10-Q 1 a15-12072_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, 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 June 30, 2015

Common Stock, $0.01 par value per share

 

624,745,409 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, 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

11

 

Note 3.

Goodwill and Intangible Assets

12

 

Note 4.

Supplemental Equity and Comprehensive Income Information

14

 

Note 5.

Income Taxes

19

 

Note 6.

Marketable Securities

20

 

Note 7.

Long-Term Debt and Short-Term Borrowings

22

 

Note 8.

Pension and Postretirement Benefit Plans

23

 

Note 9.

Derivatives

25

 

Note 10.

Fair Value Measurements

35

 

Note 11.

Commitments and Contingencies

39

 

Note 12.

Stock-Based Compensation

46

 

Note 13.

Business Segments

50

 

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

56

 

Performance by Business Segment

60

 

Financial Condition and Liquidity

66

 

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, 2015

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)

 

2015

 

2014

 

2015

 

2014

 

Net sales

 

$

7,686

 

$

8,134

 

$

15,264

 

$

15,965

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

3,858

 

4,184

 

7,679

 

8,215

 

Selling, general and administrative expenses

 

1,550

 

1,646

 

3,114

 

3,278

 

Research, development and related expenses

 

438

 

448

 

901

 

900

 

Total operating expenses

 

5,846

 

6,278

 

11,694

 

12,393

 

Operating income

 

1,840

 

1,856

 

3,570

 

3,572

 

 

 

 

 

 

 

 

 

 

 

Interest expense and income

 

 

 

 

 

 

 

 

 

Interest expense

 

35

 

45

 

66

 

82

 

Interest income

 

(7

)

(9

)

(11

)

(18

)

Total interest expense — net

 

28

 

36

 

55

 

64

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

1,812

 

1,820

 

3,515

 

3,508

 

Provision for income taxes

 

509

 

537

 

1,011

 

1,000

 

Net income including noncontrolling interest

 

$

1,303

 

$

1,283

 

$

2,504

 

$

2,508

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

3

 

16

 

5

 

34

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,300

 

$

1,267

 

$

2,499

 

$

2,474

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — basic

 

631.3

 

652.0

 

633.8

 

656.7

 

Earnings per share attributable to 3M common shareholders — basic

 

$

2.06

 

$

1.94

 

$

3.94

 

$

3.77

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — diluted

 

643.0

 

664.6

 

646.1

 

669.6

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

2.02

 

$

1.91

 

$

3.87

 

$

3.70

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per 3M common share

 

$

1.025

 

$

0.855

 

$

2.05

 

$

1.71

 

 

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

 

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3M Company and Subsidiaries

Consolidated Statement of Comprehensive Income

(Unaudited)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(Millions)

 

2015

 

2014

 

2015

 

2014

 

Net income including noncontrolling interest

 

$

1,303

 

$

1,283

 

$

2,504

 

$

2,508

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

23

 

127

 

(170

)

147

 

Defined benefit pension and postretirement plans adjustment

 

96

 

60

 

187

 

121

 

Debt and equity securities, unrealized gain (loss)

 

 

1

 

 

2

 

Cash flow hedging instruments, unrealized gain (loss)

 

(32

)

(9

)

38

 

(7

)

Total other comprehensive income (loss), net of tax

 

87

 

179

 

55

 

263

 

Comprehensive income (loss) including noncontrolling interest

 

1,390

 

1,462

 

2,559

 

2,771

 

Comprehensive (income) loss attributable to noncontrolling interest

 

(2

)

(20

)

(4

)

(50

)

Comprehensive income (loss) attributable to 3M

 

$

1,388

 

$

1,442

 

$

2,555

 

$

2,721

 

 

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

 

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3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

 

 

June 30,

 

December 31,

 

(Dollars in millions, except per share amount)

 

2015

 

2014

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

2,983

 

$

1,897

 

Marketable securities — current

 

502

 

626

 

Accounts receivable — net

 

4,578

 

4,238

 

Inventories

 

 

 

 

 

Finished goods

 

1,765

 

1,723

 

Work in process

 

1,132

 

1,081

 

Raw materials and supplies

 

950

 

902

 

Total inventories

 

3,847

 

3,706

 

Other current assets

 

1,521

 

1,298

 

Total current assets

 

13,431

 

11,765

 

 

 

 

 

 

 

Marketable securities — non-current

 

13

 

828

 

Investments

 

106

 

102

 

Property, plant and equipment

 

22,851

 

22,841

 

Less: Accumulated depreciation

 

