10-Q 1 mmm-20170930x10q.htm 10-Q mmm_Current_Folio_10Q

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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 September 30, 2017

 

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 ☒  No ☐

 

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 ☒  No ☐

 

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

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

(Do not check if a smaller reporting company)

 

Smaller reporting company ☐

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for

complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

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 September 30, 2017

Common Stock, $0.01 par value per share

 

595,608,108 shares

 

 

 

 

 


 

      3M COMPANY

   Form 10-Q for the Quarterly Period Ended September 30, 2017

 

 

 

 

 

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

14

 

Note 3. Goodwill and Intangible Assets

16

 

Note 4. Restructuring Actions and Exit Activities

18

 

Note 5. Supplemental Equity and Comprehensive Income Information

19

 

Note 6. Income Taxes

23

 

Note 7. Marketable Securities

24

 

Note 8. Long-Term Debt and Short-Term Borrowings

25

 

Note 9. Pension and Postretirement Benefit Plans

26

 

Note 10. Derivatives

27

 

Note 11. Fair Value Measurements

34

 

Note 12. Commitments and Contingencies

37

 

Note 13. Stock-Based Compensation

47

 

Note 14. Business Segments

51

 

Report of Independent Registered Public Accounting Firm

53

 

 

 

ITEM 2. 

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

 

 

Index to Management’s Discussion and Analysis:

 

 

Overview

54

 

Results of Operations

62

 

Performance by Business Segment

66

 

Financial Condition and Liquidity

73

 

Cautionary Note Concerning Factors That May Affect Future Results

80

 

 

 

ITEM 3. 

Quantitative and Qualitative Disclosures About Market Risk

80

 

 

 

ITEM 4. 

Controls and Procedures

81

 

 

 

PART II 

OTHER INFORMATION

 

 

 

 

ITEM 1. 

Legal Proceedings

82

 

 

 

ITEM 1A. 

Risk Factors

82

 

 

 

ITEM 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

85

 

 

 

ITEM 3. 

Defaults Upon Senior Securities

86

 

 

 

ITEM 4. 

Mine Safety Disclosures

86

 

 

 

ITEM 5. 

Other Information

86

 

 

 

ITEM 6. 

Exhibits

86

 

2


 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended September 30, 2017

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

    

Nine months ended 

 

 

 

September 30,

 

September 30,

 

(Millions, except per share amounts)

    

2017

    

2016

    

2017

 

2016

 

Net sales

 

$

8,172

 

$

7,709

 

$

23,667

 

$

22,780

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

4,045

 

 

3,847

 

 

11,921

 

 

11,324

 

Selling, general and administrative expenses

 

 

1,623

 

 

1,531

 

 

4,830

 

 

4,624

 

Research, development and related expenses

 

 

463

 

 

427

 

 

1,407

 

 

1,314

 

Gain on sale of businesses

 

 

 —

 

 

 —

 

 

(490)

 

 

(40)

 

Total operating expenses

 

 

6,131

 

 

5,805

 

 

17,668

 

 

17,222

 

Operating income

 

 

2,041

 

 

1,904

 

 

5,999

 

 

5,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and income

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

57

 

 

50

 

 

156

 

 

135

 

Interest income

 

 

(13)

 

 

(8)

 

 

(33)

 

 

(20)

 

Total interest expense — net

 

 

44

 

 

42

 

 

123

 

 

115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

1,997

 

 

1,862

 

 

5,876

 

 

5,443

 

Provision for income taxes

 

 

564

 

 

531

 

 

1,532

 

 

1,541

 

Net income including noncontrolling interest

 

$

1,433

 

$

1,331

 

$

4,344

 

$

3,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

 

 4

 

 

 2

 

 

 9

 

 

 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,429

 

$

1,329

 

$

4,335

 

$

3,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — basic

 

 

597.6

 

 

604.4

 

 

597.9

 

 

606.2

 

Earnings per share attributable to 3M common shareholders — basic

 

$

2.39

 

$

2.20

 

$

7.25

 

$

6.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — diluted

 

 

612.7

 

 

618.8

 

 

612.5

 

 

620.3

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

2.33

 

$

2.15

 

$

7.08

 

$

6.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per 3M common share

 

$

1.175

 

$

1.11

 

$

3.525

 

$

3.33

 

 

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

 

3


 

3M Company and Subsidiaries

Consolidated Statement of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

    

Nine months ended 

 

 

 

September 30,

 

September 30,

 

(Millions)

    

2017

    

2016

    

2017

    

2016

 

Net income including noncontrolling interest

 

$

1,433

 

$

1,331

 

$

4,344

 

$

3,902

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

44

 

 

17

 

 

269

 

 

192

 

Defined benefit pension and postretirement plans adjustment

 

 

80

 

 

67

 

 

241

 

 

203

 

Cash flow hedging instruments, unrealized gain (loss)

 

 

(49)

 

 

(45)

 

 

(176)

 

 

(182)

 

Total other comprehensive income (loss), net of tax

 

 

75

 

 

39

 

 

334

 

 

213

 

Comprehensive income (loss) including noncontrolling interest

 

 

