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RNS Number : 7919W
3M Company
27 April 2021
 

 

 

 

Click on, or paste the following link into your web browser, to view the associated PDF document.
http://www.rns-pdf.londonstockexchange.com/rns/7919W_1-2021-4-27.pdf

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

 

Commission file number:  1-3285

 

3M COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

41-0417775

(State or other jurisdiction of incorporation)

 

(IRS Employer Identification No.)

 

 

 

3M Center, St. Paul, Minnesota

 

55144-1000

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

 

(Registrant's Telephone Number, Including Area Code) (651) 733-1110

 

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

 

 

 

 

 

 

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, Par Value $.01 Per Share

 

MMM

 

New York Stock Exchange, Inc.

 

 

MMM

 

Chicago Stock Exchange, Inc.

1.500% Notes due 2026

 

MMM26

 

New York Stock Exchange, Inc.

0.375% Notes due 2022

 

MMM22A

 

New York Stock Exchange, Inc.

0.950% Notes due 2023

 

MMM23

 

New York Stock Exchange, Inc.

1.750% Notes due 2030

 

MMM30

 

New York Stock Exchange, Inc.

1.500% Notes due 2031

 

MMM31

 

New York Stock Exchange, Inc.

 

Note: The common stock of the Registrant is also traded on the SWX Swiss Exchange.

 

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 such files).  Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 

 

 

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 March 31, 2021

Common Stock, $0.01 par value per share

 

579,675,002 shares

 

 

 

3M COMPANY

Form 10-Q for the Quarterly Period Ended March 31, 2021

 

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

10

 

Note 3. Acquisitions and Divestitures

11

 

Note 4. Goodwill and Intangible Assets

12

 

Note 5. Restructuring Actions and Exit Activities

14

 

Note 6. Supplemental Income Statement Information

15

 

Note 7. Supplemental Equity and Comprehensive Income Information

16

 

Note 8. Income Taxes

18

 

Note 9. Marketable Securities

19

 

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

19

 

Note 11. Pension and Postretirement Benefit Plans

20

 

Note 12. Derivatives

20

 

Note 13. Fair Value Measurements

27

 

Note 14. Commitments and Contingencies

29

 

Note 15. Stock-Based Compensation

47

 

Note 16. Business Segments

49

 

 

 

ITEM 2.

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

 

 

Index to Management's Discussion and Analysis:

 

 

Overview

52

 

Results of Operations

57

 

Performance by Business Segment

59

 

Financial Condition and Liquidity

63

 

Cautionary Note Concerning Factors That May Affect Future Results

69

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

70

 

 

 

ITEM 4.

Controls and Procedures

70

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

71

 

 

 

ITEM 1A.

Risk Factors

71

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

75

 

 

 

ITEM 3.

Defaults Upon Senior Securities

75

 

 

 

ITEM 4.

Mine Safety Disclosures

75

 

 

 

ITEM 5.

Other Information

75

 

 

 

ITEM 6.

Exhibits

76

 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended March 31, 2021

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

 

March 31,

(Millions, except per share amounts)

    

2021

    

2020

Net sales

 

$

 8,851

 

$

 8,075

Operating expenses

 

 

 

 

 

 

Cost of sales

 

 

 4,525

 

 

 4,109

Selling, general and administrative expenses

 

 

 1,808

 

 

 1,768

Research, development and related expenses

 

 

 524

 

 

 537

Gain on sale of businesses

 

 

 -

 

 

 (2)

Total operating expenses

 

 

 6,857

 

 

 6,412

Operating income

 

 

 1,994

 

 

 1,663

 

 

 

 

 

 

 

Other expense (income), net

 

 

 49

 

 

 75

 

 

 

 

 

 

 

Income before income taxes

 

 

 1,945

 

 

 1,588

Provision for income taxes

 

 

 319

 

 

 278

Income of consolidated group

 

 

 1,626

 

 

 1,310

 

 

 

 

 

 

 

Income (loss) from unconsolidated subsidiaries, net of taxes

 

 

 1

 

 

 -

Net income including noncontrolling interest

 

 

 1,627

 

 

 1,310

 

 

 

 

 

 

 

Less: Net income (loss) attributable to noncontrolling interest

 

 

 3

 

 

 2

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

 1,624

 

$

 1,308

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding - basic

 

 

 580.5

 

 

 576.8

Earnings per share attributable to 3M common shareholders - basic

 

$

 2.80

 

$

 2.27

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding - diluted

 

 

 586.3

 

 

 581.5

Earnings per share attributable to 3M common shareholders - diluted

 

$

 2.77

 

$

 2.25

 

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

 

 

 

3M Company and Subsidiaries

Consolidated Statement of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

 

 

March 31,

 

(Millions)

    

2021

    

2020

 

Net income including noncontrolling interest

 

$

 1,627

 

$

 1,310

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 (222)

 

 

 (444)

 

Defined benefit pension and postretirement plans adjustment

 

 

 119

 

 

 108

 

Cash flow hedging instruments

 

 

 58

 

 

 47

 

Total other comprehensive income (loss), net of tax

 

 

 (45)

 

 

 (289)

 

Comprehensive income (loss) including noncontrolling interest

 

 

 1,582

 

 

 1,021

 

Comprehensive (income) loss attributable to noncontrolling interest

 

 

 (4)

 

 

 1

 

Comprehensive income (loss) attributable to 3M

 

$

 1,578

 

$

 1,022

 

 

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

 

 

 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

(Dollars in millions, except per share amount)

    

2021

    

2020

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 4,636

 

$

 4,634

 

Marketable securities - current

 

 

 501

 

 

 404

 

Accounts receivable - net of allowances of $231 and $233

 

 

 4,817

 

 

 4,705

 

Inventories

 

 

 

 

 

 

 

Finished goods

 

 

 2,215

 

 

 2,081

 

Work in process

 

 

 1,249

 

 

 1,226

 

Raw materials and supplies

 

 

 994

 

 

 932

 

Total inventories

 

 

 4,458

 

 

 4,239

 

Prepaids

 

 

 535

 

 

 675

 

Other current assets

 

 

 398

 

 

 325

 

Total current assets

 

 

 15,345

 

 

 14,982

 

Property, plant and equipment

 

 

 26,705

 

 

 26,650

 

Less: Accumulated depreciation

 

 

 (17,465)

 

 

 (17,229)

 

Property, plant and equipment - net

 

 

 9,240

 

 

 9,421

 

Operating lease right of use assets

 

 

 871

 

 

 864

 

Goodwill

 

 

 13,654

 

 

 13,802

 

Intangible assets - net

 

 

 5,697

 

 

 5,835

 

Other assets

 

 

 2,373

 

 

 2,440

 

Total assets

 

$

 47,180

 

$

 47,344

 

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

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

 

$

 1,368

 

$

 806

 

Accounts payable

 

 

 2,670

 

 

 2,561

 

Accrued payroll

 

 

 655

 

 

 747

 

Accrued income taxes

 

 

 277

 

 

 300

 

Operating lease liabilities - current

 

 

 267

 

 

 256

 

Other current liabilities

 

 

 3,126

 

 

 3,278

 

Total current liabilities

 

 

 8,363

 

 

 7,948

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 16,819

 

 

 17,989

 

Pension and postretirement benefits

 

 

 4,231

 

 

 4,405

 

Operating lease liabilities

 

 

 609

 

 

 609

 

Other liabilities

 

 

 3,330

 

 

 3,462

 

Total liabilities

 

$

 33,352

 

$

 34,413

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

3M Company shareholders' equity:

 

 

 

 

 

 

 

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

 

$

 9

 

$

 9

 

Shares outstanding - March 31, 2021: 579,675,002

 

 

 

 

 

 

 

Shares outstanding - December 31, 2020: 577,749,638

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 6,283

 

 

 6,162

 

Retained earnings

 

 

 44,255

 

 

 43,821

 

Treasury stock, at cost:

 

 

 (29,020)

 

 

 (29,404)

 

Shares at March 31, 2021: 364,358,054

 

 

 

 

 

 

 

Shares at December 31, 2020: 366,283,418

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 (7,767)

 

 

 (7,721)

 

Total 3M Company shareholders' equity

 

 

 13,760

 

 

 12,867

 

Noncontrolling interest

 

 

 68

 

 

 64

 

Total equity

 

$

 13,828

 

$

 12,931

 

Total liabilities and equity

 

$

 47,180

 

$

 47,344

 

 

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

3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

 

 

March 31,

 

(Millions)

    

2021

    

2020

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

 1,627

 

$

 1,310

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 460

 

 

 440

 

Company pension and postretirement contributions

 

 

 (47)

 

 

 (39)

 

Company pension and postretirement expense

 

 

 47

 

 

 77

 

Stock-based compensation expense

 

 

 131

 

 

 120

 

Gain on sale of businesses

 

 

 -

 

 

 (2)

 

Deferred income taxes

 

 

 16

 

 

 29

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

 (205)

 

 

 (143)

 

Inventories

 

 

 (304)

 

 

 (207)

 

Accounts payable

 

 

 155

 

 

 12

 

Accrued income taxes (current and long-term)

 

 

 42

 

 

 68

 

Other - net

 

 

 (234)

 

 

 (452)

 

Net cash provided by (used in) operating activities

 

 

 1,688

 

 

 1,213

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

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

 

 

 (310)

 

 

 (332)

 

Proceeds from sale of PP&E and other assets

 

 

 32

 

 

 7

 

Acquisitions, net of cash acquired

 

 

 -

 

 

 (25)

 

Purchases of marketable securities and investments

 

 

 (428)

 

 

 (318)

 

Proceeds from maturities and sale of marketable securities and investments

 

 

 318

 

 

 207

 

Proceeds from sale of businesses, net of cash sold

 

 

 -

 

 

 86

 

Other - net

 

 

 19

 

 

 -

 

Net cash provided by (used in) investing activities

 

 

 (369)

 

 

 (375)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Change in short-term debt - net

 

 

 6

 

 

 462

 

Repayment of debt (maturities greater than 90 days)

 

 

 (450)

 

 

 -

 

Proceeds from debt (maturities greater than 90 days)

 

 

 -

 

 

 1,745

 

Purchases of treasury stock

 

 

 (231)

 

 

 (365)

 

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

 

 

 293

 

 

 149

 

Dividends paid to shareholders

 

 

 (858)

 

 

 (847)

 

Other - net

 

 

 (11)

 

 

 (36)

 

Net cash provided by (used in) financing activities

 

 

 (1,251)

 

 

 1,108

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 (66)

 

 

 (46)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

 2

 

 

 1,900

 

Cash and cash equivalents at beginning of year

 

 

 4,634

 

 

 2,353

 

Cash and cash equivalents at end of period

 

$

 4,636

 

$

 4,253

 

 

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

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 Annual Report on Form 10-K.

 

Effective in the first quarter of 2021, 3M made the following changes. Information provided herein reflects the impact of these changes for all periods presented.

·      Change in accounting principle for net periodic pension and postretirement plan cost. See below for additional information.

·      Change in measure of segment operating performance used by 3M's chief operating decision maker-impacting 3M's disclosed measure of segment profit/loss (business segment operating income). See additional information in Note 16.

·      Change in alignment of certain products within 3M's Consumer business segment-creating the Consumer Health and Safety Division. See additional information in Note 16.

 

Change in Accounting Principle for Determining Net Periodic Pension and Postretirement Plan Cost

 

In the first quarter of 2021, 3M changed the method it uses to calculate the market-related value of fixed income securities included in its pension and other postretirement plan assets. The market-related value is used to determine the expected return on plan assets and the amortization of net unamortized actuarial gains or losses expense components of net periodic benefit cost. The Company previously used the calculated value approach for all plan assets, deferring over three years the impact on these amounts of asset gains or losses that differed from expected returns. 3M changed to the fair value approach for calculating market-related value for the fixed income class of plan assets, which does not involve deferring the impact of excess plan asset gains or losses in the determination of these two components of net periodic benefit cost. 3M considers the use of the fair value approach preferrable to the calculated value approach as it results in a more current reflection of impacts of changes in value of these plan assets in the determination of net periodic benefit cost. Additionally, given the plans' liability-driven investment strategy whereby the changes in value of the fixed income plan assets should offset changes in the value of the plans' liabilities, this approach more closely aligns the expected return on plan assets expense component with the value reflected in the plans' funded status. This change was applied retrospectively to all periods presented within 3M's financial statements. The change did not impact consolidated operating income or net cash provided by operating activities but did impact the previously reported portion of pension and postretirement net periodic benefit cost (benefit) that was included within non-operating other expense (income) along with related consolidated income items such as net income and earnings per share. Other impacts included related changes to previously reported consolidated other comprehensive income, retained earnings, accumulated other comprehensive income (loss), and associated line items within the determination of net cash provided by operating activities. For classes of plan assets other than fixed income investments, the Company continues to use the calculated value approach to determine their market-related value.

 

 

The adoption of this change impacted previously reported amounts included herein as indicated in the tables below.

 

 

 

 

 

 

 

 

 

Consolidated Statement of Income

 

 

Three months ended 

 

 

 

March 31, 2020

 

 

 

Under Prior

    

 

 

 

(Millions, except per share amounts)

 

Method

 

As Adjusted

 

Other expense (income), net

 

$

 96

 

$

 75

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

 1,567

 

$

 1,588

 

Provision for income taxes

 

 

 273

 

 

 278

 

Income of consolidated group

 

$

 1,294

 

$

 1,310

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

 1,294

 

$

 1,310

 

Net income attributable to 3M

 

$

 1,292

 

$

 1,308

 

Earnings per share attributable to 3M common shareholders - basic

 

$

 2.24

 

$

 2.27

 

Earnings per share attributable to 3M common shareholders - diluted

 

$

 2.22

 

$

 2.25

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Comprehensive Income

 

 

Three months ended 

 

 

 

March 31, 2020

 

 

 

Under Prior

    

 

 

 

(Millions)

 

Method

 

As Adjusted

 

Net income including noncontrolling interest

 

$

 1,294

 

$

 1,310

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Defined benefit pension and postretirement plans adjustment

 

$

 119

 

$

 108

 

Total other comprehensive income (loss), net of tax

 

$

 (278)

 

$

 (289)

 

Comprehensive income (loss) including noncontrolling interest

 

$

 1,016

 

$

 1,021

 

Comprehensive income (loss) attributable to 3M

 

$

 1,017

 

$

 1,022

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet

 

 

As of December 31, 2020

 

 

Under Prior

 

 

 

(Millions)

 

Method

 

As Adjusted

Retained Earnings

 

$

 43,761

 

$

 43,821

Accumulated other comprehensive income (loss)

 

$

 (7,661)

 

$

 (7,721)

 

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows

 

 

Three months ended 

 

 

 

March 31, 2020

 

 

 

Under Prior

 

 

 

 

(Millions)

 

Method

 

As Adjusted

 

Net income including noncontrolling interest

 

$

 1,294

 

$

 1,310

 

Company pension and postretirement expense

 

$

 98

 

$

 77

 

Other - net

 

$

 (457)

 

$

 (452)

 

 

The cumulative adjustment as of January 1, 2020, the beginning of the earliest period presented in the consolidated financial statements included herein, was a $5 million reduction to each of retained earnings and accumulated other comprehensive loss.

 

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 the 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 have had an anti-dilutive effect (8.7 million and 19.2 million average options for the three months ended March 31, 2021 and 2020, respectively). The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

 

 

March 31,

 

(Amounts in millions, except per share amounts)

    

2021

    

2020

 

Numerator:

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

 1,624

 

$

 1,308

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding - basic

 

 

 580.5

 

 

 576.8

 

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

 

 

 5.8

 

 

 4.7

 

Denominator for weighted average 3M common shares outstanding - diluted

 

 

 586.3

 

 

 581.5

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders - basic

 

$

 2.80

 

$

 2.27

 

Earnings per share attributable to 3M common shareholders - diluted

 

$

 2.77

 

$

 2.25

 

 

New Accounting Pronouncements

 

Refer to Note 1 in 3M's 2020 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 as applicable.

 

 

 

 

 

 

 

 

 

Standards Adopted During the Current Fiscal Year

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740)

Eliminates certain existing exceptions related to the general approach in ASC 740 relating to franchise taxes, reducing complexity in the interim-period accounting for year-to-date loss limitations and changes in tax laws, and clarifying the accounting for transactions outside of business combination that result in a step-up in the tax basis of goodwill.

January 1, 2021

Adoption of this ASU did not have a material impact on 3M's consolidated results of operations and financial condition.

ASU No. 2020-01, Clarifying the Interactions between Topic 321, Investments-Equity Securities, Topic 323, Investments-Equity Method and Joint Ventures, and Topic 815, Derivatives and Hedging

Clarifies when accounting for certain equity securities, a Company should consider observable transactions before applying or upon discontinuing the equity method of accounting for the purposes of applying the measurement alternative.

 

Indicates when determining the accounting for certain derivatives, a Company should not consider if the underlying securities would be accounted for under the equity method or fair value option.