(14,462

)

(14,352

)

Property, plant and equipment — net

 

8,389

 

8,489

 

Goodwill

 

6,985

 

7,050

 

Intangible assets — net

 

1,355

 

1,435

 

Prepaid pension benefits

 

54

 

46

 

Other assets

 

1,055

 

1,554

 

Total assets

 

$

31,388

 

$

31,269

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

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

 

$

86

 

$

106

 

Accounts payable

 

1,714

 

1,807

 

Accrued payroll

 

582

 

732

 

Accrued income taxes

 

327

 

435

 

Other current liabilities

 

2,386

 

2,918

 

Total current liabilities

 

5,095

 

5,998

 

 

 

 

 

 

 

Long-term debt

 

8,431

 

6,731

 

Pension and postretirement benefits

 

3,683

 

3,843

 

Other liabilities

 

1,049

 

1,555

 

Total liabilities

 

$

18,258

 

$

18,127

 

 

 

 

 

 

 

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

 

4,685

 

4,379

 

Retained earnings

 

35,615

 

34,317

 

Treasury stock, at cost: 319,287,647 shares at June 30, 2015; 308,898,462 shares at December 31, 2014

 

(20,983

)

(19,307

)

Accumulated other comprehensive income (loss)

 

(6,233

)

(6,289

)

Total 3M Company shareholders’ equity

 

13,093

 

13,109

 

Noncontrolling interest

 

37

 

33

 

Total equity

 

$

13,130

 

$

13,142

 

 

 

 

 

 

 

Total liabilities and equity

 

$

31,388

 

$

31,269

 

 

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)

 

2015 

 

2014 

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income including noncontrolling interest

 

$

2,504

 

$

2,508

 

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

 

 

 

 

 

Depreciation and amortization

 

683

 

708

 

Company pension and postretirement contributions

 

(185

)

(77

)

Company pension and postretirement expense

 

283

 

196

 

Stock-based compensation expense

 

187

 

174

 

Deferred income taxes

 

295

 

(36

)

Excess tax benefits from stock-based compensation

 

(129

)

(97

)

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

(446

)

(484

)

Inventories

 

(269

)

(242

)

Accounts payable

 

(34

)

57

 

Accrued income taxes (current and long-term)

 

(421

)

16

 

Other — net

 

(50

)

9

 

Net cash provided by operating activities

 

2,418

 

2,732

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

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

 

(661

)

(634

)

Proceeds from sale of PP&E and other assets

 

14

 

38

 

Acquisitions, net of cash acquired

 

(153

)

(94

)

Purchases of marketable securities and investments

 

(341

)

(849

)

Proceeds from maturities and sale of marketable securities and investments

 

1,269

 

982

 

Proceeds from sale of businesses

 

19

 

 

Other investing

 

19

 

(22

)

Net cash provided by (used in) investing activities

 

166

 

(579

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Change in short-term debt — net

 

(39

)

62

 

Repayment of debt (maturities greater than 90 days)

 

(10

)

(119

)

Proceeds from debt (maturities greater than 90 days)

 

1,925

 

1,078

 

Purchases of treasury stock

 

(2,581

)

(3,134

)

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

 

450

 

585

 

Dividends paid to shareholders

 

(1,298

)

(1,122

)

Excess tax benefits from stock-based compensation

 

129

 

97

 

Other — net

 

(50

)

(31

)

Net cash used in financing activities

 

(1,474

)

(2,584

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(24

)

(25

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

1,086

 

(456

)

Cash and cash equivalents at beginning of year

 

1,897

 

2,581

 

Cash and cash equivalents at end of period

 

$

2,983

 

$

2,125

 

 

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

 

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3M Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1.  Significant Accounting Policies

 

Basis of Presentation

 

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

 

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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, 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, 13 VEF, and 200 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 June 30, 2015, the Company continues to consolidate its Venezuelan subsidiary. As of June 30, 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 (5.5 million average options for the three months ended June 30, 2015; 4.5 million average options for the six months ended June 30, 2015; 3.1 million average options for the three months ended June 30, 2014; and 2.7 million average options for the six months ended June 30, 2014). 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)

 

2015

 

2014

 

2015

 

2014

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,300

 

$

1,267

 

$

2,499

 

$

2,474

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — basic

 

631.3

 

652.0

 

633.8

 

656.7

 

 

 

 

 

 

 

 

 

 

 

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

 

11.7

 

12.6

 

12.3

 

12.9

 

 

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — diluted

 

643.0

 

664.6

 

646.1

 

669.6

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders — basic

 

$

2.06

 

$

1.94

 

$

3.94

 

$

3.77

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

2.02

 

$

1.91

 

$

3.87

 

$

3.70

 

 

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

 

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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.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The ASU 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, the ASU is effective January 1, 2017. The Company is currently assessing this standard’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 accounting for the acquisition of other acquired software licenses. 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.

