10-Q 1 mmm-20180630x10q.htm 10-Q mmm_Current_Folio_10Q

 

 

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, 2018

 

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 every Interactive Data File required to be submitted 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 June 30, 2018

Common Stock, $0.01 par value per share

 

586,613,476 shares

 

 

 

 

 


 

      3M COMPANY

   Form 10-Q for the Quarterly Period Ended June 30, 2018

 

 

 

 

 

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. Revenue

13

 

Note 3. Acquisitions and Divestitures

16

 

Note 4. Goodwill and Intangible Assets

17

 

Note 5. Restructuring Actions and Exit Activities

19

 

Note 6. Supplemental Income Statement Information 

20

 

Note 7. Supplemental Equity and Comprehensive Income Information

20

 

Note 8. Income Taxes

24

 

Note 9. Marketable Securities

26

 

Note 10. Long-Term Debt and Short-Term Borrowings

26

 

Note 11. Pension and Postretirement Benefit Plans

27

 

Note 12. Derivatives

28

 

Note 13. Fair Value Measurements

34

 

Note 14. Commitments and Contingencies

37

 

Note 15. Stock-Based Compensation

46

 

Note 16. Business Segments

50

 

Report of Independent Registered Public Accounting Firm

52

 

 

 

ITEM 2. 

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

 

 

Index to Management’s Discussion and Analysis:

 

 

Overview

53

 

Results of Operations

60

 

Performance by Business Segment

65

 

Financial Condition and Liquidity

72

 

Cautionary Note Concerning Factors That May Affect Future Results

78

 

 

 

ITEM 3. 

Quantitative and Qualitative Disclosures About Market Risk

78

 

 

 

ITEM 4. 

Controls and Procedures

79

 

 

 

PART II 

OTHER INFORMATION

 

 

 

 

ITEM 1. 

Legal Proceedings

80

 

 

 

ITEM 1A. 

Risk Factors

80

 

 

 

ITEM 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

82

 

 

 

ITEM 3. 

Defaults Upon Senior Securities

83

 

 

 

ITEM 4. 

Mine Safety Disclosures

83

 

 

 

ITEM 5. 

Other Information

83

 

 

 

ITEM 6. 

Exhibits

83

 

2


 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended June 30, 2018

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)

    

2018

    

2017

    

2018

 

2017

 

Net sales

 

$

8,390

 

$

7,810

 

$

16,668

 

$

15,495

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

4,227

 

 

4,020

 

 

8,463

 

 

7,902

 

Selling, general and administrative expenses

 

 

1,800

 

 

1,620

 

 

4,373

 

 

3,234

 

Research, development and related expenses

 

 

468

 

 

478

 

 

954

 

 

954

 

Gain on sale of businesses

 

 

(506)

 

 

(461)

 

 

(530)

 

 

(490)

 

Total operating expenses

 

 

5,989

 

 

5,657

 

 

13,260

 

 

11,600

 

Operating income

 

 

2,401

 

 

2,153

 

 

3,408

 

 

3,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income), net

 

 

51

 

 

11

 

 

93

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

2,350

 

 

2,142

 

 

3,315

 

 

3,879

 

Provision for income taxes

 

 

488

 

 

557

 

 

847

 

 

968

 

Net income including noncontrolling interest

 

$

1,862

 

$

1,585

 

$

2,468

 

$

2,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

 

 5

 

 

 2

 

 

 9

 

 

 5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,857

 

$

1,583

 

$

2,459

 

$

2,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — basic

 

 

591.4

 

 

598.1

 

 

593.8

 

 

598.1

 

Earnings per share attributable to 3M common shareholders — basic

 

$

3.14

 

$

2.65

 

$

4.14

 

$

4.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — diluted

 

 

604.2

 

 

612.8

 

 

608.5

 

 

612.4

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

3.07

 

$

2.58

 

$

4.04

 

$

4.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per 3M common share

 

$

1.36

 

$

1.175

 

$

2.72

 

$

2.35

 

 

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 

    

Six months ended 

 

 

 

June 30,

 

June 30,

 

(Millions)

    

2018

    

2017

    

2018

    

2017

 

Net income including noncontrolling interest

 

$

1,862

 

$

1,585

 

$

2,468

 

$

2,911

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

(496)

 

 

(67)

 

 

(329)

 

 

225

 

Defined benefit pension and postretirement plans adjustment

 