January 1, 2021

Adoption of this ASU did not have a material impact on 3M's consolidated results of operations and financial condition.

ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on

Financial Reporting and ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope

Provides temporary optional expedients and exceptions to existing guidance on contract modifications and hedge accounting to facilitate the market transition from existing reference rates, such as LIBOR which is being phased out beginning at the end of 2021, to alternate reference rates, such as SOFR.

Effective upon ASUs' issuances in 2020 & 2021

With the beginning of the phase out of LIBOR at the end of 2021, 3M continues to evaluate commercial contracts that may utilize LIBOR and will continue to monitor developments during the LIBOR transition period.

 

 

 

 

           

 

 

 

NOTE 2.  Revenue

 

Contract Balances:

Deferred revenue primarily relates to revenue that is recognized over time for one-year software license contracts. Deferred revenue (current portion) as of March 31, 2021 and December 31, 2020 was $482 million and $498 million, respectively. Approximately $180 million of the December 31, 2020 balance was recognized as revenue during the three months ended March 31, 2021, while approximately $160 million of the December 31, 2019 balance was recognized as revenue during the three months ended March 31, 2020.

 

Operating Lease Revenue:

Net sales includes rental revenue from durable medical devices as part of operating lease arrangements (reported within the Medical Solutions Division), which was $140 million and $142 million for the three months ended March 31, 2021 and 2020, respectively.

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 

 

 

 

March 31,

 

Net Sales (Millions)

 

2021

    

2020

 

Abrasives

 

$

 352

 

$

 330

 

Automotive Aftermarket

 

 

 312

 

 

 284

 

Closure and Masking Systems

 

 

 243

 

 

 268

 

Electrical Markets

 

 

 307

 

 

 288

 

Industrial Adhesives and Tapes

 

 

 768

 

 

 671

 

Personal Safety

 

 

 1,237

 

 

 989

 

Roofing Granules

 

 

 108

 

 

 95

 

Other Safety and Industrial

 

 

 -

 

 

 2

 

Total Safety and Industrial Business Segment

 

$

 3,327

 

$

 2,927

 

 

 

 

 

 

 

 

 

Advanced Materials

 

$

 316

 

$

 288

 

Automotive and Aerospace

 

 

 516

 

 

 448

 

Commercial Solutions

 

 

 438

 

 

 430

 

Electronics

 

 

 1,042

 

 

 863

 

Transportation Safety

 

 

 218

 

 

 211

 

Other Transportation and Electronics

 

 

 1

 

 

 (1)

 

Total Transportation and Electronics Business Segment

 

$

 2,531

 

$

 2,239

 

 

 

 

 

 

 

 

 

Drug Delivery

 

$

 -

 

$

 105

 

Food Safety

 

 

 88

 

 

 91

 

Health Information Systems

 

 

 289

 

 

 277

 

Medical Solutions

 

 

 1,267

 

 

 1,153

 

Oral Care

 

 

 363

 

 

 277

 

Separation and Purification Sciences

 

 

 241

 

 

 202

 

Other Health Care

 

 

 -

 

 

 (1)

 

Total Health Care Business Group

 

$

 2,248

 

$

 2,104

 

 

 

 

 

 

 

 

 

Consumer Health and Safety

 

$

 150

 

$

 172

 

Home Care

 

 

 279

 

 

 271

 

Home Improvement

 

 

 623

 

 

 503

 

Stationery and Office

 

 

 285

 

 

 268

 

Other Consumer

 

 

 36

 

 

 36

 

Total Consumer Business Group

 

$

 1,373

 

$

 1,250

 

 

 

 

 

 

 

 

 

Corporate and Unallocated

 

$

 (2)

 

$

 -

 

Elimination of Dual Credit

 

 

 (626)

 

 

 (445)

 

Total Company

 

$

 8,851

 

$

 8,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2021

 

 Net Sales (Millions)

    

Americas

 

Asia Pacific

    

Europe, Middle East and Africa

    

Other Unallocated

    

Worldwide

 

Safety and Industrial

 

$

 1,697

 

$

 823

 

$

 807

 

$

 -

 

$

 3,327

 

Transportation and Electronics

 

 

 650

 

 

 1,490

 

 

 391

 

 

 -

 

 

 2,531

 

Health Care

 

 

 1,311

 

 

 408

 

 

 529

 

 

 -

 

 

 2,248

 

Consumer

 

 

 949

 

 

 278

 

 

 146

 

 

 -

 

 

 1,373

 

Corporate and Unallocated

 

 

 (1)

 

 

 -

 

 

 -

 

 

 (1)

 

 

 (2)

 

Elimination of Dual Credit

 

 

 (278)

 

 

 (230)

 

 

 (118)

 

 

 -

 

 

 (626)

 

Total Company

 

$

 4,328

 

$

 2,769

 

$

 1,755

 

$

 (1)

 

$

 8,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2020

 

 Net Sales (Millions)

    

Americas

 

Asia Pacific

    

Europe, Middle East and Africa

    

Other Unallocated

    

Worldwide

 

Safety and Industrial

 

$

 1,517

 

$

 712

 

$

 698

 

$

 -

 

$

 2,927

 

Transportation and Electronics

 

 

 675

 

 

 1,202

 

 

 362

 

 

 -

 

 

 2,239

 

Health Care

 

 

 1,281

 

 

 356

 

 

 467

 

 

 -

 

 

 2,104

 

Consumer

 

 

 874

 

 

 250

 

 

 127

 

 

 (1)

 

 

 1,250

 

Corporate and Unallocated

 

 

 1

 

 

 -

 

 

 -

 

 

 (1)

 

 

 -

 

Elimination of Dual Credit

 

 

 (206)

 

 

 (175)

 

 

 (64)

 

 

 -

 

 

 (445)

 

Total Company

 

$

 4,142

 

$

 2,345

 

$

 1,590

 

$

 (2)

 

$

 8,075

 

 

Americas included United States net sales of $3.6 billion and $3.4 billion for the three months ended March 31, 2021 and 2020, respectively.

 

 

 

NOTE 3.  Acquisitions and Divestitures

 

Refer to Note 3 in 3M's 2020 Annual Report on Form 10-K for more information on relevant pre-2021 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.

 

2021 acquisitions:

 

There were no acquisitions that closed during the three months ended March 31, 2021.

 

2020 acquisitions:

 

There were no acquisitions that closed during the year ended December 31, 2020.
 

Divestitures:

 

3M may divest certain businesses from time to time based upon review 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.

 

2021 divestitures:

 

There were no divestitures that closed during the three months ended March 31, 2021.

 

2020 divestitures:

 

During 2020, as described in Note 3 in 3M's 2020 Annual Report on Form 10-K, the Company divested its advanced ballistic-protection business, substantially all of its drug delivery business, and a small dermatology products business.

 

Operating income and held for sale amounts:

The aggregate operating income of applicable businesses held for sale with respect to the first three months of 2020 was $25 million.

 

NOTE 4.  Goodwill and Intangible Assets

 

There was no goodwill recorded from acquisitions during the first three months of 2021. The amounts in the "Translation and other" row in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balance by business segment as of December 31, 2020 and March 31, 2021, follow:

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

 

Safety and Industrial

 

Transportation and Electronics

 

Health Care

 

Consumer

 

Total Company

 

Balance as of December 31, 2020

 

$

 4,687

 

$

 1,858

 

$

 6,992

 

$

 265

 

$

 13,802

 

Translation and other

 

 

 (29)

 

 

 (14)

 

 

 (98)

 

 

 (7)

 

 

 (148)

 

Balance as of March 31, 2021

 

$

 4,658

 

$

 1,844

 

$

 6,894

 

$

 258

 

$

 13,654

 

 

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 correspond to a division.

 

As described in Note 16, effective in the first quarter of 2021, the Company changed its business segment reporting. 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, the results of which were immaterial.
 

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 March 31, 2021 and December 31, 2020, follow:

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

(Millions)

    

2021

    

2020

 

Customer related intangible assets

 

$

 4,266

 

$

 4,280

 

Patents

 

 

 517

 

 

 537

 

Other technology-based intangible assets

 

 

 2,113

 

 

 2,114

 

Definite-lived tradenames

 

 

 1,172

 

 

 1,178

 

Other amortizable intangible assets

 

 

 104

 

 

 104

 

Total gross carrying amount

 

$

 8,172

 

$

 8,213

 

 

 

 

 

 

 

 

 

Accumulated amortization - customer related

 

 

 (1,473)

 

 

 (1,422)

 

Accumulated amortization - patents

 

 

 (495)

 

 

 (512)

 

Accumulated amortization - other technology-based

 

 

 (687)

 

 

 (638)

 

Accumulated amortization - definite-lived tradenames

 

 

 (397)

 

 

 (385)

 

Accumulated amortization - other

 

 

 (78)

 

 

 (79)

 

Total accumulated amortization

 

$

 (3,130)

 

$

 (3,036)

 

 

 

 

 

 

 

 

 

Total finite-lived intangible assets - net

 

$

 5,042

 

$

 5,177

 

 

 

 

 

 

 

 

 

Non-amortizable intangible assets (primarily tradenames)

 

 

 655

 

 

 658

 

Total intangible assets - net

 

$

 5,697

 

$

 5,835

 

 

Certain tradenames acquired by 3M are not amortized because they have been in existence for over 60 years, have a history of leading-market share positions, have been and are intended to be continuously renewed, and the associated products of which are expected to generate cash flows for 3M for an indefinite period of time. As discussed in Note 13, 3M reflected an immaterial charge related to impairment of certain indefinite-lived assets in the first quarter of 2020.

 

Amortization expense for the three months ended March 31, 2021 and 2020 follows:

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

 

March 31,

(Millions)

    

2021

    

2020

Amortization expense

 

$

 133

 

$

 134

 

Expected amortization expense for acquired amortizable intangible assets recorded as of March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remainder of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After

 

(Millions)

 

2021

 

2022

 

2023

 

2024

 

2025

 

2026

 

2026

 

Amortization expense

 

$

 395

 

$

 514

 

$

 488

 

$

 458

 

$

 428

 

$

 421

 

$

 2,338

 

 

The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible assets and other events. 3M expenses the costs incurred to renew or extend the term of intangible assets.
 

NOTE 5.  Restructuring Actions and Exit Activities

2020 and 2021 Restructuring Actions:

 

Operational/Marketing Capability Restructuring:

 

As described in Note 5 in 3M's 2020 Annual Report on Form 10-K, in late 2020, 3M announced it would undertake certain actions to further enhance its operations and marketing capabilities to take advantage of certain global market trends while de-prioritizing investments in slower-growth end markets. During the fourth quarter of 2020, management approved and committed to undertake associated restructuring actions impacting approximately 2,100 positions resulting in a pre-tax charge of $137 million. In the first quarter of 2021, management approved and committed to undertake additional actions under this initiative resulting in a pre-tax charge of $14 million. Remaining activities related to the restructuring actions approved and committed under this initiative are expected to be largely completed through 2021. 3M is planning further actions under this initiative throughout 2021. This aggregate initiative, spanning 2020 and 2021, is expected to impact approximately 2,900 positions worldwide with an expected pre-tax charge of $250 to $300 million. The related first quarter 2021 restructuring charges were recorded in the income statement as follows:

 

 

 

 

 

(Millions)

 

First Quarter 2021

Cost of sales

 

$

 1

Selling, general and administrative expenses

 

 

 9

Research, development and related expenses

 

 

 4

Total operating income impact

 

$

 14

 

The business segment operating income impact of these restructuring charges is summarized as follows:

 

 

 

 

 

 

 

First Quarter 2021

(Millions)

    

Employee-Related

Safety and Industrial

 

$

 2

Transportation and Electronics

 

 

 3

Health Care

 

 

 1

Consumer

 

 

 1

Corporate and Unallocated

 

 

 7

Total Operating Expense

 

$

 14

 

Restructuring actions, including cash and non-cash impacts, follow:

 

 

 

 

 

 

(Millions)

    

Employee-Related

    

Accrued restructuring action balances as of December 31, 2020

 

$

 101

 

Incremental expense incurred in the first quarter of 2021

 

$

 14

 

Cash payments

 

 

 (14)

 

Accrued restructuring action balances as of March 31, 2021

 

$

 101

 

 

 

Divestiture-Related Restructuring

 

As described in Note 5 in 3M's 2020 Annual Report on Form 10-K, during the second quarter of 2020, following the divestiture of substantially all of the drug delivery business, management approved and committed to undertake certain restructuring actions addressing corporate functional costs and manufacturing footprint across 3M in relation to the magnitude of amounts previously allocated/burdened to the divested business. These actions affected approximately 1,300 positions worldwide and resulted in a second quarter 2020 pre-tax charge of $55 million, within Corporate and Unallocated.

 

Divestiture-related restructuring actions, including cash and non-cash impacts, follow:

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

    

Employee-Related

    

Asset-Related and Other

    

Total

 

Accrued divestiture-related restructuring action balances as of December 31, 2020

 

$

 15

 

$

 9

 

$

 24

 

Cash payments

 

 

 (1)

 

 

 -

 

 

 (1)

 

Adjustments

 

 

 (1)

 

 

 -

 

 

 (1)

 

Accrued divestiture-related restructuring action balances as of March 31, 2021

 

$

 13

 

$

 9

 

$

 22

 

 

Remaining activities related to this divestiture-related restructuring are expected to be largely completed through the third quarter of 2021.

 

Other Restructuring

 

As described in Note 5 in 3M's 2020 Annual Report on Form 10-K, in the second quarter of 2020, management approved and committed to undertake certain restructuring actions addressing structural enterprise costs and operations in certain end markets as a result of the COVID-19 pandemic and related economic impacts. These actions affected approximately 400 positions worldwide and resulted in a second quarter 2020 pre-tax charge of $58 million.

 

Restructuring actions, including cash and non-cash impacts, follow:

 

 

 

 

 

 

(Millions)

    

Employee-Related

 

Accrued restructuring action balances as of December 31, 2020

 

$

 24

 

Cash payments

 

 

 (4)

 

Adjustments

 

 

 (9)

 

Accrued restructuring action balances as of March 31, 2021

 

$

 11

 

 

Remaining activities related to this restructuring are expected to be largely completed through the second quarter of 2021.

 

NOTE 6.  Supplemental Income Statement Information

 

Other expense (income), net consists of the following:

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

 

March 31,

(Millions)

 

2021

    

2020

Interest expense

 

$

 132

 

$

 123

Interest income

 

 

 (4)

 

 

 (10)

Pension and postretirement net periodic benefit cost (benefit)

 

 

 (79)

 

 

 (38)

Total

 

$

 49

 

$

 75

 

Interest expense includes an early debt extinguishment pre-tax charge of approximately $11 million in the first quarter of 2021.

 

Pension and postretirement net periodic benefit costs described in the table above include all components of defined benefit plan net periodic benefit costs except service cost, which is reported in various operating expense lines. Refer to Note 11 for additional details on the components of pension and postretirement net periodic benefit costs.

 

NOTE 7.  Supplemental Equity and Comprehensive Income Information

 

Cash dividends declared and paid totaled $1.48 and $1.47 per share for the first quarter 2021 and 2020, respectively.