 

In May 2015, the FASB issued ASU No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This standard modifies existing disclosure requirements such that investments for which the practical expedient is used to measure their fair value at net asset value (NAV) would be removed from the fair value hierarchy disclosures. Instead, an entity would be required to include those investments as a reconciling item such that the total fair value amount of investments in the fair value hierarchy disclosure is consistent with the amount on the balance sheet. Changes were also made to the requirements in a sponsor’s employee benefit plan asset disclosures. For 3M, this standard is effective January 1, 2016, with retrospective application required. Early adoption is permitted. As this ASU only impacts certain disclosures, it will not impact the Company’s consolidated results of operations and financial condition.

 

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In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Under existing standards, the market amount requires consideration of replacement cost, net realizable value (NRV), and NRV less an approximately normal profit margin. The new ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. For 3M, this standard is effective prospectively beginning January 1, 2017, with early adoption permitted. The Company is currently assessing this ASU’s impacts on 3M’s consolidated results of operations and financial condition.

 

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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 six months ended June 30, 2015, the purchase price paid for business combinations (net of cash acquired) was $153 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 six months ended June 30, 2015 totaled $51 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 June 2015, 3M (Safety and Graphics Business) announced that it had entered into a definitive agreement to acquire Capital Safety, headquartered in Bloomington, Minnesota, from KKR & Co. L.P. for a total enterprise value of $2.5 billion including the assumption of approximately $0.7 billion of debt, net of cash acquired. Capital Safety is a leading global provider of fall protection equipment, one of the fastest-growing safety categories within the global personal protective equipment industry. Capital Safety’s sales, adjusted to include recent acquisitions on a full-year basis, were approximately $430 million for its fiscal year ended March 31, 2015. The transaction is expected to close in the third quarter of 2015, subject to customary closing conditions and regulatory approvals.

 

In February 2015, 3M (Industrial Business) 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. These transactions are expected to be completed in the third quarter of 2015.

 

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.

 

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NOTE 3.  Goodwill and Intangible Assets

 

Purchased goodwill from acquisitions totaled $95 million during the first six 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 June 30, 2015, follow:

 

Goodwill

 

 

 

December 31, 2014

 

Acquisition

 

Translation

 

June 30, 2015

 

(Millions)

 

Balance

 

activity

 

and other

 

Balance

 

Industrial

 

$

2,037 

 

$

 

$

(59

)

$

1,979 

 

Safety and Graphics

 

1,650

 

 

(24

)

1,626

 

Electronics and Energy

 

1,559

 

 

(28

)

1,531

 

Health Care

 

1,589

 

94

 

(42

)

1,641

 

Consumer

 

215

 

 

(7

)

208

 

Total Company

 

$

7,050 

 

$

95 

 

$

(160

)

$

6,985 

 

 

Acquired Intangible Assets

 

For the six months ended June 30, 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 June 30, 2015, and December 31, 2014, follow:

 

 

 

June 30,

 

December 31,

 

(Millions)

 

2015 

 

2014 

 

Customer related intangible assets

 

$

1,352

 

$

1,348

 

Patents

 

563

 

581

 

Other technology-based intangible assets

 

402

 

407

 

Definite-lived tradenames

 

398

 

401

 

Other amortizable intangible assets

 

222

 

221

 

Total gross carrying amount

 

$

2,937

 

$

2,958

 

 

 

 

 

 

 

Accumulated amortization — customer related

 

(630

)

(597

)

Accumulated amortization — patents

 

(468

)

(472

)

Accumulated amortization — other technology-based

 

(228

)

(215

)

Accumulated amortization — definite-lived tradenames

 

(204

)

(195

)

Accumulated amortization — other

 

(168

)

(167

)

Total accumulated amortization

 

$

(1,698

)

$

(1,646

)

 

 

 

 

 

 

Total finite-lived intangible assets — net

 

$

1,239

 

$

1,312

 

 

 

 

 

 

 

Non-amortizable intangible assets (primarily tradenames)

 

116

 

123

 

Total intangible assets — net

 

$

1,355

 

$

1,435

 

 

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Table of Contents

 