1,508

 

 

1,370

 

 

4,678

 

 

4,115

 

Comprehensive (income) loss attributable to noncontrolling interest

 

 

(3)

 

 

(3)

 

 

(11)

 

 

(7)

 

Comprehensive income (loss) attributable to 3M

 

$

1,505

 

$

1,367

 

$

4,667

 

$

4,108

 

 

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

 

4


 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

(Dollars in millions, except per share amount)

    

2017

    

2016

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,831

 

$

2,398

 

Marketable securities — current

 

 

586

 

 

280

 

Accounts receivable — net

 

 

5,156

 

 

4,392

 

Inventories

 

 

 

 

 

 

 

Finished goods

 

 

1,962

 

 

1,629

 

Work in process

 

 

1,164

 

 

1,039

 

Raw materials and supplies

 

 

849

 

 

717

 

Total inventories

 

 

3,975

 

 

3,385

 

Other current assets

 

 

1,108

 

 

1,271

 

Total current assets

 

 

13,656

 

 

11,726

 

Marketable securities — non-current

 

 

17

 

 

17

 

Investments

 

 

139

 

 

128

 

Property, plant and equipment

 

 

24,659

 

 

23,499

 

Less: Accumulated depreciation

 

 

(16,001)

 

 

(14,983)

 

Property, plant and equipment — net

 

 

8,658

 

 

8,516

 

Goodwill

 

 

9,221

 

 

9,166

 

Intangible assets — net

 

 

2,175

 

 

2,320

 

Prepaid pension benefits

 

 

105

 

 

52

 

Other assets

 

 

1,266

 

 

981

 

Total assets

 

$

35,237

 

$

32,906

 

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

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

 

$

835

 

$

972

 

Accounts payable

 

 

1,824

 

 

1,798

 

Accrued payroll

 

 

856

 

 

678

 

Accrued income taxes

 

 

374

 

 

299

 

Other current liabilities

 

 

2,709

 

 

2,472

 

Total current liabilities

 

 

6,598

 

 

6,219

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

10,828

 

 

10,678

 

Pension and postretirement benefits

 

 

3,748

 

 

4,018

 

Other liabilities

 

 

1,861

 

 

1,648

 

Total liabilities

 

$

23,035

 

$

22,563

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

3M Company shareholders’ equity:

 

 

 

 

 

 

 

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

 

$

 9

 

$

 9

 

Additional paid-in capital

 

 

5,302

 

 

5,061

 

Retained earnings

 

 

39,454

 

 

37,907

 

Treasury stock, at cost: 348,424,948 shares at September 30, 2017;

347,306,778 shares at December 31, 2016

 

 

(25,706)

 

 

(25,434)

 

Accumulated other comprehensive income (loss)

 

 

(6,913)

 

 

(7,245)

 

Total 3M Company shareholders’ equity

 

 

12,146

 

 

10,298

 

Noncontrolling interest

 

 

56

 

 

45

 

Total equity

 

$

12,202

 

$

10,343

 

Total liabilities and equity

 

$

35,237

 

$

32,906

 

 

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

5


 

3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

Nine months ended 

 

 

 

September 30,

 

(Millions)

    

2017

    

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

4,344

 

$

3,902

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,195

 

 

1,090

 

Company pension and postretirement contributions

 

 

(314)

 

 

(323)

 

Company pension and postretirement expense

 

 

244

 

 

180

 

Stock-based compensation expense

 

 

266

 

 

244

 

Gain on sale of businesses

 

 

(490)

 

 

(40)

 

Deferred income taxes

 

 

(105)

 

 

(100)

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(595)

 

 

(469)

 

Inventories

 

 

(436)

 

 

(15)

 

Accounts payable

 

 

(25)

 

 

(107)

 

Accrued income taxes (current and long-term)

 

 

249

 

 

155

 

Other — net

 

 

47

 

 

(64)

 

Net cash provided by operating activities

 

 

4,380

 

 

4,453

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

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

 

 

(914)

 

 

(984)

 

Proceeds from sale of PP&E and other assets

 

 

18

 

 

18

 

Acquisitions, net of cash acquired

 

 

(12)

 

 

(17)

 

Purchases of marketable securities and investments

 

 

(1,055)

 

 

(1,036)

 

Proceeds from maturities and sale of marketable securities and investments

 

 

745

 

 

794

 

Proceeds from sale of businesses, net of cash sold

 

 

862

 

 

56

 

Other — net

 

 

 2

 

 

(4)

 

Net cash used in investing activities

 

 

(354)

 

 

(1,173)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Change in short-term debt — net

 

 

60

 

 

(498)

 

Repayment of debt (maturities greater than 90 days)

 

 

(650)

 

 

(992)

 

Proceeds from debt (maturities greater than 90 days)

 

 

 —

 

 

2,832

 

Purchases of treasury stock

 

 

(1,564)

 

 

(2,829)

 

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

 

 

582

 

 

741

 

Dividends paid to shareholders

 

 

(2,104)

 

 

(2,014)

 

Other — net

 

 

(23)

 

 

(20)

 

Net cash used in financing activities

 

 

(3,699)

 