 

Consolidated Changes in Equity

 

Three months ended March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3M Company Shareholders

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Comprehensive

 

Non-

 

 

 

 

 

 

Paid-in

 

Retained

 

Treasury

 

Income

 

controlling

 

(Millions)

    

Total

    

Capital

    

Earnings

    

Stock

    

(Loss)

    

Interest

 

Balance at December 31, 2020

 

$

 12,931

 

$

 6,171

 

$

 43,821

 

$

 (29,404)

 

$

 (7,721)

 

$

 64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 1,627

 

 

 

 

 

 1,624

 

 

 

 

 

 

 

 

 3

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 (222)

 

 

 

 

 

 

 

 

 

 

 

 (223)

 

 

 1

 

Defined benefit pension and post-retirement plans adjustment

 

 

 119

 

 

 

 

 

 

 

 

 

 

 

 119

 

 

 -

 

Cash flow hedging instruments

 

 

 58

 

 

 

 

 

 

 

 

 

 

 

 58

 

 

 -

 

Total other comprehensive income (loss), net of tax

 

 

 (45)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 (858)

 

 

 

 

 

 (858)

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 121

 

 

 121

 

 

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

 

 (243)

 

 

 

 

 

 

 

 

 (243)

 

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

 

 295

 

 

 

 

 

 (332)

 

 

 627

 

 

 

 

 

 

 

Balance at March 31, 2021

 

$

 13,828

 

$

 6,292

 

$

 44,255

 

$

 (29,020)

 

$

 (7,767)

 

$

 68

 

 

Three months ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3M Company Shareholders

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Comprehensive

 

Non-

 

 

 

 

 

 

Paid-in

 

Retained

 

Treasury

 

Income

 

controlling

 

(Millions)

    

Total

    

Capital

    

Earnings

    

Stock

    

(Loss)

    

Interest

 

Balance at December 31, 2019

 

$

 10,126

 

$

 5,916

 

$

 42,130

 

$

 (29,849)

 

$

 (8,134)

 

$

 63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 1,310

 

 

 

 

 

 1,308

 

 

 

 

 

 

 

 

 2

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 (444)

 

 

 

 

 

 

 

 

 

 

 

 (441)

 

 

 (3)

 

Defined benefit pension and post-retirement plans adjustment

 

 

 108

 

 

 

 

 

 

 

 

 

 

 

 108

 

 

 -

 

Cash flow hedging instruments

 

 

 47

 

 

 

 

 

 

 

 

 

 

 

 47

 

 

 -

 

Total other comprehensive income (loss), net of tax

 

 

 (289)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 (847)

 

 

 

 

 

 (847)

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 117

 

 

 117

 

 

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

 

 (356)

 

 

 

 

 

 

 

 

 (356)

 

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

 

 153

 

 

 

 

 

 (235)

 

 

 388

 

 

 

 

 

 

 

Balance at March 31, 2020

 

$

 10,214

 

$

 6,033

 

$

 42,356

 

$

 (29,817)

 

$

 (8,420)

 

$

 62

 

 

 

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

 

Three months ended March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Total

 

 

 

 

 

 

Defined Benefit

 

Cash Flow

 

Accumulated

 

 

 

 

 

 

Pension and

 

Hedging

 

Other

 

 

 

Cumulative

 

Postretirement

 

Instruments,

 

Comprehensive

 

 

 

Translation

 

Plans

 

Unrealized

 

Income

 

(Millions)

 

Adjustment

 

Adjustment

 

Gain (Loss)

 

(Loss)

 

Balance at December 31, 2020, net of tax:

 

$

 (1,450)

 

$

 (6,098)

 

$

 (173)

 

$

 (7,721)

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

 

 (176)

 

 

 -

 

 

 66

 

 

 (110)

 

Amounts reclassified out

 

 

 -

 

 

 159

 

 

 9

 

 

 168

 

Total other comprehensive income (loss), before tax

 

 

 (176)

 

 

 159

 

 

 75

 

 

 58

 

Tax effect

 

 

 (47)

 

 

 (40)

 

 

 (17)

 

 

 (104)

 

Total other comprehensive income (loss), net of tax

 

 

 (223)

 

 

 119

 

 

 58

 

 

 (46)

 

Balance at March 31, 2021, net of tax:

 

$

 (1,673)

 

$

 (5,979)

 

$

 (115)

 

$

 (7,767)

 

 

Three months ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Total

 

 

 

 

 

 

Defined Benefit

 

Cash Flow

 

Accumulated

 

 

 

 

 

 

Pension and

 

Hedging

 

Other

 

 

 

Cumulative

 

Postretirement

 

Instruments,

 

Comprehensive

 

 

 

Translation

 

Plans

 

Unrealized

 

Income

 

(Millions)

 

Adjustment

 

Adjustment

 

Gain (Loss)

 

(Loss)

 

Balance at December 31, 2019, net of tax:

 

$

 (1,899)

 

$

 (6,204)

 

$

 (31)

 

$

 (8,134)

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

 

 (439)

 

 

 -

 

 

 77

 

 

 (362)

 

Amounts reclassified out

 

 

 -

 

 

 150

 

 

 (16)

 

 

 134

 

Total other comprehensive income (loss), before tax

 

 

 (439)

 

 

 150

 

 

 61

 

 

 (228)

 

Tax effect

 

 

 (2)

 

 

 (42)

 

 

 (14)

 

 

 (58)

 

Total other comprehensive income (loss), net of tax

 

 

 (441)

 

 

 108

 

 

 47

 

 

 (286)

 

Balance at March 31, 2020, net of tax:

 

$

 (2,340)

 

$

 (6,096)

 

$

 16

 

$

 (8,420)

 

 

Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation does include impacts from items such as net investment hedge transactions. Reclassification adjustments are made to avoid double counting in comprehensive income items that are subsequently recorded as part of net income.

 

 

Reclassifications out of Accumulated Other Comprehensive Income Attributable to 3M

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Reclassified from

 

 

 

Details about Accumulated Other

 

Accumulated Other Comprehensive Income

 

 

 

Comprehensive Income Components

 

Three months ended March 31,

 

Location on Income

 

(Millions)

    

2021

    

2020

    

Statement

 

Defined benefit pension and postretirement plans adjustments

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Transition asset

 

$

 -

 

$

 (1)

 

See Note 11

 

Prior service benefit

 

 

 15

 

 

 15

 

See Note 11

 

Net actuarial loss

 

 

 (173)

 

 

 (163)

 

See Note 11

 

Curtailments/Settlements

 

 

 (1)

 

 

 (1)

 

See Note 11

 

Total before tax

 

 

 (159)

 

 

 (150)

 

 

 

Tax effect

 

 

 40

 

 

 42

 

Provision for income taxes

 

Net of tax

 

$

 (119)

 

$

 (108)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments gains (losses)

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

$

 (7)

 

$

 18

 

Cost of sales

 

Interest rate contracts

 

 

 (2)

 

 

 (2)

 

Interest expense

 

Total before tax

 

 

 (9)

 

 

 16

 

 

 

Tax effect

 

 

 2

 

 

 (4)

 

Provision for income taxes

 

Net of tax

 

$

 (7)

 

$

 12

 

 

 

Total reclassifications for the period, net of tax

 

$

 (126)

 

$

 (96)

 

 

 

 

 

 

 

NOTE 8.  Income Taxes

 

The IRS has completed its field examination of the Company's U.S. federal income tax returns through 2018, but the years 2005 through 2017 have not closed as the Company is in the process of resolving issues identified during those examinations. In addition to the U.S. federal examination, there is also audit activity in several U.S. state and foreign jurisdictions where the Company is subject to ongoing tax examinations and governmental assessments, which could be impacted by evolving political environments in those jurisdictions. As of March 31, 2021, no taxing authority proposed significant adjustments to the Company's tax positions for which the Company is not adequately reserved.

 

It is reasonably possible that the amount of unrecognized tax benefits could significantly change within the next 12 months. At this time, the Company is not able to estimate the range by which these potential events could impact 3M's unrecognized tax benefits in the next 12 months. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2021 and December 31, 2020 are $1,094 million and $1,145 million, respectively.

 

As of March 31, 2021 and December 31, 2020, the Company had valuation allowances of $143 million and $135 million on its deferred tax assets, respectively.

 

The effective tax rate for the first quarter of 2021 was 16.4 percent, compared to 17.5 percent in the first quarter of 2020, a decrease of 1.1 percentage points. The primary factor that decreased the Company's effective tax rate was nonrepeating favorable adjustments in 2021 related to impacts of U.S. international tax provisions.

NOTE 9.  Marketable Securities

 

The Company invests in asset-backed securities, certificates of deposit/time deposits, commercial paper, and other securities. The following is a summary of amounts recorded on the Consolidated Balance Sheet for marketable securities (current and non-current).

 

 

 

 

 

 

 

 

 

(Millions)

 

March 31, 2021

 

December 31, 2020

 

Corporate debt securities

 

$

 7

 

$

 7

 

Commercial paper

 

 

 384

 

 

 237

 

Certificates of deposit/time deposits

 

 

 7

 

 

 31

 

U.S. treasury securities

 

 

 100

 

 

 125

 

U.S. municipal securities

 

 

 3

 

 

 4

 

Current marketable securities

 

$

 501

 

$

 404

 

 

 

 

 

 

 

 

 

U.S. municipal securities

 

$

 31

 

$

 30

 

Non-current marketable securities

 

$

 31

 

$

 30

 

 

 

 

 

 

 

 

 

Total marketable securities

 

$

 532

 

$

 434

 

 

At March 31, 2021 and December 31, 2020, gross unrealized, gross realized, and net realized gains and/or losses (pre-tax) were not material.

 

The balances at March 31, 2021 for marketable securities by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

 

 

 

 

 

(Millions)

    

March 31, 2021

 

Due in one year or less

 

$

 501

 

Due after one year through five years

 

 

 15

 

Due after five years through ten years

 

 

 16

 

Total marketable securities

 

$

 532

 

 

 

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

 

In March 2021, 3M, via a make-whole call offer, redeemed $450 million principal amount of 2.75% notes due 2022. The Company recorded an early debt extinguishment pre-tax charge of approximately $11 million within interest expense. This charge reflected the differential between the carrying value and the amount paid to reacquire the notes and related expenses.

 

2020 issuances, maturities, and extinguishments of short- and long-term debt are described in Note 5 in 3M's 2020 Annual Report on Form 10-K.

 

The Company had no commercial paper outstanding at March 31, 2021 and December 31, 2020.

 

Future Maturities of Long-term Debt

 

Maturities of long-term debt in the table below reflect the impact of put provisions associated with certain debt instruments and are net of the unaccreted debt issue costs such that total maturities equal the carrying value of long-term debt as of March 31, 2021. The maturities of long-term debt for the periods subsequent to March 31, 2021 are as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remainder of

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

After

    

 

 

 

2021

 

2022

 

2023

 

2024

 

2025

 

2026

 

2026

 

Total

 

$

 763

 

$

 1,256

 

$

 1,945

 

$

 1,100

 

$

 1,791

 

$

 1,516

 

$

 9,798

 

$

 18,169

 

 

 

 

NOTE 11.  Pension and Postretirement Benefit Plans

 

As discussed in Note 1, effective in the first quarter of 2021, 3M made a change in accounting principle for net periodic pension and postretirement plan cost. This impacted the expected return on plan assets and the amortization of net unamortized actuarial gains or losses expense components of net periodic benefit cost. This change was applied retrospectively to all periods presented within 3M's financial statements.

 

The service cost component of defined benefit net periodic benefit cost is recorded in cost of sales; selling, general and administrative expenses; and research, development and related expenses. The other components of net periodic benefit cost are reflected in other expense (income), net. Components of net periodic benefit cost and other supplemental information for the three months ended March 31, 2021 and 2020 follow:

 

Benefit Plan Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

 

Qualified and Non-qualified

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Postretirement

 

 

 

United States

International

 

Benefits

 

(Millions)

    

2021

    

2020

    

2021

    

2020

    

2021

    

2020

 

Net periodic benefit cost (benefit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 72

 

$

 66

 

$

 42

 

$

 38

 

$

 12

 

$

 11

 

Non-operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

$

 90

 

$

 124

 

$

 25

 

$

 31

 

$

 11

 

$

 16

 

Expected return on plan assets

 

 

 (264)

 

 

 (262)

 

 

 (81)

 

 

 (77)

 

 

 (19)

 

 

 (20)

 

Amortization of transition asset

 

 

 -

 

 

 -

 

 

 -

 

 

 1

 

 

 -

 

 

 -

 

Amortization of prior service benefit

 

 

 (6)

 

 

 (6)

 

 

 (1)

 

 

 (1)

 

 

 (8)

 

 

 (8)

 

Amortization of net actuarial loss

 

 

 132

 

 

 123

 

 

 27

 

 

 29

 

 

 14

 

 

 11

 

Settlements, curtailments, special termination benefits and other

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 1

 

 

 1

 

Total non-operating expense (benefit)

 

 

 (48)

 

 

 (21)

 

 

 (30)

 

 

 (17)

 

 

 (1)

 

 

 -

 

Total net periodic benefit cost (benefit)

 

$

 24

 

$

 45

 

$

 12

 

$

 21

 

$

 11

 

$

 11

 

 

For the three months ended March 31, 2021 contributions totaling $46 million were made to the Company's U.S. and international pension plans and $1 million to its postretirement plans. For total year 2021, the Company expects to contribute approximately $200 million of cash to its global defined benefit pension and postretirement plans. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2021. Future contributions will depend on market conditions, interest rates and other factors. 3M's annual measurement date for pension and postretirement assets and liabilities is December 31 each year, which is also the date used for the related annual measurement assumptions.

 

NOTE 12.  Derivatives

 

The Company uses interest rate swaps, currency swaps, and forward and option contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. The information that follows explains the various types of derivatives and financial instruments used by 3M, how and why 3M uses such instruments, how such instruments are accounted for, and how such instruments impact 3M's financial position and performance.

 

Additional information with respect to derivatives is included elsewhere as follows:

·      Impact on other comprehensive income of nonderivative hedging and derivative instruments is included in Note 7.

·      Fair value of derivative instruments is included in Note 13.

·      Derivatives and/or hedging instruments associated with the Company's long-term debt are described in Note 12 in 3M's 2020 Annual Report on Form 10-K.

 

 

Types of Derivatives/Hedging Instruments and Inclusion in Income/Other Comprehensive Income

 

Cash Flow Hedges:

 

For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized in current earnings.

 

Cash Flow Hedging - Foreign Currency Forward and Option Contracts: The Company enters into foreign exchange forward and option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies. These transactions are designated as cash flow hedges. The settlement or extension of these derivatives will result in reclassifications (from accumulated other comprehensive income) to earnings in the period during which the hedged transactions affect earnings. 3M may dedesignate these cash flow hedge relationships in advance of the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously included in accumulated other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction occurs or becomes probable of not occurring. Changes in the value of derivative instruments after dedesignation are recorded in earnings and are included in the Derivatives Not Designated as Hedging Instruments section below. The maximum length of time over which 3M hedges its exposure to the variability in future cash flows of the forecasted transactions is 36 months.

 

Cash Flow Hedging - Interest Rate Contracts: The Company may use forward starting interest rate contracts and treasury rate lock contracts to hedge exposure to variability in cash flows from interest payments on forecasted debt issuances. The amortization of gains and losses on forward starting interest rate swaps is included in the tables below as part of the gain/(loss) reclassified from accumulated other comprehensive income into income. Additional information regarding previously issued but terminated interest rate contracts, which have related balances within accumulated other comprehensive income being amortized over the underlying life of related debt, can be found in Note 14 in 3M's 2020 Annual Report on Form 10-K.

 

As of March 31, 2021, the Company had a balance of $115 million associated with the after-tax net unrealized loss associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This includes a remaining balance of $106 million (after-tax loss) related to the forward starting interest rate swap and treasury rate lock contracts, which will be amortized over the respective lives of the notes. Based on exchange rates as of March 31, 2021, 3M expects to reclassify approximately $19 million over the next 12 months, $22 million over the remainder of 2021, $2 million in 2022 and $91 million after 2022 of the after-tax net unrealized foreign exchange cash flow hedging losses to earnings (with the impact offset by earnings/losses from underlying hedged items). 

 

The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to derivative instruments designated as cash flow hedges are provided in the following table. Reclassifications of amounts from accumulated other comprehensive income into income include accumulated gains (losses) on dedesignated hedges at the time earnings are impacted by the forecasted transactions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax Gain (Loss) Recognized in Other

 

Pretax Gain (Loss) Reclassified from Accumulated

 

 

Comprehensive Income on Derivative

 

Other Comprehensive Income into Income

 

 

Three months ended March 31,

 

Three months ended March 31,

 

 

2021

 

2020

 

 

 

2021

 

2020

(Millions)

    

Amount

 

Amount

 

Location

    

Amount

 

Amount

Foreign currency forward/option contracts

 

$

 66

 

$

 79

 

Cost of sales

 

$

 (7)

 

$

 18

Interest rate contracts

 

 

 -

 

 

 (2)

 

Interest expense

 

 

 (2)

 

 

 (2)

Total

 

$

 66

 

$

 77

 

 

 

$

 (9)

 

$

 16

 

 

Fair Value Hedges:

 

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.

 

Fair Value Hedging - Interest Rate Swaps: The Company manages interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains or losses in interest expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest expense. Additional information regarding designated interest rate swaps can be found in Note 14 in 3M's 2020 Annual Report on Form 10-K.

 

Refer to the section below titled Statement of Income Location and Impact of Cash Flow and Fair Value Derivative Instruments for details on the location within the consolidated statements of income for amounts of gains and losses related to derivative instruments designated as fair value hedges and similar information relative to the hedged items for the three months ended March 31, 2021 and 2020.

 

The following amounts were recorded on the consolidated balance sheet related to cumulative basis adjustments for fair value hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative Amount of Fair Value Hedging

 

 

Carrying Value of the

 

Adjustment Included in the Carrying Value

(Millions)

 

Hedged Liabilities

 

of the Hedged Liabilities

Location on the Consolidated Balance Sheet

    

March 31, 2021

    

December 31, 2020

    

March 31, 2021

    

December 31, 2020

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

 

$

 357

 

$

 373

 

$

 4

 

$

 5

Long-term debt

 

 

 225

 

 

 225

 

 

 5

 

 

 6

Total

 

$

 582

 

$

 598

 

$

 9

 

$

 11

 

Net Investment Hedges:

 

The Company may use non-derivative (foreign currency denominated debt) and derivative (foreign exchange forward contracts) instruments to hedge portions of the Company's investment in foreign subsidiaries and manage foreign exchange risk. For instruments that are designated and qualify as hedges of net investments in foreign operations and that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in cumulative translation within other comprehensive income. The remainder of the change in value of such instruments is recorded in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. To the extent foreign currency denominated debt is not designated in or is dedesignated from a net investment hedge relationship, changes in value of that portion of foreign currency denominated debt due to exchange rate changes are recorded in earnings through their maturity date.