 

114

 

 

78

 

 

230

 

 

161

 

Cash flow hedging instruments, unrealized gain (loss)

 

 

162

 

 

(51)

 

 

101

 

 

(127)

 

Total other comprehensive income (loss), net of tax

 

 

(220)

 

 

(40)

 

 

 2

 

 

259

 

Comprehensive income (loss) including noncontrolling interest

 

 

1,642

 

 

1,545

 

 

2,470

 

 

3,170

 

Comprehensive (income) loss attributable to noncontrolling interest

 

 

(1)

 

 

(2)

 

 

(4)

 

 

(8)

 

Comprehensive income (loss) attributable to 3M

 

$

1,641

 

$

1,543

 

$

2,466

 

$

3,162

 

 

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

 

4


 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

(Dollars in millions, except per share amount)

    

2018

    

2017

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,801

 

$

3,053

 

Marketable securities — current

 

 

385

 

 

1,076

 

Accounts receivable — net

 

 

5,383

 

 

4,911

 

Inventories

 

 

 

 

 

 

 

Finished goods

 

 

1,979

 

 

1,915

 

Work in process

 

 

1,292

 

 

1,218

 

Raw materials and supplies

 

 

967

 

 

901

 

Total inventories

 

 

4,238

 

 

4,034

 

Prepaids

 

 

713

 

 

937

 

Other current assets

 

 

370

 

 

266

 

Total current assets

 

 

13,890

 

 

14,277

 

Property, plant and equipment

 

 

24,758

 

 

24,914

 

Less: Accumulated depreciation

 

 

(16,113)

 

 

(16,048)

 

Property, plant and equipment — net

 

 

8,645

 

 

8,866

 

Goodwill

 

 

10,107

 

 

10,513

 

Intangible assets — net

 

 

2,787

 

 

2,936

 

Other assets

 

 

1,349

 

 

1,395

 

Total assets

 

$

36,778

 

$

37,987

 

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

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

 

$

3,225

 

$

1,853

 

Accounts payable

 

 

1,871

 

 

1,945

 

Accrued payroll

 

 

646

 

 

870

 

Accrued income taxes

 

 

293

 

 

310

 

Other current liabilities

 

 

2,867

 

 

2,709

 

Total current liabilities

 

 

8,902

 

 

7,687

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

11,294

 

 

12,096

 

Pension and postretirement benefits

 

 

3,254

 

 

3,620

 

Other liabilities

 

 

2,900

 

 

2,962

 

Total liabilities

 

$

26,350

 

$

26,365

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

3M Company shareholders’ equity:

 

 

 

 

 

 

 

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

 

$

 9

 

$

 9

 

Additional paid-in capital

 

 

5,550

 

 

5,352

 

Retained earnings

 

 

39,442

 

 

39,115

 

Treasury stock, at cost: 357,419,580 shares at June 30, 2018;

   349,148,819 shares at December 31, 2017

 

 

(27,617)

 

 

(25,887)

 

Accumulated other comprehensive income (loss)

 

 

(7,019)

 

 

(7,026)

 

Total 3M Company shareholders’ equity

 

 

10,365

 

 

11,563

 

Noncontrolling interest

 

 

63

 

 

59

 

Total equity

 

$

10,428

 

$

11,622

 

Total liabilities and equity

 

$

36,778

 

$

37,987

 

 

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)

 

 

 

 

 

 

 

 

 

 

    

Six months ended 

 

 

 

June 30,

 

(Millions)

    

2018

    

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

2,468

 

$

2,911

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

762

 

 

818

 

Company pension and postretirement contributions

 

 

(261)

 

 

(279)

 

Company pension and postretirement expense

 

 

204

 

 

163

 

Stock-based compensation expense

 

 

208

 

 

206

 

Gain on sale of businesses

 

 

(530)

 

 

(490)

 

Deferred income taxes

 

 

(1)

 

 

(120)

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(606)

 

 

(412)

 

Inventories

 

 

(337)

 

 

(347)

 

Accounts payable

 

 

(12)

 

 

(60)

 

Accrued income taxes (current and long-term)

 

 

234

 

 

257

 

Other — net

 

 

(87)

 

 

(17)

 

Net cash provided by operating activities

 

 

2,042

 

 

2,630

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

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

 

 

(669)

 

 

(589)

 

Proceeds from sale of PP&E and other assets

 

 

