primarily associated with intercompany licensing arrangements) and enters into commodity price swaps to offset, in part, fluctuations in costs associated with the use of certain commodities and precious metals. 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 $7.1 billion as of March 31, 2015. 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, 2015

 

Derivatives Not Designated as Hedging Instruments

 

Gain (Loss) on Derivative Recognized in Income

 

(Millions)

 

Location

 

Amount

 

Foreign currency forward/option contracts

 

Cost of sales

 

$

4

 

Foreign currency forward contracts

 

Interest expense

 

89

 

Commodity price swap contracts

 

Cost of sales

 

(4

)

Total

 

 

 

$

89

 

 

 

 

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

 

 

24


 

 


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, 2015

 

(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

 

$

310

 

Other current liabilities

 

$

6

 

Foreign currency forward/option contracts

 

Other assets

 

100

 

Other liabilities

 

 

Interest rate swap contracts

 

Other assets

 

31

 

Other liabilities

 

 

Total derivatives designated as hedging instruments

 

 

 

$

441

 

 

 

$

6

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

Other current assets

 

$

118

 

Other current liabilities

 

$

62

 

Foreign currency forward/option contracts

 

Other assets

 

1

 

Other liabilities

 

1

 

Commodity price swap contracts

 

Other current assets

 

1

 

Other current liabilities

 

4

 

Total derivatives not designated as hedging instruments

 

 

 

$

120

 

 

 

$

67

 

 

 

 

 

 

 

 

 

 

 

Total derivative instruments

 

 

 

$

561

 

 

 

$

73

 

 

December 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

 

$

116

 

Other current liabilities

 

$

2

 

Foreign currency forward/option contracts

 

Other assets

 

47

 

Other liabilities

 

1

 

Commodity price swap contracts

 

Other current assets

 

 

Other current liabilities

 

4

 

Interest rate swap contracts

 

Other assets

 

27

 

Other liabilities

 

3

 

Total derivatives designated as hedging instruments

 

 

 

$

190

 

 

 

$

10

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

Other current assets

 

$

66

 

Other current liabilities

 

$

33

 

Total derivatives not designated as hedging instruments

 

 

 

$

66

 

 

 

$

33

 

 

 

 

 

 

 

 

 

 

 

Total derivative instruments

 

 

 

$

256

 

 

 

$

43

 

 

25



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, 2015, 3M has International Swaps and Derivatives Association (ISDA) agreements with 16 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 15 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 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, 2015

 

 

 

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

 

$

561

 

$

38

 

$

 

$

523

 

Derivatives not subject to master netting agreements

 

 

 

 

 

 

 

Total

 

$

561

 

 

 

 

 

$