 

(2,780)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

106

 

 

10

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

433

 

 

510

 

Cash and cash equivalents at beginning of year

 

 

2,398

 

 

1,798

 

Cash and cash equivalents at end of period

 

$

2,831

 

$

2,308

 

 

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

6


 

3M Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1.  Significant Accounting Policies

 

Basis of Presentation

 

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

 

As described in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K) and 3M’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2017 and June 30, 2017, effective in the first quarter of 2017, the Company changed its business segment reporting in its continuing effort to improve the alignment of businesses around markets and customers. These changes included the integration of the former Renewable Energy Division into existing divisions, the combining of two divisions to form the Automotive and Aerospace Solutions Division, and consolidation of U.S. customer account activity, impacting dual credit reporting. Segment information presented herein reflects the impact of these changes for all periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its Current Report on Form 8-K dated May 4, 2017.

 

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.

 

3M has a subsidiary in Venezuela, the financial statements of which are remeasured as if its functional currency were that of its parent because Venezuela’s economic environment is considered highly inflationary. The operating income of this subsidiary represented less than 1.0 percent of 3M’s consolidated operating income for 2016. The Venezuelan government sets official rates of exchange and conditions precedent to purchase foreign currency at these rates with local currency. The government also operates various expanded secondary currency exchange mechanisms that have been eliminated and replaced from time to time. Such rates and conditions have been and continue to be subject to change. For the periods presented, the financial statements of 3M’s Venezuelan subsidiary were remeasured utilizing the rate associated with the secondary auction mechanism, Tipo de Cambio Complementario, which was redesigned by the Venezuelan government in June 2017 (DICOM2), or its predecessor. During the same periods, the Venezuelan government’s official exchange was Tipo de Cambio Protegido (DIPRO), or its predecessor.

 

7


 

Note 1 in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K) provides additional information the Company considers in determining the exchange rate used relative to its Venezuelan subsidiary as well as factors which could lead to its deconsolidation. The Company continues to monitor these circumstances. 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 September 30, 2017, the Company had a balance of net monetary assets denominated in VEF of less than 10 billion VEF and the DIPRO and DICOM2 exchange rates were approximately 10 VEF and 3,300 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. Based upon a review of factors as of September 30, 2017, the Company continues to consolidate its Venezuelan subsidiary. As of September 30, 2017, the balance of accumulated other comprehensive loss associated with this subsidiary was approximately $145 million and the amount of intercompany receivables due from this subsidiary and its total equity balance were not significant.

 

Reclassifications

 

Certain amounts in prior periods’ consolidated financial statements have been reclassified to conform to the current period presentation.

 

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 (insignificant for the three months ended September 30, 2017; 1.1 million average options for the nine months ended September 30, 2017; insignificant for the three months ended September 30, 2016; and 4.0 million average options for the nine months ended September 30, 2016). The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

    

Nine months ended 

 

 

 

September 30,

 

September 30,

 

(Amounts in millions, except per share amounts)

    

2017

    

2016

    

2017

    

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,429

 

$

1,329

 

$

4,335

 

$

3,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding basic

 

 

597.6

 

 

604.4

 

 

597.9

 

 

606.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

15.1

 

 

14.4

 

 

14.6

 

 

14.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding –  diluted

 

 

612.7

 

 

618.8

 

 

612.5

 

 

620.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders basic

 

$

2.39

 

$

2.20

 

$

7.25

 

$

6.43

 

Earnings per share attributable to 3M common shareholders diluted

 

$

2.33

 

$

2.15

 

$

7.08

 

$

6.28

 

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, and in August 2015 issued ASU No. 2015-14, which amended the standard as to effective date. 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

8


 