Amortization expense for acquired intangible assets for the three-month and six-month periods ended June 30, 2015 and 2014 follows:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(Millions)

 

2015 

 

2014 

 

2015 

 

2014 

 

Amortization expense

 

$

50

 

$

57

 

$

103

 

$

114

 

 

The table below shows expected amortization expense for acquired amortizable intangible assets recorded as of June 30, 2015:

 

 

 

Remainder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

 

 

 

 

 

 

After

 

(Millions)

 

2015

 

2016

 

2017

 

2018

 

2019

 

2020

 

2020

 

Amortization expense

 

$

96

 

$

178

 

$

156

 

$

141

 

$

128

 

$

119

 

$

421

 

 

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.

 

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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, 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 March 31, 2015

 

$

13,952

 

$

4,616

 

$

35,080

 

$

(19,458

)

$

(6,321

)

$

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,303

 

 

 

1,300

 

 

 

 

 

3

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

23

 

 

 

 

 

 

 

24

 

(1

)

Defined benefit pension and post-retirement plans adjustment

 

96

 

 

 

 

 

 

 

96

 

 

Debt and equity securities - unrealized gain (loss)

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

(32

)

 

 

 

 

 

 

(32

)

 

Total other comprehensive income (loss), net of tax

 

87

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

(646

)

 

 

(646

)

 

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

78

 

78

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(1,787

)

 

 

 

 

(1,787

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

143

 

 

 

(119

)

262

 

 

 

 

 

Balance at June 30, 2015

 

$

13,130

 

$

4,694

 

$

35,615

 

$

(20,983

)

$

(6,233

)

$

37

 

 

Six months ended June 30, 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

 

2,504

 

 

 

2,499

 

 

 

 

 

5

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(170

)

 

 

 

 

 

 

(169

)

(1

)

Defined benefit pension and post-retirement plans adjustment

 

187

 

 

 

 

 

 

 

187

 

 

Debt and equity securities - unrealized gain (loss)

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

38

 

 

 

 

 

 

 

38

 

 

Total other comprehensive income (loss), net of tax

 

55

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

(649

)

 

 

(649

)

 

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

306

 

306

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(2,683

)

 

 

 

 

(2,683

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

455

 

 

 

(552

)

1,007

 

 

 

 

 

Balance at June 30, 2015

 

$

13,130

 

$

4,694

 

$

35,615

 

$

(20,983

)

$

(6,233

)

$

37

 

 

14



Table of Contents

 

Three months ended June 30, 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 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
Comprehensive
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

 

 

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.

 

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Table of Contents

 

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

 

Three months ended June 30, 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 March 31, 2015, net of tax

 

$

(1,288

)

$

(5,202

)

$

 

$

169

 

$

(6,321

)

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

(12

)

 

 

(16

)

(28

)

Amounts reclassified out

 

 

141

 

 

(34

)

107

 

Total other comprehensive income (loss), before tax

 

(12

)

141

 

 

(50

)

79

 

Tax effect

 

36

 

(45

)

 

18

 

9

 

Total other comprehensive income (loss), net of tax

 

24

 

96

 

 

(32

)

88

 

Balance at June 30, 2015, net of tax

 

$

(1,264

)

$

(5,106

)

$

 

$

137

 

$

(6,233

)

 

Six months ended June 30, 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

 

(56

)

24

 

 

120

 

88

 

Amounts reclassified out

 

 

265

 

 

(61

)

204

 

Total other comprehensive income (loss), before tax

 

(56

)

289

 

 

59

 

292

 

Tax effect

 

(113

)

(102

)

 

(21

)

(236

)

Total other comprehensive income (loss), net of tax

 

(169

)

187

 

 

38

 

56

 

Balance at June 30, 2015, net of tax

 

$

(1,264

)

$

(5,106

)

$

 

$

137

 

$

(6,233

)

 

16



Table of Contents

 

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
Comprehensive
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
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

 

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

)

 

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.