 

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

 

At March 31, 2021, the total notional amount of foreign exchange forward contracts designated in net investment hedges was approximately 50 million euros, along with a principal amount of long-term debt instruments designated in net investment hedges totaling 3.5 billion euros. The maturity dates of these derivative and nonderivative instruments designated in net investment hedges range from 2021 to 2031.

 

 

The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to derivative and nonderivative instruments designated as net investment hedges are as follows. There were no reclassifications of the effective portion of net investment hedges out of accumulated other comprehensive income into income for the periods presented in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pretax Gain (Loss) Recognized 

 

Amount of Gain (Loss) Excluded

 

 

as Cumulative Translation within

 

from Effectiveness Testing

 

 

 Other Comprehensive Income

 

Recognized in Income

 

 

 

Three months ended March 31,

 

Three months ended March 31,

 

 

2021

 

2020

 

 

 

2021

 

2020

(Millions)

    

Amount

 

Amount

 

Location

 

Amount

 

Amount

Foreign currency denominated debt

 

$

 167

 

$

 15

 

Cost of sales

 

$

 -

 

$

 -

Foreign currency forward contracts

 

 

 2

 

 

 1

 

Cost of sales

 

 

 (1)

 

 

 5

Total

 

$

 169

 

$

 16

 

 

 

$

 (1)

 

$

 5

 

Derivatives Not Designated as Hedging Instruments:

 

Derivatives not designated as hedging instruments include dedesignated foreign currency forward and option contracts that formerly were designated in cash flow hedging relationships (as referenced in the Cash Flow Hedges section above). In addition, 3M enters into foreign currency contracts that are not designated in hedging relationships to offset, in part, the impacts of changes in value of various non-functional currency denominated items including certain intercompany financing balances. These derivative instruments are not designated in hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings. The Company does not hold or issue derivative financial instruments for trading purposes.

 

The location in the consolidated statement of income and amounts of gains and losses related to derivative instruments not designated as hedging instruments are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) on Derivative Recognized in Income

 

 

Three months ended March 31,

 

 

 

 

2021

 

2020

(Millions)

    

Location

    

Amount

 

Amount

Foreign currency forward/option contracts

 

Cost of sales

 

$

 -

 

$

 4

Foreign currency forward contracts

 

Interest expense

 

 

 22

 

 

 (16)

Total

 

 

 

$

 22

 

$

 (12)

 

 

Statement of Income Location and Impact of Cash Flow and Fair Value Derivative Instruments

 

The location in the consolidated statement of income and pre-tax amounts recognized in income related to derivative instruments designated in a cash flow or fair value hedging relationship are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location and Amount of Gain (Loss) Recognized in Income

 

Location and Amount of Gain (Loss) Recognized in Income

 

 

Three months ended March 31, 2021

 

Three months ended March 31, 2020

(Millions)

 

Cost of sales

 

Other expense
(income), net

 

Cost of sales

 

Other expense
(income), net

Total amounts of income and expense line items presented in the consolidated statement of income in which the effects of cash flow or fair value hedges are recorded

 

$

 4,525

 

$

 49

 

$

 4,109

 

$

 75

 

 

 

 

 

 

 

 

 

 

 

 

 

The effects of cash flow and fair value hedging:

 

 

 

 

 

 

 

 

 

 

 

 

Gain or (loss) on cash flow hedging relationships:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income

 

$

 (7)

 

$

 -

 

$

 18

 

$

 -

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income

 

 

 -

 

 

 (2)

 

 

 -

 

 

 (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain or (loss) on fair value hedging relationships:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Hedged items

 

$

 -

 

$

 2

 

$

 -

 

$

 (2)

Derivatives designated as hedging instruments

 

 

 -

 

 

 (2)

 

 

 -

 

 

 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location and Fair Value Amount of Derivative Instruments

The following tables summarize the fair value of 3M's derivative instruments, excluding nonderivative instruments used as hedging instruments, and their location in the consolidated balance sheet. Notional amounts below are presented at period end foreign exchange rates, except for certain interest rate swaps, which are presented using the inception date's foreign exchange rate. Additional information with respect to the fair value of derivative instruments is included in Note 13.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

    

Assets

    

Liabilities

 

 

 

Notional

 

 

 

Fair

 

 

 

Fair

 

March 31, 2021 (Millions)

 

Amount

 

Location

 

Value Amount

 

Location

 

Value Amount

 

Derivatives designated as

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

$

 1,656

 

Other current assets

 

$

 36

 

Other current liabilities

 

$

 38

 

Foreign currency forward/option contracts

 

 

 685

 

Other assets

 

 

 21

 

Other liabilities

 

 

 10

 

Interest rate contracts

 

 

 403

 

Other current assets

 

 

 5

 

Other current liabilities

 

 

 -

 

Total derivatives designated as hedging instruments

 

 

 

 

 

 

$

 62

 

 

 

$

 48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

$

 3,487

 

Other current assets

 

$

 22

 

Other current liabilities

 

$

 15

 

Total derivatives not designated as hedging instruments

 

 

 

 

 

 

$

 22

 

 

 

$

 15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivative instruments

 

 

 

 

 

 

$

 84

 

 

 

$

 63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

    

Assets

    

Liabilities

 

 

 

Notional

 

 

 

Fair

 

 

 

Fair

 

December 31, 2020 (Millions)

 

Amount

 

Location

 

Value Amount

 

Location

 

Value Amount

 

Derivatives designated as

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

$

 1,630

 

Other current assets

 

$

 14

 

Other current liabilities

 

$

 67

 

Foreign currency forward/option contracts

 

 

 669

 

Other assets

 

 

 10

 

Other liabilities

 

 

 25

 

Interest rate contracts

 

 

 403

 

Other current assets

 

 

 7

 

Other current liabilities

 

 

 -

 

Total derivatives designated as hedging instruments

 

 

 

 

 

 

$

 31

 

 

 

$

 92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

$

 3,166

 

Other current assets

 

$

 13

 

Other current liabilities

 

$

 14

 

Total derivatives not designated as hedging instruments

 

 

 

 

 

 

$

 13

 

 

 

$

 14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivative instruments

 

 

 

 

 

 

$

 44

 

 

 

$

 106

 

 

Credit Risk and Offsetting of Assets and Liabilities of Derivative Instruments

 

The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps, currency swaps, and forward and option contracts. However, the Company's risk is limited to the fair value of the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counterparties. 3M enters into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow each counterparty to net settle amounts owed between a 3M entity and the counterparty as a result of multiple, separate derivative transactions. As of March 31, 2021, 3M has International Swaps and Derivatives Association (ISDA) agreements with 17 applicable banks and financial institutions which contain netting provisions. In addition to a master agreement with 3M supported by a primary counterparty's parent guarantee, 3M also has associated credit support agreements in place with 16 of its primary derivative counterparties which, among other things, provide the circumstances under which either party is required to post eligible collateral (when the market value of transactions covered by these agreements exceeds specified thresholds or if a counterparty's credit rating has been downgraded to a predetermined rating). The Company does not anticipate nonperformance by any of these counterparties.

 

3M has elected to present the fair value of derivative assets and liabilities within the Company's consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. However, the following tables provide information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default or termination as stipulated by the terms of netting arrangements with each of the counterparties. For each counterparty, if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period based on the 3M entity that is a party to the transactions. Derivatives not subject to master netting agreements are not eligible for net presentation. As of the applicable dates presented below, no cash collateral had been received or pledged related to these derivative instruments.

 

Offsetting of Financial Assets under Master Netting Agreements with Derivative Counterparties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts not Offset in the

 

 

 

 

    

 

    

Consolidated Balance Sheet that are Subject

    

 

 

 

 

Gross Amount of

 

to Master Netting Agreements

 

 

 

 

 

Derivative Assets

 

Gross Amount of

 

 

 

 

 

 

Presented in the

 

Eligible Offsetting

 

Cash

 

 

 

 

Consolidated

 

Recognized

 

Collateral

 

Net Amount of

March 31, 2021 (Millions)

 

Balance Sheet

 

Derivative Liabilities

 

Received

 

Derivative Assets

Derivatives subject to master netting agreements

 

$

 84

 

$

 34

 

$

 -

 

$

 50

Derivatives not subject to master netting agreements

 

 

 -

 

 

 

 

 

 

 

 

 -

Total

 

$

 84

 

 

 

 

 

 

 

$

 50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020 (Millions)

 

 

 

 

 

 

 

 

Derivatives subject to master netting agreements

 

$

 44

 

$

 11

 

$

 -

 

$

 33

Derivatives not subject to master netting agreements

 

 

 -

 

 

 

 

 

 

 

 

 -

Total

 

$

 44

 

 

 

 

 

 

 

$

 33

 

Offsetting of Financial Liabilities under Master Netting Agreements with Derivative Counterparties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts not Offset in the

 

 

 

 

    

 

    

Consolidated Balance Sheet that are Subject

    

 

 

 

 

Gross Amount of

 

to Master Netting Agreements

 

 

 

 

 

Derivative Liabilities

 

Gross Amount of

 

 

 

 

 

 

Presented in the

 

Eligible Offsetting

 

Cash

 

Net Amount of

 

 

Consolidated

 

Recognized

 

Collateral

 

Derivative

March 31, 2021 (Millions)

 

Balance Sheet

 

Derivative Assets

 

Pledged

 

Liabilities

Derivatives subject to master netting agreements

 

$

 63

 

$

 34

 

$

 -

 

$

 29

Derivatives not subject to master netting agreements

 

 

 -

 

 

 

 

 

 

 

 

 -

Total

 

$

 63

 

 

 

 

 

 

 

$

 29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020 (Millions)

 

 

 

 

 

 

 

 

Derivatives subject to master netting agreements

 

$

 106

 

$

 11

 

$

 -

 

$

 95

Derivatives not subject to master netting agreements

 

 

 -

 

 

 

 

 

 

 

 

 -

Total

 

$

 106

 

 

 

 

 

 

 

$

 95

 

Currency Effects

 

3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, decreased pre-tax income by approximately $10 million for the three months ended March 31, 2021. These estimates include transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks.

 

 

NOTE 13.  Fair Value Measurements

 

3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. The Company adopted ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurements, as of January 1, 2020. This ASU primarily amended the disclosures around Level 3 investments, of which the Company had an immaterial amount for all periods presented.

 

In addition to the information above, refer to Note 15 in 3M's 2020 Annual Report on Form 10-K for a qualitative discussion of the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis, a description of the valuation methodologies used by 3M, and categorization within the valuation framework of ASC 820.

 

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

Description

 

Fair Value at

 

Using Inputs Considered as

(Millions)

    

March 31, 2021

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

 7

 

$

 -

 

$

 7

 

$

 -

Commercial paper

 

 

 384

 

 

 -

 

 

 384

 

 

 -

Certificates of deposit/time deposits

 

 

 7

 

 

 -

 

 

 7

 

 

 -

U.S. treasury securities

 

 

 100

 

 

 100

 

 

 -

 

 

 -

U.S. municipal securities

 

 

 34

 

 

 -

 

 

 -

 

 

 34

Derivative instruments - assets:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

 

 79

 

 

 -

 

 

 79

 

 

 -

Interest rate contracts

 

 

 5

 

 

 -

 

 

 5

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

 

 63

 

 

 -

 

 

 63

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

Description

 

Fair Value at

 

Using Inputs Considered as

 

(Millions)

    

December 31, 2020

    

Level 1

    

Level 2

    

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

 7

 

$

 -

 

$

 7

 

$

 -

 

Commercial paper

 

 

 237

 

 

 -

 

 

 237

 

 

 -

 

Certificates of deposit/time deposits

 

 

 31

 

 

 -

 

 

 31

 

 

 -

 

U.S. treasury securities

 

 

 125

 

 

 125

 

 

 -

 

 

 -

 

U.S. municipal securities

 

 

 34

 

 

 -

 

 

 -

 

 

 34

 

Derivative instruments - assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

 

 37

 

 

 -

 

 

 37

 

 

 -

 

Interest rate contracts

 

 

 7

 

 

 -

 

 

 7

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

 

 106

 

 

 -

 

 

 106

 

 

 -

 

 

The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (level 3).

 

 

 

 

 

 

 

 

 

    

Three months ended 

Marketable securities - certain U.S. municipal securities only

 

March 31,

(Millions)

 

2021

    

2020

Beginning balance

 

$

 34

 

$

 46

Total gains or losses:

 

 

 

 

 

 

Included in earnings

 

 

 -

 

 

 -

Included in other comprehensive income

 

 

 -

 

 

 -

Purchases and issuances

 

 

 -

 

 

 10

Sales and settlements

 

 

 -

 

 

 (19)

Transfers in and/or out of level 3

 

 

 -

 

 

 -

Ending balance

 

$

 34

 

$

 37

Change in unrealized gains or losses for the period included in earnings for securities held at the end of the reporting period

 

 

 -

 

 

 -

 

In addition, the plan assets of 3M's pension and postretirement benefit plans are measured at fair value on a recurring basis (at least annually). Refer to Note 13 in 3M's 2020 Annual Report on Form 10-K.

 

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:

 

Disclosures are required for certain assets and liabilities that are measured at fair value, but are recognized and disclosed at fair value on a nonrecurring basis in periods subsequent to initial recognition. For 3M, such measurements of fair value relate primarily to indefinite-lived and long-lived asset impairments, goodwill impairments, and adjustment in carrying value of equity securities for which the measurement alternative of cost less impairment plus or minus observable price changes is used. There were no material impairments of assets or adjustments to equity securities using the measurement alternative for the three months ended March 31, 2021. 3M reflected an immaterial charge related to impairment of certain indefinite-lived assets and a net charge of $22 million related to adjustment to the carrying value of equity securities using the measurement alternative during the three months ended March 31, 2020.

 

Fair Value of Financial Instruments:

 

The Company's financial instruments include cash and cash equivalents, marketable securities, accounts receivable, certain investments, accounts payable, borrowings, and derivative contracts. The fair values of cash equivalents, accounts receivable, accounts payable, and short-term borrowings and current portion of long-term debt approximated carrying values because of the short-term nature of these instruments. Available-for-sale marketable securities, in addition to certain derivative instruments, are recorded at fair values as indicated in the preceding disclosures. To estimate fair values (classified as level 2) for its long-term debt, the Company utilized third-party quotes, which are derived all or in part from model prices, external sources, market prices, or the third-party's internal records. Information with respect to the carrying amounts and estimated fair values of these financial instruments follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

 

December 31, 2020

 

 

    

Carrying

    

Fair

    

Carrying

    

Fair

 

(Millions)

 

Value

 

Value

 

Value

 

Value

 

Long-term debt, excluding current portion

 

$

 16,819

 

$

 18,277

 

$

 17,989

 

$

 20,496

 

 

The fair values reflected above consider the terms of the related debt absent the impacts of derivative/hedging activity. The carrying amount of long-term debt referenced above is impacted by certain fixed-to-floating interest rate swaps that are designated as fair value hedges and by the designation of certain fixed rate Eurobond securities issued by the Company as hedging instruments of the Company's net investment in its European subsidiaries. A number of 3M's fixed-rate bonds were trading at a premium at March 31, 2021 and December 31, 2020 due to the lower interest rates and tighter credit spreads compared to issuance levels.

 

 

NOTE 14.  Commitments and Contingencies

 

Legal Proceedings:

 

The Company and some of its subsidiaries are involved in numerous claims and lawsuits, principally in the United States, and regulatory proceedings worldwide. These claims, lawsuits and proceedings include, but are not limited to, products liability (involving products that the Company now or formerly manufactured and sold), intellectual property, commercial, antitrust, federal False Claims Act, securities, and state and federal environmental laws. Unless otherwise stated, the Company is vigorously defending all such litigation and proceedings. From time to time, the Company also receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a cooperative, thorough and timely manner. These responses sometimes require time and effort and can result in considerable costs being incurred by the Company. Such subpoenas and requests can also lead to the assertion of claims or the commencement of administrative, civil or criminal legal proceedings against the Company and others, as well as to settlements. The outcomes of legal proceedings and regulatory matters are often difficult to predict. Any determination that the Company's operations or activities are not, or were not, in compliance with applicable laws or regulations could result in the imposition of fines, civil or criminal penalties, and equitable remedies, including disgorgement, suspension or debarment or injunctive relief. Additional information about the Company's process for disclosure and recording of liabilities and insurance receivables related to legal proceedings can be found in Note 16 "Commitments and Contingencies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

 

The following sections first describe the significant legal proceedings in which the Company is involved, and then describe the liabilities and associated insurance receivables the Company has accrued relating to its significant legal proceedings.

 

Respirator Mask/Asbestos Litigation

 

As of March 31, 2021, the Company is a named defendant, with multiple co-defendants, in numerous lawsuits in various courts that purport to represent approximately 2,179 individual claimants, compared to approximately 2,075 individual claimants with actions pending December 31, 2020.