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 the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. During 2016, the FASB also issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU No. 2016-10, Identifying Performance Obligations and Licensing; ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers which amend ASU No. 2014-09. These amendments include clarification of principal versus agent guidance in situations in which a revenue transaction involves a third party in providing goods or services to a customer. In such circumstances, an entity must determine whether the nature of its promise to the customer is to provide the underlying goods or services (i.e., the entity is the principal in the transaction) or to arrange for the third party to provide the underlying goods or services (i.e., the entity is the agent in the transaction). The amendments clarify, in terms of identifying performance obligations, how entities would determine whether promised goods or services are separately identifiable from other promises in a contract and, therefore, would be accounted for separately. The guidance allows entities to disregard goods or services that are immaterial in the context of a contract and provides an accounting policy election to account for shipping and handling activities as fulfillment costs rather than as additional promised services. With regard to the licensing, the amendments clarify how an entity would evaluate the nature of its promise in granting a license of intellectual property, which determines whether the entity recognizes revenue over time or at a point in time. The amendments also address implementation issues relative to transition (adding a practical expedient for contract modifications and clarifying what constitutes a completed contract when employing full or modified retrospective transition methods), collectability, noncash consideration, and the presentation of sales and other similar-type taxes (allowing entities to exclude sales-type taxes collected from transaction price). Finally, the amendments make certain technical corrections and provide additional guidance in the areas of disclosure of performance obligations, provisions for losses on certain types of contracts, scoping, and other areas. Overall, ASU No. 2014-09, as amended, 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, 2018 and the Company has concluded that it will utilize the modified retrospective method of adoption. 3M continues to evaluate the standard’s impact on its consolidated results of operations and financial condition. In addition to expanded disclosures regarding revenue, the ASU could impact the timing of revenue and certain cost recognition. 3M has conducted initial analyses, executed project management relative to the process of adopting this ASU, and is finalizing detailed contract reviews to complete necessary adjustments to existing accounting policies and quantify the ASU’s effect. For most of 3M’s revenue arrangements, no significant impacts are expected as these transactions are not accounted for under industry-specific guidance that will be superseded by the ASU and generally consist of a single performance obligation to transfer promised goods or services. However, 3M engages in some arrangements for which software industry-specific guidance (which the ASU supersedes) is presently utilized. The Company has considered these arrangements in the detailed contract reviews that have been conducted. While 3M will continue to finalize its efforts relative to the adoption of ASU No. 2014-09, based on the analysis completed to date, the Company does not expect this standard to have a material impact on its consolidated results of operations and financial condition.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which modified previous requirements regarding measuring inventory at the lower of cost or market. Under previous standards, the market amount required consideration of replacement cost, net realizable value (NRV), and NRV less an approximately normal profit margin. The new ASU replaced market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminated the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. 3M adopted this standard prospectively beginning January 1, 2017. The adoption did not have a material impact on 3M’s consolidated results of operations and financial condition.

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which revises the accounting related to (1) the classification and measurement of investments in equity

9


 

securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance requires the fair value measurement of investments in equity securities and other ownership interests in an entity, including investments in partnerships, unincorporated joint ventures and limited liability companies (collectively, equity securities) that do not result in consolidation and are not accounted for under the equity method. Entities will need to measure these investments and recognize changes in fair value in net income. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities they classify under current guidance as available for sale in other comprehensive income (OCI). They also will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. Instead, for these types of equity investments that do not otherwise qualify for the net asset value practical expedient, entities will be permitted to elect a practicability exception and measure the investment at cost less impairment plus or minus observable price changes (in orderly transactions). The ASU also establishes an incremental recognition and disclosure requirement related to the presentation of fair value changes of financial liabilities for which the fair value option (FVO) has been elected. Under this guidance, an entity would be required to separately present in OCI the portion of the total fair value change attributable to instrument-specific credit risk as opposed to reflecting the entire amount in earnings. For derivative liabilities for which the FVO has been elected, however, any changes in fair value attributable to instrument-specific credit risk would continue to be presented in net income, which is consistent with current guidance. For 3M, this standard is effective beginning January 1, 2018 via a cumulative-effect adjustment to beginning retained earnings, except for guidance relative to equity securities without readily determinable fair values which is applied prospectively. The Company is currently assessing this ASU’s impact on 3M’s consolidated results of operations and financial condition; however, 3M has historically held limited amounts of equity securities and cost method investments (less than $75 million in aggregate at September 30, 2017), and has not elected the FVO with respect to material financial liabilities.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, replacing existing lease accounting guidance. The new standard introduces a lessee model that would require entities to recognize assets and liabilities for most leases, but recognize expenses on their income statements in a manner similar to current accounting. The ASU does not make fundamental changes to existing lessor accounting. However, it modifies what qualifies as a sales-type and direct financing lease and related accounting and aligns a number of the underlying principles with those of the new revenue standard, ASU No. 2014-09, such as evaluating how collectability should be considered and determining when profit can be recognized. The guidance eliminates existing real estate-specific provisions and requires expanded qualitative and quantitative disclosures. The standard requires modified retrospective transition by which it is applied at the beginning of the earliest comparative period presented in the year of adoption. For 3M, the ASU is effective January 1, 2019. Information under existing lease guidance with respect to rent expense for operating leases and the Company’s minimum lease payments for capital and operating leases with non-cancelable terms in excess of one year as of December 31, 2016 is included in Note 14 in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K). The Company is currently assessing this ASU’s impact on 3M’s consolidated results of operations and financial condition.

 

In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments. This ASU clarified guidance used to determine if debt instruments that contain contingent put or call options require separation of the embedded put or call feature from the debt instrument and trigger accounting for the feature as a derivative with changes in fair value recorded through income. Under the new guidance, fewer put or call options embedded in debt instruments require derivative accounting. For 3M, this ASU was effective January 1, 2017. The Company’s outstanding debt with embedded put provisions did not require separate derivative accounting under previous guidance. As a result, the adoption of this standard did not have a material impact on the Company’s consolidated results of operations and financial condition.

 

In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminated the previous requirement to apply the equity method of accounting retrospectively (revising prior periods as if the equity method had always been applied) when an entity obtained significant influence over a previously held investment. The new guidance requires the investor to apply the equity method prospectively from the date the investment qualifies for the equity method. The investor would add the carrying value of the existing investment to the cost of any additional investment to determine the initial cost basis of the equity method investment. For 3M, this ASU

10


 

was effective January 1, 2017 on a prospective basis. 3M will apply this guidance to investments that transition to the equity method after the adoption date.