96

 

 

13

 

Acquisitions, net of cash acquired

 

 

13

 

 

 —

 

Purchases of marketable securities and investments

 

 

(964)

 

 

(407)

 

Proceeds from maturities and sale of marketable securities and investments

 

 

1,636

 

 

543

 

Proceeds from sale of businesses, net of cash sold

 

 

806

 

 

862

 

Other — net

 

 

(11)

 

 

 5

 

Net cash provided by investing activities

 

 

907

 

 

427

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Change in short-term debt — net

 

 

774

 

 

(113)

 

Repayment of debt (maturities greater than 90 days)

 

 

(6)

 

 

(650)

 

Proceeds from debt (maturities greater than 90 days)

 

 

 6

 

 

 —

 

Purchases of treasury stock

 

 

(2,537)

 

 

(1,184)

 

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

 

 

305

 

 

496

 

Dividends paid to shareholders

 

 

(1,612)

 

 

(1,403)

 

Other — net

 

 

(26)

 

 

(2)

 

Net cash used in financing activities

 

 

(3,096)

 

 

(2,856)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(105)

 

 

55

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(252)

 

 

256

 

Cash and cash equivalents at beginning of year

 

 

3,053

 

 

2,398

 

Cash and cash equivalents at end of period

 

$

2,801

 

$

2,654

 

 

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. 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 8, 2018 (which updated 3M’s 2017 Annual Report on Form 10-K).

 

As described in the “New Accounting Pronouncements” section, the Company adopted Accounting Standards Update (ASU) No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, effective January 1, 2018 on a retrospective basis. This ASU changed how 3M presents net periodic benefit cost within its consolidated statement of income, as reflected in the table that follows. The financial information presented herein reflects these impacts for all periods presented.

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2017

 

Previously

 

 

 

 

 

(Millions)

    

Reported

    

Revised

    

Change

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

7,810

 

$

7,810

 

$

 —

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

4,007

 

 

4,020

 

 

13

 

Selling, general and administrative expenses

 

 

1,607

 

 

1,620

 

 

13

 

Research, development and related expenses

 

 

473

 

 

478

 

 

 5

 

Gain on sale of businesses

 

 

(461)

 

 

(461)

 

 

 —

 

Total operating expenses

 

 

5,626

 

 

5,657

 

 

31

 

Operating income

 

$

2,184

 

$

2,153

 

$

(31)

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income), net

 

$

42

 

$

11

 

$

(31)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

2,142

 

$

2,142

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2017

 

Previously

 

 

 

 

 

(Millions)

    

Reported

    

Revised

    

Change

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

15,495

 

$

15,495

 

$

 —

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

7,876

 

 

7,902

 

 

26

 

Selling, general and administrative expenses

 

 

3,207

 

 

3,234

 

 

27

 

Research, development and related expenses

 

 

944

 

 

954

 

 

10

 

Gain on sale of businesses

 

 

(490)

 

 

(490)

 

 

 —

 

Total operating expenses

 

 

11,537

 

 

11,600

 

 

63

 

Operating income

 

$

3,958

 

$

3,895

 

$

(63)

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income), net

 

$

79

 

$

16

 

$

(63)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

3,879

 

$

3,879

 

$

 —

 

 

7


 

In addition, as described in Note 16, effective in the first quarter of 2018, 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 consolidation of customer account activity within international countries (expanding dual credit reporting) and the centralization of manufacturing and supply chain technology platforms. Segment information presented herein reflects the impact of these changes for all periods presented.

 

The Company updated its financial information and disclosures in its Current Report on Form 8-K dated May 8, 2018 (which updated 3M’s 2017 Annual Report on Form 10-K) to reflect the retrospective application of ASU No. 2017-07 and the preceding business reporting changes.

 

Changes to Significant Accounting Policies

 

The following accounting policies have been updated since the Company’s 2017 Annual Report on Form 10-K (which was updated by 3M’s Current Report on Form 8-K dated May 8, 2018 in regards to the adoption of ASU 2017-07 and the business segment reporting changes discussed above).

 

Revenue (sales) recognition: As described in the “New Accounting Pronouncements” section,  3M adopted ASU No. 2014-09, Revenue from Contracts with Customers, and other related ASUs on January 1, 2018 using the modified retrospective transition approach. The Company’s accounting policy with respect to revenue recognition and additional disclosure relative to this ASU are included in Note 2.