 

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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

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

Comprehensive Income Components

 

2015

 

2014

 

2015

 

2014

 

Location on Income Statement

 

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

 

 

 

 

 

 

 

 

 

 

 

Transition asset

 

$

1

 

$

 

$

1

 

$

 

See Note 8

 

Prior service benefit

 

17

 

15

 

35

 

30

 

See Note 8

 

Net actuarial loss

 

(159

)

(107

)

(318

)

(213

)

See Note 8

 

Curtailments/Settlements

 

 

 

17

 

 

See Note 8

 

Total before tax

 

(141

)

(92

)

(265

)

(183

)

 

 

Tax effect

 

45

 

32

 

91

 

62

 

Provision for income taxes

 

Net of tax

 

$

(96

)

$

(60

)

$

(174

)

$

(121

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

35

 

$

(6

)

$

65

 

$

(2

)

Cost of sales

 

Commodity price swap contracts

 

 

1

 

(2

)

3

 

Cost of sales

 

Interest rate swap contracts

 

(1

)

 

(2

)

 

Interest expense

 

Total before tax

 

34

 

(5

)

61

 

1

 

 

 

Tax effect

 

(12

)

2

 

(22

)

 

Provision for income taxes

 

Net of tax

 

$

22

 

$

(3

)

$

39

 

$

1

 

 

 

Total reclassifications for the period, net of tax

 

$

(74

)

$

(63

)

$

(135

)

$

(120

)

 

 

 

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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 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 June 30, 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 June 30, 2015, during the next 12 months. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of June 30, 2015 and December 31, 2014 are $232 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 $4 million of benefit and $2 million of expense for the three months ended June 30, 2015 and June 30, 2014, respectively, and approximately $2 million of benefit and $13 million of benefit for the six months ended June 30, 2015 and June 30, 2014, respectively. At June 30, 2015 and December 31, 2014, accrued interest and penalties in the consolidated balance sheet on a gross basis were $41 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 second quarter of 2015 was 28.1 percent, compared to 29.5 percent in the second quarter of 2014, a decrease of 1.4 percentage points. Primary factors that decreased the Company’s effective tax rate on a combined basis by 3.7 percentage points year-on-year included remeasurements of 3M’s uncertain tax positions, as a result of, among other factors, matters related to transfer pricing, and an increase in the domestic manufacturer’s deduction benefit. This decrease was partially offset by a 2.3 percentage points year-on-year increase to the Company’s effective tax rate. Primary factors that increased the effective tax rate included international taxes, which were impacted by changes in foreign currency rates and changes to the geographic mix of income before taxes, and other items.

 

The effective tax rate for the first six months of 2015 was 28.8 percent, compared to 28.5 percent in the first six months of 2014, an increase of 0.3 percentage points. Primary factors that increased the Company’s effective tax rate on a combined basis by 2.5 percentage points for the first six months of 2015 when compared to the same period for 2014 included international taxes, which were impacted by changes in foreign currency rates and changes to the geographic mix of income before taxes, the 2014 restoration of tax basis on certain assets for which depreciation deductions were previously limited, and other items. This increase was partially offset by a 2.2 percentage point year-on-year decrease, which included remeasurements of 3M’s uncertain tax positions, as a result of, among other factors, matters related to transfer pricing, and an increase in the domestic manufacturer’s deduction benefits.

 

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 June 30, 2015 and December 31, 2014, the Company had valuation allowances of $22 million on its deferred tax assets.

 

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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).

 

 

 

June 30,

 

December 31,

 

(Millions)

 

2015 

 

2014 

 

 

 

 

 

 

 

U.S. government agency securities

 

$

49

 

$

67

 

Foreign government agency securities

 

50

 

75

 

Corporate debt securities

 

230

 

241

 

Commercial paper

 

36

 

 

Certificates of deposit/time deposits

 

27

 

41

 

U.S. municipal securities

 

3

 

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

66

 

122

 

Credit card related

 

13

 

59

 

Equipment lease related

 

8

 

21

 

Other

 

20

 

 

Asset-backed securities total

 

107

 

202

 

 

 

 

 

 

 

Current marketable securities

 

$

502

 

$

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

 

$

515

 

$

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 June 30, 2015, was impacted by the 2015 announcements with respect to acquiring Polypore’s Separations Media business and Capital Safety, as discussed in Note 2.

 

At June 30, 2015, both gross unrealized gains and losses were immaterial. 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 attributable to 3M for the applicable accounting period because the loss is not viewed as other-than-temporary. The

 

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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 June 30, 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)

 

June 30, 2015

 

 

 

 

 

Due in one year or less

 

$

199

 

Due after one year through five years

 

299

 

Due after five years through ten years

 

2

 

Due after ten years

 

15

 

 

 

 

 

Total marketable securities

 

$

515

 

 

3M has a diversified marketable securities portfolio of $515 million as of June 30, 2015. Within this portfolio, current and long-term asset-backed securities (estimated fair value of $107 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 June 30, 2015, all asset-backed security investments were in compliance with this policy. Approximately 83.2 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