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. With respect to available-for-sale (AFS) debt securities, the ASU amends the current other-than-temporary impairment model. For such securities with unrealized losses, entities will still consider if a portion of any impairment is related only to credit losses and therefore recognized as a reduction in income. However, rather than also reflecting that credit loss amount as a permanent reduction in cost (amortized cost) basis of that AFS debt security, the ASU requires that credit losses be reflected as an allowance. As a result, under certain circumstances, a recovery in value could result in previous allowances, or portions thereof, reversing back into income. For 3M, this ASU is effective January 1, 2020, with early adoption permitted. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently assessing this ASU’s impact on 3M’s consolidated results of operations and financial condition.

 

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which was intended to reduce diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provided guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The ASU also provided guidance for classifying cash receipts and payments that have aspects of more than one class of cash flows. The Company early adopted ASU No. 2016-15 as of January 1, 2017. Since the associated changes in classification were immaterial to all prior periods presented, no impact was reflected in the Company’s pre-2017 consolidated results of operations and financial condition presented.

 

In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which modifies existing guidance and is intended to reduce diversity in practice with respect to the accounting for the income tax consequences of intra-entity transfers of assets. The ASU indicates that the current exception to income tax accounting that requires companies to defer the income tax effects of certain intercompany transactions would apply only to intercompany inventory transactions. That is, the exception would no longer apply to intercompany sales and transfers of other assets (e.g., intangible assets). Under the existing exception, income tax expense associated with intra-entity profits in an intercompany sale or transfer of assets is eliminated from earnings. Instead, that cost is deferred and recorded on the balance sheet (e.g., as a prepaid asset) until the assets leave the consolidated group. Similarly, the entity is prohibited from recognizing deferred tax assets for the increases in tax bases due to the intercompany sale or transfer. For 3M, this ASU is effective January 1, 2018. The standard requires modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. Upon adoption, a company would write off any income tax effects that had been deferred from past intercompany transactions involving non-inventory assets to opening retained earnings. In addition, an entity would record deferred tax assets with an offset to opening retained earnings for amounts that entity had previously not recognized under existing guidance but would recognize under the new guidance. While 3M could initiate additional relevant transactions prior to this ASU’s adoption date, based on deferred tax amounts related to applicable past intercompany transactions as of September 30, 2017, the Company does not expect this ASU to have a material impact on 3M’s consolidated results of operations and financial condition.

 

In October 2016, the FASB issued ASU No. 2016-17, Interests Held through Related Parties That Are under Common Control, which modified previous guidance with respect to how a decision maker that holds an indirect interest in a variable interest entity (VIE) through a common control party determines whether it is the primary beneficiary of the VIE as part of the analysis of whether the VIE would need to be consolidated. Under the ASU, a decision maker would need to consider only its proportionate indirect interest in the VIE held through a common control party. Previous guidance had required the decision maker to treat the common control party’s interest in the VIE as if the decision maker

11


 

held the interest itself. As a result of the ASU, in certain cases, previous consolidation conclusions may change. For 3M, the standard was effective January 1, 2017 with retrospective application to January 1, 2016. 3M does not have significant involvement with entities subject to consolidation considerations impacted by VIE model factors. As a result, the adoption of this ASU did not have a material impact on the Company’s consolidated results of operations and financial condition.

 

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarified guidance on the classification and presentation of restricted cash in the statement of cash flows. Under the ASU, changes in restricted cash and restricted cash equivalents would be included along with those of cash and cash equivalents in the statement of cash flows. As a result, entities would no longer present transfers between cash/equivalents and restricted cash/equivalents in the statement of cash flows. In addition, a reconciliation between the balance sheet and the statement of cash flows would be disclosed when the balance sheet includes more than one line item for cash/equivalents and restricted cash/equivalents. The Company early adopted ASU No. 2016-18 as of January 1, 2017. Due to the immaterial use of restricted cash and restricted cash equivalents, no impact was reflected in the Company’s pre-2017 consolidated results of operations and financial condition presented.

 

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs. The standard also narrows the definition of outputs. The definition of a business affects areas of accounting such as acquisitions, disposals and goodwill. Under the new guidance, fewer acquired sets are expected to be considered businesses. For 3M, this ASU is effective January 1, 2018 on a prospective basis with early adoption permitted. 3M would apply this guidance to applicable transactions after the adoption date.

 

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. For 3M, this ASU is effective prospectively to impairment tests beginning January 1, 2020, with early adoption permitted at the time of any interim impairment test that may be performed prior to that date. 3M currently plans to apply this ASU in the fourth quarter of 2017 in conjunction with its annual goodwill impairment testing.

 

In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU addresses scope-related questions that arose after the FASB issued its revenue guidance in ASU No. 2014-09, Revenue from Contracts with Customers. The new standard clarifies the accounting for derecognition of nonfinancial assets and defines what is considered an in substance nonfinancial asset. Nonfinancial assets largely relate to items such as real estate, ships and intellectual property that do not constitute a business. The new ASU impacts entities derecognizing (e.g. selling) nonfinancial assets (or in substance nonfinancial assets), including partial interests therein, when the purchaser is not a customer. Under the new guidance, the seller would apply certain recognition and measurement principles of ASU No. 2014-09, Revenue from Contracts with Customers, even though the purchaser is not a customer. For 3M, this new standard is effective coincident with the Company’s January 1, 2018 adoption of ASU No. 2014-09. The Company is currently assessing this ASU’s impact on 3M’s consolidated results of operations and financial condition.