 

Investments: As described in the “New Accounting Pronouncements” section, 3M adopted ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities,  effective January 1, 2018. As a result, all equity securities that do not result in consolidation and are not accounted for under the equity method are measured at fair value with changes therein reflected in net income. 3M utilizes the measurement alternative for equity investments that do not have readily determinable fair values and measures these investments at cost less impairment plus or minus observable price changes in orderly transactions. Further, the change in balance of these securities for the three and six months ended June 30, 2018 was not considered material for additional disclosure.

 

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 is immaterial as a percent of 3M’s consolidated operating income for 2017. The Venezuelan government sets official rates of exchange and conditions precedent to purchase foreign currency at these rates with local currency. The government has also operated 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 (DICOM), or its predecessor. During the same periods, the Venezuelan government’s official exchange was Tipo de Cambio Protegido (DIPRO), or its predecessor, until its discontinuance in the first quarter of 2018.

 

Note 1 in 3M’s Current Report on Form 8-K dated May 8, 2018 (which updated 3M’s 2017 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 June 30, 2018, the Company had a balance of net monetary assets denominated in VEF of less than 860 billion VEF and the DIPRO exchange rate was approximately 96,000 VEF per U.S. dollar. 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 June 30, 2018, the Company continues to

8


 

consolidate its Venezuelan subsidiary. As of June 30, 2018, 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 equity balance were not significant.

 

3M has subsidiaries in Argentina, the operating income of which is less than one half of one percent of 3M’s consolidated operating income for 2017. Based on various indices, Argentina’s cumulative three-year inflation rate exceeded 100 percent in the second quarter of 2018, thus being considered highly inflationary. As a result, the financial statements of the Argentine subsidiaries will be remeasured as if its functional currency were that of its parent, starting in the third quarter of 2018. As of June 30, 2018, the Company had a balance of net monetary assets denominated in Argentine pesos (ARS) of less than 230 million ARS and the exchange rate was approximately 28 ARS per U.S. dollar.

 

Earnings Per Share

 

The difference in the weighted average 3M shares outstanding for calculating basic and diluted earnings per share attributable to 3M common shareholders is a result of the dilution associated with the Company’s stock-based compensation plans. Certain options outstanding under these stock-based compensation plans were not included in the computation of diluted earnings per share attributable to 3M common shareholders because they would not have had a dilutive effect (3.5 million average options for the three months ended June 30, 2018; 2.7 million average options for the six months ended June 30, 2018; insignificant for the three months ended June 30, 2017; 1.6 million average options for the six months ended June 30, 2017). 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)

    

2018

    

2017

    

2018

    

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,857

 

$

1,583

 

$

2,459

 

$

2,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding basic

 

 

591.4

 

 

598.1

 

 

593.8

 

 

598.1

 

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

 

 

12.8

 

 

14.7

 

 

14.7

 

 

14.3

 

Denominator for weighted average 3M common shares outstanding diluted

 

 

 604.2

 

 

612.8

 

 

608.5

 

 

612.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders basic

 

$

3.14

 

$

2.65

 

$

4.14

 

$

4.86

 

Earnings per share attributable to 3M common shareholders diluted

 

$

3.07

 

$

2.58

 

$

4.04

 

$

4.74

 

 

9


 

New Accounting Pronouncements

 

See the Company’s Current Report on Form 8-K dated May 8, 2018 (which updated 3M’s 2017 Annual Report on Form 10-K) for a more detailed discussion of the standards in the tables that follow, except for those pronouncements issued subsequent to the most recent Form 10-K filing date for which separate, more detailed discussion is provided below.

 

 

 

 

 

Standards Adopted During the Current Fiscal Year

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

ASU No. 2014-09, Revenue from Contracts with Customers (as amended by ASU Nos. 2015-14, 2016-08, 2016-10, 2016-12, and 2016-20) and related ASU No. 2017-10, Determining the Customer of the Operation Services

Provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes most previous revenue recognition guidance, including industry-specific guidance.

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.

Requires disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

Specifies the accounting for some costs to obtain or fulfill a contract with a customer.

January 1, 2018

See Note 2 for detailed discussion and disclosures.

Adopted using a modified retrospective approach. January 1, 2018 balance of retained earnings was increased by less than $2 million.

ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities

Requires investments in equity securities in an entity that do not result in consolidation and are not accounted for under the equity method to be measured at fair value with changes therein reflected in net income.