 

The vast majority of the lawsuits and claims resolved by and currently pending against the Company allege use of some of the Company's mask and respirator products and seek damages from the Company and other defendants for alleged personal injury from workplace exposures to asbestos, silica, coal mine dust or other occupational dusts found in products manufactured by other defendants or generally in the workplace. A minority of the lawsuits and claims resolved by and currently pending against the Company generally allege personal injury from occupational exposure to asbestos from products previously manufactured by the Company, which are often unspecified, as well as products manufactured by other defendants, or occasionally at Company premises.

 

The Company's current volume of new and pending matters is substantially lower than it experienced at the peak of filings in 2003. The Company expects that filing of claims by unimpaired claimants in the future will continue to be at much lower levels than in the past. Accordingly, the number of claims alleging more serious injuries, including mesothelioma, other malignancies, and black lung disease, will represent a greater percentage of total claims than in the past. Over the past twenty plus years, the Company has prevailed in fifteen of the sixteen cases tried to a jury (including the lawsuits in 2018 described below). In 2018, 3M received a jury verdict in its favor in two lawsuits - one in California state court in February and the other in Massachusetts state court in December - both involving allegations that 3M respirators were defective and failed to protect the plaintiffs against asbestos fibers. In April 2018, a jury in state court in Kentucky found 3M's 8710 respirators failed to protect two coal miners from coal mine dust and awarded compensatory damages of approximately $2 million and punitive damages totaling $63 million. In August 2018, the trial court entered judgment and the Company appealed. During March and April 2019, the Company agreed in principle to settle a substantial majority of the coal mine dust lawsuits in Kentucky and West Virginia for $340 million, including the jury verdict in April 2018 in the Kentucky case mentioned above. That settlement was completed in 2019, and the appeal has been dismissed. In October 2020, 3M defended a respirator case before a jury in King County, Washington, involving a former shipyard worker who alleged 3M's 8710 respirator was defective and that 3M acted negligently in failing to protect him against asbestos fibers. The jury delivered a complete defense verdict in favor of 3M, concluding that the 8710 respirator was not defective in design or warnings and any conduct by 3M was not a cause of plaintiff's mesothelioma. The plaintiff has filed a notice of appeal.

 

The Company has demonstrated in these past trial proceedings that its respiratory protection products are effective as claimed when used in the intended manner and in the intended circumstances. Consequently, the Company believes that claimants are unable to establish that their medical conditions, even if significant, are attributable to the Company's respiratory protection products. Nonetheless, the Company's litigation experience indicates that claims of persons alleging more serious injuries, including mesothelioma, other malignancies, and black lung disease, are costlier to resolve than the claims of unimpaired persons, and it therefore believes the average cost of resolving pending and future claims on a per-claim basis will continue to be higher than it experienced in prior periods when the vast majority of claims were asserted by medically unimpaired claimants. In addition, during the second half of 2020 and as of March 31, 2021, the Company has experienced an increase in the number of cases filed that allege injuries from exposures to coal mine dust.

 

As previously reported, the State of West Virginia, through its Attorney General, filed a complaint in 2003 against the Company and two other manufacturers of respiratory protection products in the Circuit Court of Lincoln County, West Virginia, and amended its complaint in 2005. The amended complaint seeks substantial, but unspecified, compensatory damages primarily for reimbursement of the costs allegedly incurred by the State for worker's compensation and healthcare benefits provided to all workers with occupational pneumoconiosis and unspecified punitive damages. In October 2019, the court granted the State's motion to sever its unfair trade practices claim. In January 2020, the manufacturers filed a petition with the West Virginia Supreme Court, challenging the trial court's rulings; that petition was denied in November 2020. No liability has been recorded for this matter because the Company believes that liability is not probable and estimable at this time. In addition, the Company is not able to estimate a possible loss or range of loss given the lack of any meaningful discovery responses by the State of West Virginia, the otherwise minimal activity in this case, and the assertions of claims against two other manufacturers where a defendant's share of liability may turn on the law of joint and several liability and by the amount of fault, if any, a jury may allocate to each defendant if the case were ultimately tried.

 

Respirator Mask/Asbestos Liabilities and Insurance Receivables

 

The Company regularly conducts a comprehensive legal review of its respirator mask/asbestos liabilities. The Company reviews recent and historical claims data, including without limitation, (i) the number of pending claims filed against the Company, (ii) the nature and mix of those claims (i.e., the proportion of claims asserting usage of the Company's mask or respirator products and alleging exposure to each of asbestos, silica, coal or other occupational dusts, and claims pleading use of asbestos-containing products allegedly manufactured by the Company), (iii) the costs to defend and resolve pending claims, and (iv) trends in filing rates and in costs to defend and resolve claims, (collectively, the "Claims Data"). As part of its comprehensive legal review, the Company regularly provides the Claims Data to a third party with expertise in determining the impact of Claims Data on future filing trends and costs. The third party assists the Company in estimating the costs to defend and resolve pending and future claims. The Company uses these estimates to develop its best estimate of probable liability.

 

Developments may occur that could affect the Company's estimate of its liabilities. These developments include, but are not limited to, significant changes in (i) the key assumptions underlying the Company's accrual, including, the number of future claims, the nature and mix of those claims, the average cost of defending and resolving claims, and in maintaining trial readiness (ii) trial and appellate outcomes, (iii) the law and procedure applicable to these claims, and (iv) the financial viability of other co-defendants and insurers.

 

As a result of its review of its respirator mask/asbestos liabilities, of pending and expected lawsuits and of the cost of resolving claims of persons who claim more serious injuries, including mesothelioma, other malignancies, and black lung disease, the Company increased its accruals in the first three months of 2021 for respirator mask/asbestos liabilities by $36 million. In the first quarter of 2021, the Company made payments for legal defense costs and settlements of $19 million related to the respirator mask/asbestos litigation. As previously disclosed, during the first quarter of 2019, the Company recorded a pre-tax charge of $313 million in conjunction with an increase in the accrual as a result of the March and April 2019 settlements-in-principle of the coal mine dust lawsuits mentioned above and the Company's assessment of other then current and expected coal mine dust lawsuits (including the costs to resolve all then current and expected coal mine dust lawsuits in Kentucky and West Virginia at the time of the charge). As of March 31, 2021, the Company had an accrual for respirator mask/asbestos liabilities (excluding Aearo accruals) of $679 million. This accrual represents the Company's best estimate of probable loss and reflects an estimation period for future claims that may be filed against the Company approaching the year 2050. The Company cannot estimate the amount or upper end of the range of amounts by which the liability may exceed the accrual the Company has established because of the (i) inherent difficulty in projecting the number of claims that have not yet been asserted or the time period in which future claims may be asserted, (ii) the complaints nearly always assert claims against multiple defendants where the damages alleged are typically not attributed to individual defendants so that a defendant's share of liability may turn on the law of joint and several liability, which can vary by state, (iii) the multiple factors described above that the Company considers in estimating its liabilities, and (iv) the several possible developments described above that may occur that could affect the Company's estimate of liabilities.

 

As of March 31, 2021, the Company's receivable for insurance recoveries related to the respirator mask/asbestos litigation was $4 million. The Company continues to seek coverage under the policies of certain insolvent and other insurers. Once those claims for coverage are resolved, the Company will have collected substantially all of its remaining insurance coverage for respirator mask/asbestos claims.

 

Respirator Mask/Asbestos Litigation - Aearo Technologies

 

On April 1, 2008, a subsidiary of the Company acquired the stock of Aearo Holding Corp., the parent of Aearo Technologies ("Aearo"). Aearo manufactured and sold various products, including personal protection equipment, such as eye, ear, head, face, fall and certain respiratory protection products.

 

As of March 31, 2021, Aearo and/or other companies that previously owned and operated Aearo's respirator business (American Optical Corporation, Warner-Lambert LLC, AO Corp. and Cabot Corporation ("Cabot")) are named defendants, with multiple co-defendants, including the Company, in numerous lawsuits in various courts in which plaintiffs allege use of mask and respirator products and seek damages from Aearo and other defendants for alleged personal injury from workplace exposures to asbestos, silica-related, coal mine dust, or other occupational dusts found in products manufactured by other defendants or generally in the workplace.

 

As of March 31, 2021, the Company, through its Aearo subsidiary, had accruals of $27 million for product liabilities and defense costs related to current and future Aearo-related asbestos, silica-related and coal mine dust claims. This accrual represents the Company's best estimate of Aearo's probable loss and reflects an estimation period for future claims that may be filed against Aearo approaching the year 2050. The accrual was reduced by $37 million during the second quarter of 2020 after paying Aearo's share of certain settlements under the informal arrangement described below. The accrual reflects the Company's assessment of pending and expected lawsuits, its review of its respirator mask/asbestos liabilities, and the cost of resolving claims of persons who claim more serious injuries. Responsibility for legal costs, as well as for settlements and judgments, is currently shared in an informal arrangement among Aearo, Cabot, American Optical Corporation and a subsidiary of Warner Lambert and their respective insurers (the "Payor Group"). Liability is allocated among the parties based on the number of years each company sold respiratory products under the "AO Safety" brand and/or owned the AO Safety Division of American Optical Corporation and the alleged years of exposure of the individual plaintiff.

 

Aearo's share of the contingent liability is further limited by an agreement entered into between Aearo and Cabot on July 11, 1995. This agreement provides that, so long as Aearo pays to Cabot a quarterly fee of $100,000, Cabot will retain responsibility and liability for, and indemnify Aearo against, any product liability claims involving exposure to asbestos, silica, or silica products for respirators sold prior to July 11, 1995. Because of the difficulty in determining how long a particular respirator remains in the stream of commerce after being sold, Aearo and Cabot have applied the agreement to claims arising out of the alleged use of respirators involving exposure to asbestos, silica or silica products prior to January 1, 1997. With these arrangements in place, Aearo's potential liability is limited to exposures alleged to have arisen from the use of respirators involving exposure to asbestos, silica, or silica products on or after January 1, 1997. To date, Aearo has elected to pay the quarterly fee. Aearo could potentially be exposed to additional claims for some part of the pre-July 11, 1995 period covered by its agreement with Cabot if Aearo elects to discontinue its participation in this arrangement, or if Cabot is no longer able to meet its obligations in these matters.

 

Developments may occur that could affect the estimate of Aearo's liabilities. These developments include, but are not limited to: (i) significant changes in the number of future claims, (ii) significant changes in the average cost of resolving claims, (iii) significant changes in the legal costs of defending these claims, (iv) significant changes in the mix and nature of claims received, (v) trial and appellate outcomes, (vi) significant changes in the law and procedure applicable to these claims, (vii) significant changes in the liability allocation among the co-defendants, (viii) the financial viability of members of the Payor Group including exhaustion of available insurance coverage limits, and/or (ix) a determination that the interpretation of the contractual obligations on which Aearo has estimated its share of liability is inaccurate. The Company cannot determine the impact of these potential developments on its current estimate of Aearo's share of liability for these existing and future claims. If any of the developments described above were to occur, the actual amount of these liabilities for existing and future claims could be significantly larger than the amount accrued.

 

Because of the inherent difficulty in projecting the number of claims that have not yet been asserted, the complexity of allocating responsibility for future claims among the Payor Group, and the several possible developments that may occur that could affect the estimate of Aearo's liabilities, the Company cannot estimate the amount or range of amounts by which Aearo's liability may exceed the accrual the Company has established.

 

Environmental Matters and Litigation

 

The Company's operations are subject to environmental laws and regulations including those pertaining to air emissions, wastewater discharges, toxic substances, and the handling and disposal of solid and hazardous wastes enforceable by national, state, and local authorities around the world, and private parties in the United States and abroad. These laws and regulations provide, under certain circumstances, a basis for the remediation of contamination, for capital investment in pollution control equipment, for restoration of or compensation for damages to natural resources, and for personal injury and property damage claims. The Company has incurred, and will continue to incur, costs and capital expenditures in complying with these laws and regulations, defending personal injury and property damage claims, and modifying its business operations in light of its environmental responsibilities. In its effort to satisfy its environmental responsibilities and comply with environmental laws and regulations, the Company has established, and periodically updates, policies relating to environmental standards of performance for its operations worldwide.

 

Under certain environmental laws, including the United States Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and similar state laws, the Company may be jointly and severally liable, typically with other companies, for the costs of remediation of environmental contamination at current or former facilities and at off-site locations. The Company has identified numerous locations, most of which are in the United States, at which it may have some liability. Please refer to the section entitled "Environmental Liabilities and Insurance Receivables" that follows for information on the amount of the accrual for such liabilities.

 

Environmental Matters

 

As previously reported, the Company has been voluntarily cooperating with ongoing reviews by local, state, federal (primarily the U.S. Environmental Protection Agency (EPA)), and international agencies of possible environmental and health effects of various perfluorinated compounds, including perfluorooctanoate (PFOA), perfluorooctane sulfonate (PFOS), perfluorohexane sulfonate (PFHxS), or other per- and polyfluoroalkyl substances (collectively PFAS). As a result of its phase-out decision in May 2000, the Company no longer manufactures certain PFAS compounds including PFOA, PFOS, PFHxS, and their pre-cursor compounds. The Company ceased manufacturing and using the vast majority of these compounds within approximately two years of the phase-out announcement and ceased all manufacturing and the last significant use of this chemistry by the end of 2008. The Company continues to manufacture a variety of shorter chain length PFAS compounds, including, but not limited to, pre-cursor compounds to perfluorobutane sulfonate (PFBS). These compounds are used as input materials to a variety of products, including engineered fluorinated fluids, fluoropolymers and fluorelastomers, as well as surfactants, additives, and coatings. Through its ongoing life cycle management and its raw material composition identification processes associated with the Company's policies covering the use of all persistent and bio-accumulative materials, the Company continues to review, control or eliminate the presence of certain PFAS in purchased materials or as byproducts in some of 3M's current fluorochemical manufacturing processes, products, and waste streams.

 

Regulatory activities concerning PFAS continue in the United States, Europe and elsewhere, and before certain international bodies. These activities include gathering of exposure and use information, risk assessment, and consideration of regulatory approaches. In the European Union, where 3M has manufacturing facilities in countries such as Germany and Belgium, recent regulatory activities have included preliminary work on various restrictions under the Regulation concerning the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), including the restriction of PFAS in certain usages and a broader restriction of PFAS as a class. As of December 2020, PFOA is subject to certain restrictions under EU's Persistent Organic Pollutants (POPs) Recast Regulation. With respect to the applicability of the newly enacted POPs to certain manufacturing processes that create PFOA as an unintended and unavoidable byproduct designed to be removed through an emulsifier recycling process, Dyneon, a 3M subsidiary that operates a facility at Gendorf, Germany, proactively consulted with the relevant German regulatory authority. In response to the authority's view that POPs may apply to those processes, Dyneon continues to communicate its position regarding POPs' applicability, share technical process improvements that are in progress and discuss potential options if an agreement is not reached on the applicability of POPs.

 

In the United States, as the database of studies of both PFOA and PFOS has expanded, the EPA has developed human health effects documents summarizing the available data from these studies. In February 2014, the EPA initiated external peer review of its draft human health effects documents for PFOA and PFOS. The peer review panel met in August 2014. In May 2016, the EPA announced lifetime health advisory levels for PFOA and PFOS at 70 parts per trillion (ppt) (superseding the provisional levels established by the EPA in 2009 of 400 ppt for PFOA and 200 ppt for PFOS). Where PFOA and PFOS are found together, EPA recommends that the concentrations be added together, and the lifetime health advisory for PFOA and PFOS combined is also 70 ppt. Lifetime health advisories, which are non-enforceable and non-regulatory, provide information about concentrations of drinking water contaminants at which adverse health effects are not expected to occur over the specified exposure duration. To collect exposure information under the Safe Drinking Water Act, the EPA published on May 2, 2012 a list of unregulated substances, including six PFAS chemicals, required to be monitored during the period 2013-2015 by public water system suppliers to determine the extent of their occurrence. Through January 2017, the EPA reported results for 4,920 public water supplies nationwide. Based on the 2016 lifetime health advisory, 13 public water supplies exceed the level for PFOA and 46 exceed the level for PFOS (unchanged from the July 2016 EPA summary). A technical advisory issued by EPA in September 2016 on laboratory analysis of drinking water samples stated that 65 public water supplies had exceeded the combined level for PFOA and PFOS. These results are based on one or more samples collected during the period 2012-2015 and do not necessarily reflect current conditions of these public water supplies. EPA reporting does not identify the sources of the PFOA and PFOS in the public water supplies.

 

The Company is continuing to make progress in its work, under the supervision of state regulators, to remediate historic disposal of PFAS-containing waste associated with manufacturing operations at its Decatur, Alabama; Cottage Grove, Minnesota; and Cordova, Illinois plants. As previously reported, the Company entered into a voluntary remedial action agreement with the Alabama Department of Environmental Management (ADEM) to remediate the presence of PFAS in the soil and groundwater at the Company's manufacturing facility in Decatur, Alabama associated with the historic (1978-1998) incorporation of wastewater treatment plant sludge. With ADEM's agreement, 3M substantially completed installation of a multilayer cap on the former sludge incorporation areas. Further remediation activities, including certain on-site and off-site investigations and studies, will be conducted in accordance with the July 2020 Interim Consent Order described below in the "Other PFAS-related Matters" section.