 

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU changes how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Under the new standard, only the service cost component of net periodic benefit cost would be included in operating expenses and only the service cost component would be eligible for capitalization into assets such as inventory. All other net periodic benefit costs components (such as interest, expected return on plan assets, prior service cost amortization and actuarial gain/loss

12


 

amortization) would be reported outside of operating income. For 3M, this ASU is effective January 1, 2018 on a retrospective basis; however, guidance limiting the capitalization to only the service cost component is applied on prospective basis. The components of 3M’s net periodic defined benefit pension and postretirement benefit costs are presented in Note 9. These include components totaling a benefit of $31 million and $50 million for the three months ended September 30, 2017 and 2016, respectively, and $95 million and $156 million for the nine months ended September 30, 2017 and 2016, respectively, that would no longer be included within operating expenses and instead would be reported outside of income from operations under the new standard.

 

In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium. Under existing standards, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The new guidance shortens the amortization period to the earliest call date for certain callable debt securities that have explicit, noncontingent call features and are callable at a fixed price and preset date. The amendments do not require an accounting change for securities held at a discount. For 3M, this ASU is effective January 1, 2019 with a modified retrospective transition resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Early adoption is permitted. 3M’s marketable security portfolio includes very limited instances of callable debt securities held at a premium. As a result, the Company does not expect this ASU to have a material impact on 3M’s consolidated results of operations and financial condition.

 

In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. The general model for accounting for modifications of share-based payment awards is to record the incremental value arising from the changes as additional compensation cost. Under the new standard, fewer changes to the terms of an award would require accounting under this modification model. For 3M, this ASU is effective January 1, 2018, with early adoption permitted. Because the Company does not typically make changes to the terms or conditions of its issued share-based payment awards, 3M does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.

 

In May 2017, the FASB issued ASU No. 2017-10, Determining the Customer of the Operation Services, that clarifies how an operating entity determines the customer of the operation services for transactions within the scope of a service concession arrangement. Service concession arrangements are typically agreements between a grantor and an operating entity whereby the operating entity will operate the grantor’s infrastructure (i.e. airports, roadways, bridges, and prisons) for a specified period of time. The operating entity also may be required to maintain the infrastructure and provide capital-intensive maintenance to enhance or extend its life. In such arrangements, typically the operation services (i.e. operation and maintenance of a roadway) would be used by third parties (i.e. drivers). The ASU clarifies that the grantor, not the third party, is the customer of the operation services in such arrangements. For 3M, this new standard is effective coincident with the Company’s January 1, 2018 adoption of ASU No. 2014-09. Because the Company is not typically a party to agreements within the scope of accounting for service concession arrangements, 3M does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.

 

In July 2017, the FASB issued ASU No. 2017-11, (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The new standard applies to issuers of financial instruments with down-round features. A down-round provision is a term in an equity-linked financial instrument (i.e. a freestanding warrant contract or an equity conversion feature embedded within a host debt or equity contract) that triggers a downward adjustment to the instrument’s strike price (or conversion price) if equity shares are issued at a lower price (or equity-linked financial instruments are issued at a lower strike price) than the instrument’s then-current strike price. The purpose of the feature is typically to protect the instrument’s counterparty from future issuances of equity shares at a more favorable price. The ASU amends (1) the classification of such instruments as liabilities or equity by revising the certain guidance relative to evaluating if they must be accounted for as derivative instruments and (2) the guidance on recognition and measurement of freestanding equity-classified instruments. For 3M, this ASU is effective January 1, 2019, with early adoption permitted. Because the Company has not issued financial instruments with down-round features, 3M does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.

13


 

 

In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The ASU amends existing guidance to simplify the application of hedge accounting in certain situations and allow companies to better align their hedge accounting with their risk management activities. Existing standards contain certain requirements for an instrument to qualify for hedge accounting relative to initial and ongoing assessments of hedge effectiveness. While an initial quantitative test to establish the hedge relationship is highly effective would still be required, the new ASU permits subsequent qualitative assessments for certain hedges instead of a quantitative test and expands the timeline for performing the initial quantitative assessment. The ASU also simplifies related accounting by eliminating the requirement to separately measure and report hedge ineffectiveness. Instead, for qualifying cash flow and net investment hedges, the entire change in fair value (including the amount attributable to ineffectiveness) will be recorded within other comprehensive income and reclassified to earnings in the same income statement line that is used to present the earnings effect of the hedged item when the hedged item affects earnings. For fair value hedges, generally, the entire change in fair value of the hedging instrument would also be presented in the same income statement line as the hedged item. The new standard also simplifies the accounting for fair value hedges of interest rate risks and expands an entity’s ability to hedge nonfinancial and financial risk components. In addition, the guidance also eases certain documentation requirements, modifies the accounting for components excluded from the assessment of hedge effectiveness, and requires additional tabular disclosures of derivative and hedge-related information. For 3M, this ASU is effective January 1, 2019, with a modified retrospective transition resulting in a cumulative-effect adjustment recorded to the opening balance of retained earnings as of the adoption date. Early adoption is permitted. The Company is currently assessing this ASU’s impact on 3M’s consolidated results of operations and financial condition.