Simplifies the impairment assessment and allows for a fair value measurement alternative for equity investments without a readily determinable fair value.

Eliminates the previous cost method of accounting for certain equity securities that did not have readily determinable fair values.

January 1, 2018

Measurement alternative adopted prospectively.

See the preceding “Changes to Significant Accounting Policies” section for impact.

 

ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory

Exempts income tax accounting that requires companies to defer the income tax effects of certain intercompany transactions only for intercompany inventory transactions.

The exception no longer applies to intercompany sales and transfers of other assets (e.g., intangible assets).

January 1, 2018

Adopted using a modified retrospective approach. January 1, 2018 balance of retained earnings was decreased by less than $2 million.

ASU No. 2017-01, Clarifying the Definition of a Business

Narrows the previous 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.

January 1, 2018

Adopted prospectively with no immediate impact.

Fewer sets of transferred assets and activities are expected to be considered businesses.

ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

Largely impacts the sale of nonfinancial assets (such as real estate and intellectual property) that do not constitute a business, when the purchaser is not a customer.

Seller applies certain recognition and measurement principles of ASU No. 2014-09, Revenue from Contracts with Customers, even though the purchaser is not a customer.

January 1, 2018

Adopted coincident with the adoption of ASU No. 2014-09 with no material impact.

10


 

Standards Adopted During the Current Fiscal Year (continued)

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

Changes previous classification of net periodic defined benefit pension and postretirement benefit costs within operating expenses.

Requires that only the service cost component of net periodic benefit cost be included in operating expenses and that only the service cost component is eligible for capitalization into assets such as inventory.

Specifies that other net periodic benefit costs components (such as interest, expected return on plan assets, prior service cost amortization and actuarial gain/loss amortization) would be reported outside of operating income.

January 1, 2018

Adopted on a retrospective basis.

No impact on previously reported income before income taxes and net income attributable to 3M. However, non-service cost components of net periodic benefit costs in prior periods have been reclassified from operating expenses and are now reported outside of operating income within other expense (income), net.

See the “Basis of Presentation” section above for impact of this ASU’s adoption on prior period income statement amounts. 

Prospective impact on costs capitalized into assets was not material.

ASU No. 2017-09, Scope of Modification Accounting

Provides that fewer changes to the terms of share-based payment awards will require accounting under the modification model (which generally would have required additional compensation cost).

January 1, 2018

Adopted prospectively with no immediate impact.

3M does not typically make changes to the terms or conditions of its issued share-based payments.

ASU No. 2017-09, Scope of Modification Accounting

Provides that fewer changes to the terms of share-based payment awards will require accounting under the modification model (which generally would have required additional compensation cost).

January 1, 2018

Adopted prospectively with no immediate impact.

3M does not typically make changes to the terms or conditions of its issued share-based payments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standards Issued and Not Yet Adopted

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

ASU No. 2016-02, Leases (as amended by ASU No. 2018-10)

Introduces a lessee model that requires entities to recognize assets and liabilities for most leases, but recognize expenses on their income statements in a manner similar to current accounting. This ASU does not make fundamental changes to existing lessor accounting.

January 1, 2019

Requires modified retrospective transition applied to earliest period presented

3M is currently assessing this ASU’s impact.

See the “Relevant New Standards Issued Subsequent to Most Recent Annual Report” below for further discussion on ASU No. 2018-10 issued in July 2018.

ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments

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.

Amends the current other-than-temporary impairment model for available-for-sale debt securities. 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.

January 1, 2020

Required to make a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

3M is currently assessing this ASU’s impact.

ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities

Shortens the amortization period to the earliest call date for the premium related to certain callable debt securities that have explicit, noncontingent call features and are callable at a fixed price and preset date.

January 1, 2019

3M’s marketable security portfolio includes limited instances of callable debt securities held at a premium.

3M does not expect this ASU to have a material impact.

 

11


 

 

 

 

 

Standards Issued and Not Yet Adopted (continued)

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

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

 

Amends (1) the classification of financial instruments with down-round features as liabilities or equity by revising 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.

January 1, 2019

No financial instruments with down-round features have been issued.

3M does not expect this ASU to have a material impact.

ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities

Amends existing guidance to simplify application of hedge accounting in certain situations and allow companies to better align their hedge accounting with risk management activities.