 

The Company continues to work with the Minnesota Pollution Control Agency (MPCA) pursuant to the terms of the previously disclosed May 2007 Settlement Agreement and Consent Order to address the presence of certain PFAS in the soil and groundwater at former disposal sites in Washington County, Minnesota (Oakdale and Woodbury) and at the Company's manufacturing facility at Cottage Grove, Minnesota. Under this agreement, the Company's principal obligations include (i) evaluating releases of certain PFAS from these sites and proposing response actions; (ii) providing treatment or alternative drinking water upon identifying any level exceeding a Health Based Value (HBV) or Health Risk Limit (HRL) (i.e., the amount of a chemical in drinking water determined by the Minnesota Department of Health (MDH) to be safe for human consumption over a lifetime) for certain PFAS for which a HBV and/or HRL exists as a result of contamination from these sites; (iii) remediating identified sources of other PFAS at these sites that are not controlled by actions to remediate PFOA and PFOS; and (iv) sharing information with the MPCA about certain perfluorinated compounds. During 2008, the MPCA issued formal decisions adopting remedial options for the former disposal sites in Washington County, Minnesota (Oakdale and Woodbury). In August 2009, the MPCA issued a formal decision adopting remedial options for the Company's Cottage Grove manufacturing facility. During the spring and summer of 2010, 3M began implementing the agreed upon remedial options at the Cottage Grove and Woodbury sites. 3M commenced the remedial option at the Oakdale site in late 2010. At each location the remedial options were recommended by the Company and approved by the MPCA. Remediation work has been completed at the Oakdale and Woodbury sites, and they are in an operational maintenance mode. Remediation work has been substantially completed at the Cottage Grove site, with operational and maintenance activities ongoing.

 

In August 2014, the Illinois EPA approved a request by the Company to establish a groundwater management zone at its manufacturing facility in Cordova, Illinois, which includes ongoing pumping of impacted site groundwater, groundwater monitoring and routine reporting of results.

 

In May 2017, the MDH issued new HBVs for PFOA and PFOS. The new HBVs are 35 ppt for PFOA and 27 ppt for PFOS. In connection with its announcement the MDH stated that "Drinking water with PFOA and PFOS, even at the levels above the updated values, does not represent an immediate health risk. These values are designed to reduce long-term health risks across the population and are based on multiple safety factors to protect the most vulnerable citizens, which makes them overprotective for most of the residents in our state." In December 2017, the MDH issued a new HBV for perfluorobutane sulfonate (PFBS) of 2 parts per billion (ppb). In February 2018, the MDH published reports finding no unusual rates of certain cancers or adverse birth outcomes (low birth rates or premature births) among residents of Washington and Dakota Counties in Minnesota. In April 2019, the MDH issued a new HBV for PFOS of 15 ppt and a new HBV for PFHxS of 47 ppt.

 

In May 2018, the EPA announced a four-step PFAS action plan, which includes evaluating the need to set Safe Drinking Water Act maximum contaminant levels (MCLs) for PFOA and PFOS and beginning the steps necessary to designate PFOA and PFOS as "hazardous substances" under CERCLA. In November 2018, the EPA asked for public comment on draft toxicity assessments for two PFAS compounds, including PFBS. In April 2021, EPA released an updated toxicity assessment for PFBS. In February 2019, the EPA issued a PFAS Action Plan that outlines short- and long-term actions the EPA is taking to address PFAS - actions that include developing a national drinking water determination for PFOA and PFOS, strengthening enforcement authorities and evaluating cleanup approaches, nationwide drinking water monitoring for PFAS, expanding scientific knowledge for understanding and managing risk from PFAS, and developing consistent risk communication tools for communicating with other agencies and the public. With respect to groundwater contaminated with PFOA and PFOS, the EPA issued interim recommendations in December 2019, providing guidance for screening levels and preliminary remediation goals for groundwater that is a current or potential drinking water source, to inform final clean-up levels of contaminated sites. In February 2020, the EPA provided notice and requested public comment on certain preliminary determinations to regulate PFOA and PFOS under the Safe Drinking Water Act (SDWA). In June 2020, 3M submitted comments on EPA's preliminary determinations to regulate PFOA and PFOS under the SDWA.

 

EPA announced in its Spring 2020 Regulatory Agenda, released in June 2020, that it intended to publish a notice of proposed rulemaking to designate PFOA and PFOS as hazardous substances under CERCLA in August 2020. In November 2020, EPA announced it was developing of a new analytical method to test for PFAS in wastewater and other environmental media. In December 2020, EPA released two new guidance documents related to PFAS. First, it issued a Draft Compliance Guide for Imported Articles Containing Surface Coatings Subject to the Long-Chain Perfluoroalkyl Carboxylate and Perfluoroalkyl Sulfonate Chemical Substances Significant New Use Rule. Second, EPA released for public comment interim guidance on destroying and disposing of certain PFAS and PFAS-containing materials. 3M has submitted comments on both guidance documents.

 

In March 2021, EPA published its intention to initiate a process to develop a national primary drinking water regulation for PFOA and PFOS; the process will include further analyses, scientific review and opportunities for public comment. EPA also announced in January 2021 that it will issue an advance notice of proposed rulemaking (ANPR) to solicit public comment on whether the agency should take additional regulatory steps to address PFAS contamination, including designating PFOA and PFOS and other PFAS as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and seeking comment on whether PFOA and PFOS and other PFAS should be subject to regulation as hazardous waste under the Resource Conservation and Recovery Act (RCRA). EPA indicated it will also issue an ANPR to collect information regarding manufacturers of PFAS and the presence and treatment of PFAS in discharges from these facilities. In January 2021, the new federal Administration withdrew this EPA ANPR announcement. EPA also separately issued an ANPR in March 2021 to collect information regarding manufacturers of PFAS and the presence and treatment of PFAS in discharges from these facilities.

 

The U.S. Agency for Toxic Substances and Disease Registry (ATSDR) within the Department of Health and Human Services released a draft Toxicological Profile for PFAS for public review and comment in June 2018. In the draft report, ATSDR proposed draft minimal risk levels (MRLs) for PFOS, PFOA and several other PFAS. An MRL is an estimate of the daily human exposure to a hazardous substance that is likely to be without appreciable risk of adverse non-cancer health effects over a specified duration of exposure. MRLs are not intended to define cleanup or action levels for ATSDR or other agencies. In August 2018, 3M submitted comments on the ATSDR proposal, noting that there are major shortcomings with the current draft, especially with the MRLs, and that the ATSDR's profile must reflect the best science and full weight of evidence known about these chemicals.

 

Several state legislatures and state agencies have been evaluating or have taken actions related to cleanup standards, groundwater values or drinking water values for PFOS, PFOA, and other PFAS, and 3M has submitted various responsive comments. Those states include the following:

 

Vermont finalized drinking water standards for a combination of PFOA, PFOS and three other PFAS in March 2020. New Jersey finalized drinking water standards and designated PFOA and PFOS as hazardous substances in June 2020. New York established drinking water standards for PFOA and PFOS in July 2020. New Hampshire established drinking water standards by legislation for certain PFAS, including PFOS and PFOA, in July 2020. Michigan implemented final drinking water standards for certain PFAS, including PFOS and PFOA, in August 2020. Massachusetts published final regulations establishing a drinking water standard relating to six combined PFAS in October 2020. Some other states have also been evaluating or have taken actions relating to PFOA, PFOS and other PFAS in products such as food packaging, carpets and other products. For example, in March 2021, California proposed listing PFOA and PFOS as carcinogens under its Proposition 65 law.

 

In October 2020, 3M and several other parties filed notices of appeal in the appellate division of the Superior Court of New Jersey to challenge the validity of the New Jersey PFOS and PFOA regulations. In January 2021, the appellate division of the court denied the group's motion to stay the regulations, and the parties are proceeding to litigation on the merits. In March 2021, 3M and several other parties filed a lawsuit against the New York State Department of Health, urging that drinking water levels set by the agency for PFOS and PFOA be vacated.

 

The Company cannot predict what additional regulatory actions in the United States, Europe and elsewhere arising from the foregoing or other proceedings and activities, if any, may be taken regarding such compounds or the consequences of any such actions to the Company.

 

Litigation Related to Historical PFAS Manufacturing Operations in Alabama

 

As previously reported, a former employee filed a putative class action lawsuit against 3M, BFI Waste Management Systems of Alabama, and others in the Circuit Court of Morgan County, Alabama (the "St. John" case), seeking property damage from exposure to certain perfluorochemicals at or near the Company's Decatur, Alabama, manufacturing facility. The parties have agreed to continue to stay the St. John case, pending ongoing mediation between the parties involved in this case and another case discussed below. Two additional putative class actions filed in the same court by certain residents in the vicinity of the Decatur plant seeking relief on similar grounds (the Chandler case and the Stover case, respectively) are stayed pending the resolution of class certification issues in the St. John case.

 

In October 2015, West Morgan-East Lawrence Water & Sewer Authority (Water Authority) filed an individual complaint against 3M Company, Dyneon, L.L.C, and Daikin America, Inc., in the U.S. District Court for the Northern District of Alabama. The complaint also includes representative plaintiffs who brought the complaint on behalf of themselves, and a class of all owners and possessors of property who use water provided by the Water Authority and five local water works to which the Water Authority supplies water (collectively, the "Water Utilities"). The complaint seeks compensatory and punitive damages and injunctive relief based on allegations that the defendants' chemicals, including PFOA and PFOS from their manufacturing processes in Decatur, have contaminated the water in the Tennessee River at the water intake, and that the chemicals cannot be removed by the water treatment processes utilized by the Water Authority. In April 2019, 3M and the Water Authority settled the lawsuit for $35 million, which will fund a new water filtration system, with 3M indemnifying the Water Authority from liability resulting from the resolution of the currently pending and future lawsuits against the Water Authority alleging liability or damages related to 3M PFAS. The putative class claims brought by the representative plaintiffs who were supplied drinking water by the Water Authority (the "Lindsey" case) remain. The parties are in active discussions regarding a negotiated resolution, and the case is currently stayed.

 

In June 2016, the Tennessee Riverkeeper, Inc. (Riverkeeper), a non-profit corporation, filed a lawsuit in the U.S. District Court for the Northern District of Alabama against 3M; BFI Waste Systems of Alabama; the City of Decatur, Alabama; and the Municipal Utilities Board of Decatur, Morgan County, Alabama. The complaint alleges that the defendants violated the Resource Conservation and Recovery Act in connection with the disposal of certain PFAS through their ownership and operation of their respective sites. The complaint further alleges such practices may present an imminent and substantial endangerment to health and/or the environment and that Riverkeeper has suffered and will continue to suffer irreparable harm caused by defendants' failure to abate the endangerment unless the court grants the requested relief, including declaratory and injunctive relief. This case has been stayed, pending ongoing mediation between the parties in conjunction with the St. John case.

 

In August 2016, a group of over 200 plaintiffs filed a putative class action against West Morgan-East Lawrence Water and Sewer Authority (Water Authority), 3M, Dyneon, Daikin, BFI, and the City of Decatur in state court in Lawrence County, Alabama (the "Billings" case). Plaintiffs are residents of Lawrence, Morgan and other counties who are or have been customers of the Water Authority. They contend defendants have released PFAS that contaminate the Tennessee River and, in turn, their drinking water, causing damage to their health and properties. In January 2017, the court in the St. John case, discussed above, stayed this litigation pending resolution of the St. John case. Plaintiffs in the Billings case have amended their complaint numerous times to add additional plaintiffs. There are now approximately 4,000 named plaintiffs. Mediation in the Billings case is ongoing, but plaintiffs have moved to lift the stay, and that motion is set for hearing in May 2021.

 

In January 2017, several hundred plaintiffs sued 3M, Dyneon and Daikin America in Lawrence and Morgan Counties, Alabama (the "Owens" case). The plaintiffs are owners of property, residents, and holders of property interests who receive their water from the West Morgan-East Lawrence Water and Sewer Authority (Water Authority). They assert common law claims for negligence, nuisance, trespass, wantonness and battery, and they seek injunctive relief and punitive damages. The plaintiffs contend that the defendants own and operate manufacturing and disposal facilities in Decatur that have released and continue to release PFOA, PFOS and related chemicals into the groundwater and surface water of their sites, resulting in discharges into the Tennessee River. The plaintiffs contend that, as a result of the alleged discharges, the water supplied by the Water Authority to the plaintiffs was, and is, contaminated with PFOA, PFOS and related chemicals at a level dangerous to humans. The court denied a motion by co-defendant Daikin to stay this case pending resolution of the St. John case, and the case is progressing through discovery.

 

In November 2017, a putative class action (the "King" case) was filed against 3M, Dyneon, Daikin America and the West Morgan-East Lawrence Water and Sewer Authority (Water Authority) in the U.S. District Court for the Northern District of Alabama. The plaintiffs are residents of Lawrence and Morgan County, Alabama who receive their water from the Water Authority and seek injunctive relief, attorneys' fees, compensatory and punitive damages for their alleged personal injuries. The plaintiffs contend that the defendants own and operate manufacturing and disposal facilities in Decatur, Alabama that have released and continue to release PFOA, PFOS and related chemicals into the groundwater and surface water of their sites, resulting in discharges into the Tennessee River. The plaintiffs contend that, as a result of the alleged discharges, the water supplied by the Water Authority to the plaintiffs was, and is, contaminated with PFOA, PFOS and related chemicals at a level dangerous to humans. In November 2019, the King plaintiffs amended their complaint to withdraw all class allegations. Since then, the plaintiffs have added 37 new individual plaintiffs and voluntarily dismissed five plaintiffs (for a total of 55 plaintiffs). The case is scheduled for trial in June 2022, but the plaintiffs have sought to extend the case deadlines. The parties negotiated a revised schedule and proposed a July 2023 trial date, pending the court's approval. Discovery in this case is proceeding.

 

In July 2019, 3M announced that it had initiated an investigation into the possible presence of PFAS in three closed municipal landfills in Decatur that accepted waste from 3M's Decatur plant and other companies in the 1960s through the 1980s. 3M is working with local and state entities as it conducts its investigation and will report the results and recommended remedial action, if any, to those entities and the public. 3M is also defending or has received notice of potential lawsuits in state and federal court brought by individual property owners who claim damages related to historical PFAS disposal at former area landfills near their properties. 3M has resolved for an immaterial amount some of the claims brought by property owners.

 

In September 2020, the City of Guin Water Works and Sewer Board (Guin WWSB) brought a lawsuit against 3M in Alabama state court, alleging that PFAS contamination in the Guin water system stems from manufacturing operations at 3M's Guin facility and disposal activity at a nearby landfill. In this same month, Guin WWSB dismissed its lawsuit without prejudice and is working with 3M to further investigate the presence of chemicals in the area. Discussions between the parties are ongoing.

 

Litigation Related to Historical PFAS Manufacturing Operations in Minnesota

 

In July 2016, the City of Lake Elmo filed a lawsuit in the U.S. District Court for the District of Minnesota against 3M alleging that the City suffered damages from drinking water supplies contaminated with PFAS, including costs to construct alternative sources of drinking water. In April 2019, 3M and the City of Lake Elmo agreed to settle the lawsuit for less than $5 million.

 

State Attorneys General Litigation related to PFAS

 

Minnesota. In December 2010, the State of Minnesota, by its Attorney General, filed a lawsuit in Hennepin County District Court against 3M seeking damages and injunctive relief with respect to the presence of PFAS in the groundwater, surface water, fish or other aquatic life, and sediments in the state of Minnesota (the "NRD Lawsuit"). In February 2018, 3M and the State of Minnesota reached a resolution of the NRD Lawsuit. Under the terms of the settlement, 3M agreed to provide an $850 million grant to the State for a special "3M Water Quality and Sustainability Fund." This Fund, which is administered by the State, will enable projects that support water sustainability in the Twin Cities East Metro region, such as continued delivery of water to residents and enhancing groundwater recharge to support sustainable growth. Other purposes of the grant include habitat and recreation improvements, such as fishing piers, trails, and open space preservation. 3M recorded a pre-tax charge of $897 million, inclusive of legal fees and other related obligations, in the first quarter of 2018 associated with the resolution of this matter.

 

In connection with the above referenced settlement, the Minnesota Pollution Control Agency and the Department of Natural Resources, as co-trustees of the Fund, released in September 2020 a conceptual drinking water supply plan for the communities in the East Metro area, seeking public comment on three recommended options for utilizing the Fund. In December 2020, 3M submitted preliminary comments on the co-trustees' draft conceptual drinking water supply plan to address legal and technical aspects of the draft plan.