 

NOTE 2.  Acquisitions and Divestitures

 

Acquisitions:

 

3M makes acquisitions of certain businesses from time to time that are aligned 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 September 2017, 3M purchased all of the ownership interests of Elution Technologies, LLC, a Vermont-based manufacturer of test kits that help enable food and beverage companies ensure their products are free from certain potentially harmful allergens such as peanuts, soy or milk. Elution is reported within the Company’s Health Care business.

 

In October 2017, 3M completed the acquisition of the underlying legal entities and associated assets of Scott Safety, which is headquartered in Monroe, North Carolina, from Johnson Controls for $2.0 billion of cash, net of closing and other adjustments. Scott Safety is a premier manufacturer of innovative products, including self-contained breathing apparatus systems, gas and flame detection instruments, and other safety devices that complement 3M’s personal safety portfolio. The business had revenues of approximately $570 million in 2016. Scott Safety will be reported within 3M’s Safety and Graphics business. The Company is in the process of completing its initial accounting for this acquisition and, accordingly, has not included disclosures relative to the allocation of purchase consideration to the respective assets and liabilities acquired. 3M expects to finalize the allocation of purchase price within the one year measurement-period following the acquisition.

 

Pro forma information related to acquisitions has not been included because the impact on the Company’s consolidated results of operations was not considered material.

 

Divestitures:

 

3M may divest certain businesses from time to time based upon reviews of the Company’s portfolio considering, among other items, factors relative to the extent of strategic and technological alignment and optimization of capital deployment, in addition to considering if selling the businesses results in the greatest value creation for the Company and for shareholders.

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In January 2017, 3M sold the assets of its safety prescription eyewear business, with annual sales of approximately $45 million, to HOYA Vision Care. The Company recorded a pre-tax gain of $29 million in the first quarter of 2017 as a result of this sale, which was reported within the Company’s Safety and Graphics business.

 

In May 2017, 3M completed the related sale or transfer of control, as applicable, of its identity management business to Gemalto N.V. This business, with 2016 sales of approximately $205 million, is a leading provider in identity management solutions, including biometric hardware and software that enable identity verification and authentication, as well as secure materials and document readers. In June 2017, 3M also completed the sale of its tolling and automated license/number plate recognition business, with annual sales of approximately $40 million, to Neology, Inc. 3M’s tolling and automated license/number plate recognition business includes RFID readers and tags, automatic vehicle classification systems, lane controller and host software, and back office software and services. It also provides mobile and fixed cameras, software, and services in automated license/number plate recognition. 3M received proceeds of $833 million, or $809 million net of cash sold, and reflected a pre-tax gain of $461 million in the second quarter of 2017 as a result of these two divestitures, which was reported within the Company’s Safety and Graphics business.

 

In October 2017, 3M sold its electronic monitoring business to an affiliate of Apax Partners for $200 million, net of cash sold and closing and other adjustments. This business, with annual sales of approximately $95 million, is a provider of electronic monitoring technologies, serving hundreds of correctional and law enforcement agencies around the world. 3M expects to reflect a pre-tax gain of approximately $100 million in the fourth quarter of 2017 as a result of this divestiture, which will be reported within the Company’s Safety and Graphics business.

 

The aggregate operating income of these divested businesses was less than $20 million in 2016. The approximate amounts of major assets and liabilities associated with disposal groups classified as held-for-sale as of September 30, 2017 were not significant and, as of December 31, 2016, included the following:

 

 

 

 

 

 

 

    

December 31,

 

(Millions)

    

2016

 

Accounts receivable

 

$

25

 

Property, plant and equipment (net)

 

 

25

 

Intangible assets

 

 

35

 

Deferred revenue (other current liabilities)

 

 

35

 

 

In addition, approximately $50 million and $270 million of goodwill was estimated to be attributable to disposal groups classified as held-for-sale as of September 30, 2017 and December 31, 2016, respectively, based upon relative fair value. The amounts above have not been segregated and are classified within the existing corresponding line items on the Company’s consolidated balance sheet.

 

Refer to Note 2 in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 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 $6 million during the first nine months of 2017, all 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, 2016 and September 30, 2017, follow:

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

Acquisition

 

Divestiture

 

Translation

 

September 30, 2017

 

(Millions)

    

Balance

    

activity

    

activity

    

and other

    

Balance

 

Industrial

 

$

2,536

 

$

 —

 

$

 —

 

$

128

 

$

2,664

 

Safety and Graphics

 

 

3,324

 

 

 —

 

 

(276)

 

 

98

 

 

3,146

 

Health Care

 

 

1,609

 

 

 6

 

 

 —

 

 

59

 

 

1,674

 

Electronics and Energy

 

 

1,489

 

 

 —

 

 

 —

 

 

37

 

 

1,526

 

Consumer

 

 

208

 

 

 —

 

 

 —

 

 

 3

 

 

211

 

Total Company

 

$

9,166

 

$

 6

 

$

(276)

 

$

325

 

$

9,221

 

 

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

 

As described in Note 14, effective in the first quarter of 2017, the Company changed its business segment reporting in its continuing effort to improve the alignment of its businesses around markets and customers. For any product changes that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill of the associated reporting units. During the first quarter of 2017, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.