Simplifies related accounting by eliminating requirement to separately measure and report hedge ineffectiveness.

Expands an entity’s ability to hedge nonfinancial and financial risk components.

January 1, 2019

Required to make a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.  

3M is currently assessing this ASU’s impact.

 

Relevant New Standards Issued Subsequent to Most Recent Annual Report

 

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify, to retained earnings, the one-time income tax effects stranded in accumulated other comprehensive income (AOCI) arising from the change in the U.S. federal corporate tax rate as a result of the Tax Cuts and Jobs Act of 2017. An entity that elects to make this reclassification must consider all items in AOCI that have tax effects stranded as a result of the tax rate change, and must disclose the reclassification of these tax effects as well as the entity’s policy for releasing income tax effects from AOCI. The ASU may be applied either retrospectively or as of the beginning of the period of adoption. For 3M, the ASU is effective January 1, 2019. While this ASU will have no impact on 3M’s results of operations, the Company is currently assessing this standard’s impact on its consolidated financial condition.

 

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which largely aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees. The ASU also clarifies that any share-based payment issued to a customer should be evaluated under ASC 606, Revenue from Contracts with Customers. The ASU requires a modified retrospective transition approach. For 3M, the ASU is effective as of January 1, 2019. Because the Company does not grant share-based payments to nonemployees or customers, this ASU will not have a material impact on its consolidated results of operations and financial condition.

 

In June 2018, the FASB issued ASU No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The ASU applies to entities that receive or make contributions, which primarily are not-for-profit entities but also affects business entities that make contributions. In the context of business entities that make contributions, the FASB clarified that a contribution is conditional if the arrangement includes both a barrier for the recipient to be entitled to the assets transferred and a right of return for the assets transferred (or a right of release of the business entity’s obligation to transfer assets). The recognition of contribution expense is deferred for conditional arrangements and is immediate for unconditional arrangements. The ASU requires modified prospective transition to arrangements that have not been completed as of the effective date or that are entered into after the effective date, but full retrospective application to each period presented is permitted. For 3M, the ASU is effective as of January 1, 2019. The Company does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.

 

In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amends ASU No. 2016-02, Leases. The new ASU includes certain clarifications to address potential narrow-scope implementation issues which the Company is incorporating into its assessment and adoption of ASU No. 2016-02. This ASU has the same transition requirements and effective date as ASU No. 2016-02, which for 3M is January 1, 2019.

12


 

 

NOTE 2.  Revenue

 

The Company adopted ASU No. 2014-09 and related standards (collectively, Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers), as described in Note 1, on January 1, 2018 using the modified retrospective method of adoption. Prior periods have not been restated. Due to the cumulative net impact of adopting ASC 606, the January 1, 2018 balance of retained earnings was increased by less than $2 million, primarily relating to the accelerated recognition for software installation service and training revenue. This cumulative impact reflects retrospective application of ASC 606 only to contracts that were not completed as of January 1, 2018. Further, the Company applied the practical expedient permitting the effect of all contract modifications that occurred before January 1, 2018 to be aggregated in the transition accounting. The impact of applying ASC 606 as compared with previous guidance applied to revenues and costs was not material for the three and six months ended June 30, 2018.

 

Performance Obligations:

The Company sells a wide range of products to a diversified base of customers around the world and has no material concentration of credit risk or significant payment terms extended to customers. The vast majority of 3M’s customer arrangements contain a single performance obligation to transfer manufactured goods as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and, therefore, not distinct. However, to a limited extent 3M also enters into customer arrangements that involve intellectual property out-licensing, multiple performance obligations (such as equipment, installation and service), software with coterminous post-contract support, services and non-standard terms and conditions.

 

Revenue is recognized when control of goods has transferred to customers. For the majority of the Company’s customer arrangements, control transfers to customers at a point-in-time when goods/services have been delivered as that is generally when legal title, physical possession and risks and rewards of goods/services transfers to the customer. In limited arrangements, control transfers over time as the customer simultaneously receives and consumes the benefits as 3M completes the performance obligation(s).