 

New York. The State of New York, by its Attorney General, has filed four lawsuits (in June 2018, February 2019, July 2019, and November 2019) against 3M and other defendants seeking to recover the costs incurred in responding to PFAS contamination allegedly caused by Aqueous Film Forming Foam (AFFF) manufactured by 3M and others. Each of the four suits was filed in Albany County Supreme Court before being removed to federal court, and each has been transferred to the multi-district litigation (MDL) proceeding for AFFF cases, which is discussed further below. The state is seeking compensatory and punitive damages, and injunctive and equitable relief in the form of a monetary fund for the State's reasonably expected future damages, and/or requiring defendants to perform investigative and remedial work.

 

Ohio. In December 2018, the State of Ohio, by its Attorney General, filed a lawsuit in the Common Pleas Court of Lucas County, Ohio against 3M, Tyco Fire Products LP, Chemguard, Inc., Buckeye Fire Equipment Co., National Foam, Inc., and Angus Fire Armour Corp., seeking injunctive relief and compensatory and punitive damages for remediation costs and alleged injury to Ohio natural resources from AFFF manufacturers. This case was removed to federal court and transferred to the MDL.

 

New Jersey. In March 2019, the New Jersey Attorney General filed two actions against 3M, DuPont, and Chemours on behalf of the New Jersey Department of Environmental Protection (NJDEP), the NJDEP's commissioner, and the New Jersey Spill Compensation Fund regarding alleged discharges at two DuPont facilities in Pennsville, New Jersey (Salem County) and Parlin, New Jersey (Middlesex County). 3M is included as a defendant in both cases because it allegedly supplied PFOA to DuPont for use at the facilities at issue. Both cases expressly seek to have the defendants pay all costs necessary to investigate, remediate, assess, and restore the affected natural resources of New Jersey. DuPont removed these cases to federal court. In June 2020, the court consolidated the two actions, along with two others brought by the NJDEP relating to the DuPont facilities, for case management and pretrial purposes. In August 2020, the NJDEP filed second amended complaints. 3M has moved to dismiss those complaints. The parties have exchanged written discovery requests. The case is in early stages of litigation.

 

In May 2019, the New Jersey Attorney General and NJDEP filed a lawsuit against 3M, DuPont, and six other companies, alleging natural resource damages from AFFF products and seeking damages, including punitive damages, and associated fees. This case was removed to federal court and transferred to the AFFF MDL.

 

New Hampshire. In May 2019, the New Hampshire Attorney General filed two lawsuits alleging contamination of the state's drinking water supplies and other natural resources by PFAS chemicals. The first lawsuit was filed against 3M and seven co-defendants, alleging PFAS contamination resulting from the use of AFFF products at several sites around the state. This case was removed to federal court and transferred to the AFFF MDL. The second suit asserts PFAS contamination from non-AFFF sources and names 3M, DuPont, and Chemours as defendants. In its June 2020 ruling on defendants' motions to dismiss, the court dismissed the state's trespass claim, but allowed several claims to proceed. In October 2020, the state amended its complaint to add a state commission as plaintiff and make a claim related to the state's drinking water and groundwater trust fund statute. Defendants have filed motions to dismiss related to these amendments, and the case remains in early stages of litigation.

 

Vermont. In June 2019, the Vermont Attorney General filed two lawsuits alleging contamination of the state's drinking water supplies and other natural resources by PFAS chemicals. The first lawsuit was filed against 3M and ten co-defendants, alleging PFAS contamination resulting from the use of AFFF products at several sites around the state. This case was removed to federal court and transferred to the AFFF MDL. The second suit asserts PFAS contamination from non-AFFF sources and names 3M and several entities related to DuPont and Chemours as defendants. This suit is proceeding in state court. In May 2020, the court denied the defendants' motion to dismiss, but dismissed the state's trespass claim as to property the state does not own. The parties are now engaged in discovery.

 

Michigan. In January 2020, the Michigan Attorney General filed a lawsuit in state court against 3M, Dyneon, DuPont, Chemours and others seeking injunctive and equitable relief and damages for alleged injury to Michigan public natural resources and its residents related to PFAS, excluding AFFF. The defendants filed motions to dismiss, and 3M's motion was denied in August 2020. 3M removed the case to federal court in March 2021, and 3M and certain other defendants have filed a motion to transfer the case to the AFFF MDL. The state has filed a motion to remand the case to state court. In addition, in August 2020, the Michigan Attorney General filed two lawsuits against numerous AFFF manufacturers and distributors, and suppliers of PFAS to AFFF manufacturers. 3M is named a defendant in one of the lawsuits, filed in federal court, and the case has been transferred to the AFFF MDL, where it remains in early stages of litigation.

 

Guam. In September 2019, the Attorney General of Guam filed a lawsuit against 3M and other defendants relating to contamination of the territory's drinking water supplies and other natural resources by PFAS, allegedly resulting from the use of AFFF products at several sites around the island. This lawsuit has been removed to federal court and transferred to the AFFF MDL.

 

Commonwealth of Northern Mariana Islands. In December 2019, the Attorney General of the Commonwealth of Northern Mariana Islands, a U.S. territory, filed a lawsuit against 3M and other defendants relating to contamination of the territory's drinking water supplies and other natural resources by PFAS, allegedly resulting from the use of AFFF products. This lawsuit has been removed to federal court and transferred to the AFFF MDL.

 

Mississippi. In December 2020, the Mississippi Attorney General filed an AFFF-related PFAS lawsuit against 3M and other defendants directly with the AFFF MDL court in South Carolina. The lawsuit alleges injuries to the State's property and natural resources purportedly caused by PFAS contamination from AFFF use and seeks both compensatory and punitive damages.

 

Alaska. In April 2021, the State of Alaska filed a lawsuit against 3M and other defendants, alleging damages from the release of PFAS into the environment from a variety of products, including AFFF.

 

In addition to the above state attorneys general actions, several other states and the District of Columbia, through their attorneys general, have announced selection processes to retain outside law firms to bring PFSA-related lawsuits against certain manufacturers including the Company. In addition, the Company is in discussions with several state attorneys general and agencies, responding to information and other requests relating to PFAS matters and exploring potential resolution of some of the matters raised.

 

Aqueous Film Forming Foam (AFFF) Environmental Litigation

 

3M manufactured and marketed AFFF for use in firefighting at airports and military bases from approximately 1963 to 2002. As of March 31, 2021, 1,076 lawsuits (including 26 putative class actions) alleging injuries or damages by AFFF use have been filed against 3M (along with other defendants) in various state and federal courts. As further described below, a vast majority of these pending cases are in a federal Multi-District Litigation (MDL) court in South Carolina. Additional AFFF cases continue to be filed in or transferred to the MDL. The Company also continues to defend certain AFFF cases that remain in state court and be in discussions with pre-suit claimants for possible resolutions where appropriate.

 

In December 2018, the U.S. Judicial Panel on Multidistrict Litigation (JPML) granted motions to transfer and consolidate all AFFF cases pending in federal courts to the U.S. District Court for the District of South Carolina to be managed in an MDL proceeding to centralize pre-trial proceedings. The parties in the MDL are currently in the process of conducting discovery. An initial pool of ten water supplier cases was selected in February 2021 for case-specific fact discovery as potential bellwether cases. After completion of such discovery, the parties and the MDL court will select a smaller set of these cases for expert discovery and to be tried as bellwethers.

 

In June 2019, several subsidiaries of Valero Energy Corporation, an independent petroleum refiner, filed eight AFFF cases against 3M and other defendants, including DuPont/Chemours, National Foam, Buckeye Fire Equipment, and Kidde-Fenwal, in various state courts. Plaintiffs seek damages that allegedly have been or will be incurred in investigating and remediating PFAS contamination at their properties and replacing or disposing of AFFF products containing long-chain PFAS. Two of these cases have been removed to federal court and transferred to the AFFF MDL. Five cases remain pending in state courts where they are in early stages of litigation, after Valero dismissed its Ohio state court action without prejudice in October 2019. The parties in the state court cases have agreed to stay all five cases until September 2021.

 

Two subsidiaries of Husky Energy filed suit in April 2020 against 3M and other AFFF manufacturers in Wisconsin state court relating to alleged PFAS contamination from AFFF use at Husky facilities in Superior, Wisconsin and Lima, Ohio. The parties have entered into a tolling agreement deferring further action on the plaintiffs' claims. The plaintiffs filed a notice of dismissal without prejudice in September 2020.

 

As of March 31, 2021, the Company is aware of six other AFFF suits originally filed in various state courts across the country in which the Company has been named a defendant. The Company is assessing whether these cases may be removed to federal court and transferred to the AFFF MDL. Separately, the Company is aware of pre-suit claims by other parties related to the use and disposal of AFFF. The Company had discussions with certain potential claimants pre-suit and reached a negotiated resolution with the City of Bemidji in March 2021.

 

Other PFAS-related Product and Environmental Litigation

 

3M manufactured and sold products containing various PFOA and PFOS, including Scotchgard, for several decades. Starting in 2017, 3M has been served with individual and putative class action complaints in various state and federal courts alleging, among other things, that 3M's customers' improper disposal of PFOA and PFOS resulted in the contamination of groundwater or surface water. The plaintiffs in these cases generally allege that 3M failed to warn its customers about the hazards of improper disposal of the product. They also generally allege that contaminated groundwater has caused various injuries, including personal injury, loss of use and enjoyment of their properties, diminished property values, investigation costs, and remediation costs. Several companies have been sued along with 3M, including Saint-Gobain Performance Plastics Corp., Honeywell International Inc. f/k/a Allied-Signal Inc. and/or AlliedSignal Laminate Systems, Inc., Wolverine World Wide Inc., Georgia-Pacific LLC, E.I. DuPont De Nemours and Co., Chemours Co., and various carpet manufacturers.

 

In New York, 3M is defending 40 individual cases and one putative class action filed in the U.S. District Court for the Northern District of New York and four additional cases filed in New York state court against 3M, Saint-Gobain Performance Plastics Corp. (Saint-Gobain), Honeywell International Inc. and E.I. DuPont De Nemours and Co. (DuPont). The plaintiffs allege that 3M manufactured and sold PFOA that was used for manufacturing purposes at Saint-Gobain's and Honeywell's facilities located in the Village of Hoosick Falls and the Town of Hoosick. The plaintiffs claim that the drinking water around Hoosick Falls became contaminated with unsafe levels of PFOA due to the activities of the defendants and allege that they suffered bodily injury due to the ingestion and inhalation of PFOA. The four state court cases also include Tonaga, Inc. (Taconic) as a defendant and make similar allegations related to Taconic's facility in neighboring Petersburg. The plaintiffs seek unstated compensatory, consequential, and punitive damages, as well as attorneys' fees and costs. 3M has answered the complaints in these individual cases, which are now proceeding through discovery. In the putative class action, briefings on class certification have been completed and the parties are engaging in mediation efforts. 3M is also defending 12 individual cases in New York filed by Nassau County drinking water providers in the U.S. District Court for the Eastern District of New York. The plaintiffs in these cases allege that 3M, DuPont, and additional unnamed defendants are responsible for the contamination of plaintiffs' water supply sources with various PFAS compounds. DuPont's motion to transfer these cases to the AFFF MDL was denied in March 2020. 3M has filed answers in the cases in which it has been served. Preliminary discovery is ongoing.

 

In Michigan, one consolidated putative class action is pending in the U.S. District Court for the Western District of Michigan against 3M and Wolverine World Wide (Wolverine). The action arises from Wolverine's allegedly improper disposal of materials and wastes, including 3M Scotchgard, related to Wolverine's shoe manufacturing operations. Plaintiffs allege Wolverine used 3M Scotchgard in its manufacturing process and that chemicals from 3M's product contaminated the environment and drinking water sources after disposal. In January 2021, 3M moved to dismiss certain claims in the complaint, and the case remains in early stages of litigation. The court has set a trial date in January 2022. In addition to the consolidated federal court putative class action, as of March 31, 2021, 3M is a defendant in approximately 277 private individual actions in Michigan state court based on similar allegations. These cases are coordinated for pre-trial purposes. Five of these cases were selected over time for bellwether trials. In January 2020, the court issued the first round of dispositive motion rulings related to the first two bellwether cases, including dismissing the second bellwether case entirely and dismissing certain plaintiffs' medical monitoring and risk of future disease claims, and granting summary judgment to the defendants on one plaintiff's cholesterol injury claims. The parties settled the first bellwether case in early 2020. In June 2020, the court denied the plaintiffs' motion to reconsider the dismissal of the second bellwether case, and the plaintiffs have appealed the decision to the state appellate court. In January 2021, the court granted summary judgment in favor of the defendants in one of three remaining bellwether cases. The plaintiffs in this dismissed bellwether case have also appealed the dismissal to the state appellate court. The remaining two bellwether trials are preliminarily scheduled for October 2021. The parties have engaged in mediation efforts in both the putative class action and the state court mass action cases.

 

Wolverine also filed a third-party complaint against 3M in a suit by the State of Michigan and intervenor townships that sought to compel Wolverine to investigate and address contamination associated with its historic disposal activity. 3M filed an answer and counterclaims to Wolverine's third-party complaint in June 2019. In September and October 2019, the parties (including 3M as third-party defendant) engaged in mediation. In December 2019, the State of Michigan, the intervening townships, and Wolverine announced that they had tentatively resolved the State and townships' claims against Wolverine in exchange for a $70 million payment and certain future remediation measures by Wolverine. In February 2020, the court approved a Consent Decree that memorializes Wolverine's ongoing remediation obligations and the State's and intervening townships' covenants not to bring further lawsuits as to the remediated area. 3M has been formally designated as a "Contributing Party," and as such, the State's and townships' covenants will also apply to 3M. In February 2020, 3M and Wolverine executed an agreement to resolve the legal claims between the two companies. Pursuant to the agreement, 3M made a one-time financial contribution of $55 million in March 2020 to support Wolverine's past and ongoing efforts to address PFAS remediation under Wolverine's Consent Decree with the State and the townships. This amount was part of 3M's charge taken in the fourth quarter of 2019 as discussed below in the "Environmental Liabilities and Insurance Receivables" section.

 

3M is also a defendant, together with Georgia-Pacific as co-defendant, in a putative class action in federal court in Michigan brought by residents of Parchment, who allege that the municipal drinking water was contaminated from waste generated by a paper mill owned by Georgia-Pacific's corporate predecessor. The defendants' motion to dismiss certain claims in the complaint was denied in January 2021. A trial date is set for January 2022. The parties have engaged in mediation and in April 2021 reached a preliminary settlement agreement, subject to court approval, under which 3M and Georgia-Pacific would pay an amount and be released from plaintiffs' putative class action claims. Separately, as a result of discussions among Georgia-Pacific, 3M and municipalities near Parchment, Georgia-Pacific and 3M contributed to a fund in November 2020 to provide expanded municipal water service in the area. These municipalities released 3M from claims relating to or arising out of the extension of municipal water or the alleged PFAS contamination in the area of that extension. 3M's portion relative to the preliminary agreement and contribution above was not material.

 

In Alabama and Georgia, 3M, together with multiple co-defendants, is defending three state court cases brought by municipal water utilities, relating to 3M's sale of PFAS-containing products to carpet manufacturers in Georgia. The plaintiffs in these cases allege that the carpet manufacturers improperly discharged PFAS into the surface water and groundwater, contaminating drinking water supplies of cities located downstream along the Coosa River, including Rome, Georgia and Centre and Gadsden, Alabama. The three water utility cases remain in the early stages of litigation. Another case originally filed in Georgia state court was brought by individuals asserting PFAS contamination by the Georgia carpet manufacturers and seeking economic damages and injunctive relief on behalf of a putative class of Rome and Floyd County water subscribers. This case has been removed to federal court, where 3M has filed a motion to dismiss a series of amended complaints. 3M, together with co-defendants, is also defending two putative class actions in federal court, where the plaintiffs seek relief on behalf of classes of individual ratepayers in Summerville, Georgia who allege their water supply was contaminated by PFAS discharged from a textile mill.

 

In California, 3M and other defendants were named as defendants in an action brought in federal court by Golden State Water Company, alleging PFAS contamination of certain wells located in its water systems. 3M filed a motion to dismiss in November 2020 and in January 2021, the court granted defendants' motion to dismiss the case for lack of personal jurisdiction. In February 2021, the plaintiffs voluntarily dismissed their action without prejudice and filed a new case in the AFFF MDL court. Separately, in December 2020, the Orange County Water District and ten additional local water providers sued 3M, Decra Roofing and certain DuPont-related entities in California state court, alleging PFAS contamination of the plaintiffs' water sources and also referring to 3M's industrial minerals facility in Corona, California as a potential source of contamination. The plaintiffs filed an amended complaint, and 3M filed a demurrer to the amended complaint in March 2021. In April 2021, the court denied 3M's demurrer, and the case remains in early stages of litigation. In February 2021, the City of Corona and a local utility authority filed a lawsuit in California state court against 3M and other defendants, alleging PFAS contamination from 3M products generally as well as from 3M's Corona facility and roofing granules products.