 

Acquired Intangible Assets

 

The carrying amount and accumulated amortization of acquired finite-lived intangible assets, in addition to the balance of non-amortizable intangible assets, as of September 30, 2017, and December 31, 2016, follow:

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

(Millions)

    

2017

    

2016

 

Customer related intangible assets

 

$

1,924

 

$

1,939

 

Patents

 

 

586

 

 

602

 

Other technology-based intangible assets

 

 

478

 

 

524

 

Definite-lived tradenames

 

 

393

 

 

420

 

Other amortizable intangible assets

 

 

211

 

 

211

 

Total gross carrying amount

 

$

3,592

 

$

3,696

 

 

 

 

 

 

 

 

 

Accumulated amortization — customer related

 

 

(865)

 

 

(797)

 

Accumulated amortization — patents

 

 

(500)

 

 

(497)

 

Accumulated amortization — other technology based

 

 

(293)

 

 

(302)

 

Accumulated amortization — definite-lived tradenames

 

 

(238)

 

 

(236)

 

Accumulated amortization — other

 

 

(167)

 

 

(173)

 

Total accumulated amortization

 

$

(2,063)

 

$

(2,005)

 

 

 

 

 

 

 

 

 

Total finite-lived intangible assets — net

 

$

1,529

 

$

1,691

 

 

 

 

 

 

 

 

 

Non-amortizable intangible assets (primarily tradenames)

 

 

646

 

 

629

 

Total intangible assets — net

 

$

2,175

 

$

2,320

 

 

16


 

3M does not amortize certain acquired tradenames because they have been in existence for over 55 years, have a history of leading-market share positions, are intended to be continuously renewed, and the associated products are expected to generate cash flows for 3M for an indefinite period of time.

 

Amortization expense for acquired intangible assets for the three and nine months ended September 30, 2017 and 2016 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

    

Nine months ended 

 

 

 

September 30,

 

September 30,

 

(Millions)

   

2017

   

2016

   

2017

 

2016

 

Amortization expense

 

$

51

 

$

63

 

$

162

 

$

195

 

 

Expected amortization expense for acquired amortizable intangible assets recorded as of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Remainder

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

 

 

of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After

 

(Millions)

 

2017

 

2018

 

2019

 

2020

 

2021

 

2022

 

2022

 

Amortization expense

 

$

49

 

$

192

 

$

183

 

$

174

 

$

162

 

$

148

 

$

602

 

 

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. The table above excludes the impact of the carrying value of finite-lived intangible assets associated with disposal groups classified as held-for-sale at September 30, 2017. See Note 2 for additional details. 3M expenses the costs incurred to renew or extend the term of intangible assets.

17


 

NOTE 4.  Restructuring Actions and Exit Activities

 

2017 Restructuring Actions:

 

During the second quarter of 2017, management approved and committed to undertake certain restructuring actions primarily focused on portfolio and footprint optimization. These actions affected approximately 1,300 positions worldwide and resulted in a second quarter 2017 pre-tax charges of $99 million. Remaining activities related to restructuring are expected to be completed by the end of 2018.

 

Components of these restructuring charges are summarized by business segment as follows:

 

 

 

 

 

 

 

 

Second Quarter 2017

 

(Millions)

    

Employee-Related

 

Industrial

 

$

39

 

Safety and Graphics

 

 

 9

 

Health Care

 

 

 2

 

Electronics and Energy

 

 

 7

 

Consumer

 

 

36

 

Corporate and Unallocated

 

 

 6

 

Total Expense

 

$

99

 

 

The preceding restructuring charges were recorded in the income statement as follows:

 

 

 

 

 

 

(Millions)

    

Second Quarter 2017

 

Cost of sales

 

$

86

 

Selling, general and administrative expenses

 

 

 5

 

Research, development and related expenses

 

 

 8

 

Total

 

$

99

 

 

Components of these restructuring actions, follow:

 

 

 

 

 

 

 

 

 

(Millions)

    

Employee-Related

 

Expense incurred in the second quarter of 2017

 

$

99

 

Accrued restructuring action balances as of June 30, 2017

 

$

99

 

Cash payments

 

 

(3)

 

Accrued restructuring action balances as of September 30, 2017

 

$

96

 

 

2017 Exit Activities:

 

In the first quarter of 2017, the Company recorded net pre-tax charges of $24 million related to exit activities. These charges related to employee reductions, primarily in Western Europe.

18


 

NOTE 5.  Supplemental Equity and Comprehensive Income Information

 

Consolidated Statement of Changes in Equity

 

Three months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3M Company Shareholders