 

Revenue is recognized at the transaction price which the Company expects to be entitled. When determining the transaction price, 3M estimates variable consideration applying the portfolio approach practical expedient under ASC 606. The main sources of variable consideration for 3M are customer rebates, trade promotion funds, and cash discounts. These sales incentives are recorded as a reduction to revenue at the time of the initial sale using the most-likely amount estimation method. The most-likely amount method is based on the single most likely outcome from a range of possible consideration outcomes. The range of possible consideration outcomes are primarily derived from the following inputs: sales terms, historical experience, trend analysis, and projected market conditions in the various markets served. Because 3M serves numerous markets, the sales incentive programs offered vary across businesses, but the most common incentive relates to amounts paid or credited to customers for achieving defined volume levels or growth objectives. There are no material instances where variable consideration is constrained and not recorded at the initial time of sale. Free goods are accounted for as an expense and recorded in cost of sales. Product returns are recorded as a reduction to revenue based on anticipated sales returns that occur in the normal course of business. 3M primarily has assurance-type warranties that do not result in separate performance obligations. Sales, use, value-added, and other excise taxes are not recognized in revenue. The Company has elected to present revenue net of sales taxes and other similar taxes.

 

For substantially all arrangements recognized over time, the Company applies the “right to invoice” practical expedient. As a result, 3M recognizes revenue at the invoice amount when the entity has a right to invoice a customer at an amount that corresponds directly with the value to the customer of the Company’s performance completed to date.

 

For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using 3M’s best estimate of the standalone selling price of each distinct good or service in the contract.

 

The Company did not recognize any material revenue in the current reporting period for performance obligations that were fully satisfied in previous periods.

 

Contract Balances:

Deferred income (current portion) as of June 30, 2018 and December 31, 2017 was $512 million and $513 million, respectively, and primarily relates to revenue that is recognized over time for one-year software license contracts, the changes in balance of which are related to the satisfaction or partial satisfaction of these contracts. The balance also contains a deferral of income for goods that are in-transit at period end for which control transfers to the customer upon delivery. Approximately $110 million and $390 million of the

13


 

December 31, 2017 balance was recognized as revenue during the three and six months ended June 30, 2018, respectively. The amount of noncurrent deferred income is not considered significant.

 

Exemptions and Practical Expedients Applied or Elected:

3M applies ASC 606 utilizing the following allowable exemptions or practical expedients:

·

Exemption to not disclose the unfulfilled performance obligation balance for contracts with an original length of one year or less.

·

Practical expedient relative to costs of obtaining a contract by expensing sales commissions when incurred because the amortization period would have been one year or less.

·

Portfolio approach practical expedient relative to estimation of variable consideration.

·

“Right to invoice” practical expedient based on 3M’s right to invoice the customer at an amount that reasonably represents the value to the customer of 3M’s performance completed to date.

·

Election to present revenue net of sales taxes and other similar taxes.

·

Sales-based royalty exemption permitting future intellectual property out-licensing royalty payments to be excluded from the otherwise required remaining performance obligations disclosure.

 

Disaggregated revenue information:

The Company views the following disaggregated disclosures as useful to understanding the composition of revenue recognized during the respective reporting periods:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Six months ended 

 

 

 

June 30,

 

June 30,

 

Net Sales (Millions)

 

2018

    

2017

    

2018

    

2017

 

Abrasives

 

$

473

 

$

437

 

$

948

 

$

867

 

Adhesives and Tapes

 

 

1,165

 

 

1,096

 

 

2,318

 

 

2,171

 

Advanced Materials

 

 

317

 

 

287

 

 

621

 

 

574

 

Automotive and Aerospace

 

 

519

 

 

489

 

 

1,078

 

 

997

 

Automotive Aftermarket

 

 

438

 

 

418

 

 

856

 

 

835

 

Separation and Purification

 

 

238

 

 

219

 

 

474

 

 

439

 

Other Industrial

 

 

(2)

 

 

 —

 

 

(3)

 

 

(1)

 

Total Industrial Business Group

 

$

3,148

 

$

2,946

 

$

6,292

 

$

5,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Solutions

 

$

502

 

$

457

 

$

987

 

$

900

 

Personal Safety

 

 

957

 

 

721

 

 

1,919

 

 

1,428

 

Roofing Granules

 

 

99

 

 

96

 

 

200

 

 

193

 

Transportation Safety

 

 

257

 

 

295

 

 

493

 

 

598

 

Other Safety and Graphics

 

 

 —

 

 

 —

 

 

(1)

 

 

 —

 

Total Safety and Graphics Business Group

 

$

1,815

 

$

1,569

 

$

3,598

 

$

3,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Drug Delivery

 

$

119

 

$

120