 

In Delaware, 3M, together with several co-defendants, is defending one putative class action brought by individuals alleging PFAS contamination of their water supply resulting from the operations of local metal plating facilities. Plaintiffs allege that 3M supplied PFAS to the metal plating facilities. DuPont, Chemours, and the metal platers have also been named as defendants. This case has been removed from state court to federal court, and plaintiffs have withdrawn its motion to remand to state court and filed an amended complaint. 3M has filed a motion to dismiss the amended complaint. In February 2021, the court raised the question whether subject matter jurisdiction under the Class Action Fairness Act was proper, issued an order requiring the parties to brief the issue and denied defendants' motions to dismiss with leave to renew pending the court's ruling on jurisdiction. Briefing on the jurisdictional question is anticipated to be complete in May 2021.

 

In New Jersey, 3M is a defendant in an action brought in federal court by Middlesex Water Company, alleging PFAS contamination of its water wells. 3M's motion to transfer the case to the AFFF MDL was denied. 3M has moved to dismiss the complaint, and the case is currently in discovery. In addition, 3M, together with several co-defendants, is defending two federal court cases by multiple individuals with private drinking water wells near DuPont and Solvay facilities that were allegedly supplied with PFAS by 3M. Plaintiffs seek medical monitoring and damages. 3M has filed a motion to dismiss in the first of those actions and the motion was denied. In January 2021, certain plaintiffs in that lawsuit severed their claims in order to be represented by different counsel in what is now a separate case, which remains in early stages of litigation. The second case is in early stages of litigation. 3M and other defendants are also defending three federal court cases brought by individuals who live near the DuPont and Solvay facilities, alleging personal injury caused by PFAS exposure. Those cases are in early stages of litigation. In September 2020, a federal court case was filed against 3M on behalf of the Borough of Hopatcong, alleging general PFAS contamination of its public water supply. In December 2020, 3M filed a motion to dismiss the Hopatcong matter. In January 2021, another case of this nature was filed in federal court on behalf of Pequannock Township. 3M has filed a motion to dismiss this case.

 

In October 2018, 3M and other defendants, including DuPont and Chemours, were named in a putative class action in the U.S. District Court for the Southern District of Ohio brought by the named plaintiff, a firefighter allegedly exposed to PFAS chemicals through his use of firefighting foam, purporting to represent a putative class of all U.S. individuals with detectable levels of PFAS in their blood. The plaintiff brings claims for negligence, battery, and conspiracy and seeks injunctive relief, including an order "establishing an independent panel of scientists" to evaluate PFAS. 3M and other entities jointly filed a motion to dismiss in February 2019. In September 2019, the court denied the defendants' motion to dismiss. In February 2020, the court denied 3M's motion to transfer the case to the AFFF MDL. In December 2020, the defendants filed their joint opposition to the class certification motion filed earlier by the plaintiff. The plaintiffs filed a reply brief in support of class certification in March 2021.

 

In West Virginia, 3M and other entities were originally named as defendants in a state court action brought by Weirton Area Water Board that alleges PFAS contamination of local water supplies. This case was been removed to federal court where the defendants filed various motions to dismiss the complaint based on pleading deficiencies and lack of personal jurisdiction. In November 2020, the court granted some of the personal jurisdiction motions, denied other personal jurisdiction motions (including 3M's) and ordered the remaining parties to engage in discovery on jurisdiction. In December 2020, the court denied the defendants' non-jurisdictional motion to dismiss. In January 2021, the plaintiffs amended its complaint to include allegations related to AFFF, and the case was transferred to the AFFF MDL court, where it remains in early stages of litigation.

 

Other PFAS-related Matters

 

In July 2019, the Company received a written request from the Subcommittee on Environment of the Committee on Oversight and Reform, U.S. House of Representatives, seeking certain documents and information relating to the Company's manufacturing and distribution of PFAS products. In September 2019, a 3M representative testified before and responded to questions from the Subcommittee on Environment with respect to PFAS and the Company's environmental stewardship initiatives. The Company continues to cooperate with the Subcommittee.

 

The Company operates under a 2009 consent order issued under the federal Toxic Substances Control Act (TSCA) (the "2009 TSCA consent order") for the manufacture and use of two perfluorinated materials (FBSA and FBSEE) at its Decatur, Alabama site that does not permit release of these materials into "the waters of the United States." In March 2019, the Company halted the manufacture, processing, and use of these materials at the site upon learning that these materials may have been released from certain specified processes at the Decatur site into the Tennessee River. In April 2019, the Company voluntarily disclosed the releases to the U.S. Environmental Protection Agency (EPA) and the Alabama Department of Environmental Management (ADEM). During June and July 2019, the Company took steps to fully control the aforementioned processes by capturing all wastewater produced by the processes and by treating all air emissions. These processes have been back on-line and in operation since July 2019. The Company continues to cooperate with the EPA and ADEM in their investigations and will work with the regulatory authorities to demonstrate compliance with the release restrictions.

 

The Company is authorized to discharge wastewater from its Decatur plant pursuant to the terms of a Clean Water Act National Pollutant Discharge Elimination System (NPDES) permit issued by ADEM. The NPDES permit requires the Company to report on a monthly and quarterly basis the quality and quantity of pollutants discharged to the Tennessee River. In June 2019, the Company voluntarily disclosed to the EPA and ADEM that it had included incorrect values in certain of its monthly and quarterly reports. The Company has submitted the corrected values to both the EPA and ADEM.

 

As part of ongoing work with the EPA and ADEM to address compliance matters at the Decatur facility, the Company discovered it had not fully characterized its PFAS discharge in its NPDES permit. In September 2019, the Company disclosed the matter to the EPA and ADEM and announced that it had elected to temporarily idle certain other manufacturing processes at 3M Decatur. The Company is reviewing its operations at the plant, has installed wastewater treatment controls and has restarted idled processes.

 

As a result of the Company's discussions with ADEM to address these and other related matters in the state of Alabama, 3M and ADEM have agreed to the terms of an interim Consent Order in July 2020 to cover all PFAS-related wastewater discharges and air emissions from the Company's Decatur facility. Under the interim Consent Order, the Company's principal obligations include commitments related to (i) future ongoing site operations such as (a) providing certain notices or reports and performing various analytical and characterization studies and (b) future capital improvements; and (ii) remediation activities, including certain on-site and off-site investigations and studies. Obligations related to ongoing future site operations under the Consent Order will involve additional operating costs and capital expenditures over multiple years. The Company does not expect them to have a material impact on its consolidated results of operations or financial position. With respect to remediation activities, financial obligations related to certain activities under the Consent Order are probable and estimable, and are included in the Company's accruals for "other environmental liabilities" as described in the "Environmental Liabilities and Insurance Receivables" section below. As offsite investigation activities continue, additional remediation amounts may become probable and estimable in the future.

 

In December 2019, the Company received a grand jury subpoena from the U.S. Attorney's Office for the Northern District of Alabama for documents related to, among other matters, the Company's compliance with the 2009 TSCA consent order and unpermitted discharges to the Tennessee River. The Company is cooperating with this and other inquiries and is producing documents in response to requests.

 

In addition, as part of its ongoing evaluation of regulatory compliance at its Cordova, Illinois facility, the Company discovered it had not fully characterized its PFAS discharge in its NPDES permit for the Cordova facility. In November 2019, the Company disclosed this matter to the EPA, and in January 2020 disclosed this matter to the Illinois Environmental Protection Agency (IEPA). The Company continues to work with the EPA and IEPA to address these issues from the Cordova facility. In December 2020, the EPA requested certain documents and information related to TSCA compliance at the facility. In February and April 2021, the EPA requested certain documents and information related to RCRA compliance at this facility. The Company is cooperating and producing documents and information in response to these requests.

 

The Company is also reviewing operations at its other plants with similar manufacturing processes, such as the plant in Cottage Grove, Minnesota, to ensure those operations are in compliance with applicable environmental regulatory requirements and Company policies and procedures. As a result of these reviews, the Company discovered it had not fully characterized its PFAS discharge in its NPDES permit for the Cottage Grove facility. In March 2020, the Company disclosed this matter to the Minnesota Pollution Control Agency (MPCA) and the EPA. In July 2020, the Company received an information request from MPCA for documents and information related to, among other matters, the Company's compliance with the Clean Water Act at its Cottage Grove facility. The Company is cooperating with this inquiry and is producing documents and information in response to the request for information. The Company continues to work with the MPCA and EPA to address the discharges from the Cottage Grove facility.

 

Separately, in June 2020, the Company reported to EPA and MPCA that it had not fully complied with elements of the inspection, characterization and waste stream profile verification process of the Waste and Feedstream Analysis Plan (WAP/FAP) of its Resource Conservation and Recovery Act (RCRA) permit for its Cottage Grove incinerator. In July 2020, the Company received an information request from MPCA related to the June 2020 disclosure, to which the Company responded in September 2020. The Company continues to work with the MPCA to address WAP/FAP implementation issues disclosed in June 2020. In January 2021, the Company received a notice of violation (NOV) from MPCA related to, among other matters, the above-described Clean Water Act and RCRA issues.  The Company is cooperating with MPCA to address the issues that are the subject of the NOV.

 

In February 2020, the Company received an information request from EPA for documents and information related to, among other matters, the Company's compliance with the Clean Water Act at its facilities that manufacture, process and use PFAS, including the Decatur, Cordova and Cottage Grove facilities. The Company is cooperating with this inquiry and is producing documents and information in response to the request for information.

 

The Company will continue to work with relevant federal and state agencies (including EPA, the U.S. Department of Justice, state environmental agencies and state attorneys general) as it conducts these reviews. The Company cannot predict at this time the outcomes of resolving these compliance matters or what potential actions may be taken by the regulatory agencies.

 

Other Environmental Litigation

 

In July 2018, the Company, along with more than 120 other companies, was served with a complaint seeking cost recovery and contribution towards the cleaning up of approximately eight miles of the Lower Passaic River in New Jersey. The plaintiff, Occidental Chemical Corporation, alleges that it agreed to design and pay the estimated $165 million cost to remove and cap sediment containing eight chemicals of concern, including PCBs and dioxins. The complaint seeks to spread those costs among the defendants, including the Company. The Company's involvement in the case relates to its past use of two commercial drum conditioning facilities in New Jersey. Whether, and to what extent, the Company may be required to contribute to the costs at issue in the case remains to be determined.

 

For environmental matters and litigation described above, unless otherwise described below, no liability has been recorded as the Company believes liability in those matters is not probable and estimable and the Company is not able to estimate a possible loss or range of possible loss at this time. The Company's environmental liabilities and insurance receivables are described below.

 

Environmental Liabilities and Insurance Receivables

 

The Company periodically examines whether the contingent liabilities related to the environmental matters and litigation described above are probable and estimable based on experience and developments in those matters. During the first three months of 2021, the Company increased its accrual for PFAS-related other environmental liabilities by $55 million and made related payments of $8 million. During the first quarter of 2019, the EPA issued its PFAS Action Plan and the Company settled the litigation with the Water Authority (both matters are described in more detail above). The Company completed a comprehensive review with the assistance of environmental consultants and other experts regarding environmental matters and litigation related to historical PFAS manufacturing operations in Minnesota; Alabama; Gendorf, Germany; and at four former landfills in Alabama. As a result of these developments and of that review, the Company increased its accrual for "other environmental liabilities" by $235 million pre-tax (including the settlement with the Water Authority) in the first quarter of 2019. During the fourth quarter of 2019, 3M updated its evaluation of certain customer-related PFAS litigation based on continued, productive settlement discussions with multiple parties. As previously disclosed, 3M has been engaged in mediation and resolution negotiations in multiple PFAS cases. In addition, during the fourth quarter of 2019, the Company updated its assessment of environmental matters and litigation related to its historical PFAS manufacturing operations and expanded its evaluation of other 3M sites that may have used certain PFAS-containing materials and locations at which they were disposed. As a result of these actions during the fourth quarter the Company recorded a pre-tax charge of $214 million. As of March 31, 2021, the Company had recorded liabilities of $463 million for "other environmental liabilities." The accruals represent the Company's best estimate of the probable loss in connection with the environmental matters and PFAS-related litigation described above. The Company is not able to estimate a possible loss or range of possible loss in excess of the established accruals at this time.

 

As of March 31, 2021, the Company had recorded liabilities of $24 million for estimated non-PFAS related "environmental remediation" costs to clean up, treat, or remove hazardous substances at current or former 3M manufacturing or third-party sites. The Company evaluates available facts with respect to each individual site each quarter and records liabilities for remediation costs on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of feasibility studies or the Company's commitment to a plan of action. Liabilities for estimated costs of environmental remediation, depending on the site, are based primarily upon internal or third-party environmental studies, and estimates as to the number, participation level and financial viability of any other potentially responsible parties, the extent of the contamination and the nature of required remedial actions. The Company adjusts recorded liabilities as further information develops or circumstances change. The Company expects that it will pay the amounts recorded over the periods of remediation for the applicable sites, currently ranging up to 20 years.

 

It is difficult to estimate the cost of environmental compliance and remediation given the uncertainties regarding the interpretation and enforcement of applicable environmental laws and regulations, the extent of environmental contamination and the existence of alternative cleanup methods. Developments may occur that could affect the Company's current assessment, including, but not limited to: (i) changes in the information available regarding the environmental impact of the Company's operations and products; (ii) changes in environmental regulations, changes in permissible levels of specific compounds in drinking water sources, or changes in enforcement theories and policies, including efforts to recover natural resource damages; (iii) new and evolving analytical and remediation techniques; (iv) success in allocating liability to other potentially responsible parties; and (v) the financial viability of other potentially responsible parties and third-party indemnitors. For sites included in both "environmental remediation liabilities" and "other environmental liabilities," at which remediation activity is largely complete and remaining activity relates primarily to operation and maintenance of the remedy, including required post-remediation monitoring, the Company believes the exposure to loss in excess of the amount accrued would not be material to the Company's consolidated results of operations or financial condition. However, for locations at which remediation activity is largely ongoing, the Company cannot estimate a possible loss or range of loss in excess of the associated established accruals for the reasons described above.

 

The Company has both pre-1986 general and product liability occurrence coverage and post-1985 occurrence reported product liability and other environmental coverage for environmental matters and litigation. As of March 31, 2021, the Company's receivable for insurance recoveries related to the environmental matters and litigation was $8 million. Various factors could affect the timing and amount of recovery of this and future expected increases in the receivable, including (i) delays in or avoidance of payment by insurers; (ii) the extent to which insurers may become insolvent in the future, (iii) the outcome of negotiations with insurers, and (iv) the scope of the insurers' purported defenses and exclusions to avoid coverage.

 

Product Liability Litigation

 

Aearo Technologies sold Dual-Ended Combat Arms - Version 2 earplugs starting in about 2003. 3M acquired Aearo Technologies in 2008 and sold these earplugs from 2008 through 2015, when the product was discontinued. In December 2018, a military veteran filed an individual lawsuit against 3M in the San Bernardino Superior Court in California alleging that he sustained personal injuries while serving in the military caused by 3M's Dual-Ended Combat Arms earplugs - Version 2. The plaintiff asserts claims of product liability and fraudulent misrepresentation and concealment. The plaintiff seeks various damages, including medical and related expenses, loss of income, and punitive damages.

 

As of March 31, 2021, the Company is a named defendant in approximately 3,349 lawsuits (including 14 putative class actions) in various state and federal courts that purport to represent approximately 12,700 individual claimants making similar allegations. In April 2019, the U.S. Judicial Panel on Multidistrict Litigation granted motions to transfer and consolidate all cases pending in federal courts to the U.S. District Court for the Northern District of Florida to be managed in a multi-district litigation (MDL) proceeding to centralize pre-trial proceedings. Discovery is underway. The plaintiffs and 3M filed preliminary summary judgment motions on the government contractor defense. In July 2020, the court granted the plaintiffs' summary judgment motion and denied the defendants' summary judgment motion, ruling that plaintiffs' claims are not barred by the government contractor defense. The court denied the Company's request to immediately certify the summary judgment ruling for appeal to the U.S. Court of Appeals for the Eleventh Circuit. In December 2020, the MDL court granted the plaintiffs' motion to consolidate three plaintiffs for the first bellwether trial, which began in March 2021. Individual trials for the next two bellwether plaintiffs are scheduled to proceed in May and June of 2021. Discovery in the next 20 bellwether cases in the MDL court is ongoing and is scheduled to be complete by the end of 2021.

 

3M is also defending lawsuits brought by non-military plaintiffs in state court in Hennepin County, Minnesota. 3M removed these actions to federal court and the federal court remanded them to state court in March 2020. The Company has appealed the remand orders to the U.S. Court of Appeals for the Eighth Circuit. Oral argument on the first remand order appeal is scheduled for June 2021. There are approximately 40 lawsuits involving approximately 800 plaintiffs pending in the state court. The state court actions will be subject to a bellwether case selection process. The first trial in Hennepin County is scheduled for August 2021.

 

No liability has been recorded for these matters because the Company believes that any such liability is not probable and estimable at this time.

 

As of March 31, 2021, the Company was a named defendant in 26 lawsuits in the United States involving 27 plaintiffs and one Canadian putative class action with a single named plaintiff, alleging that the Bair Hugger™ patient warming system caused a surgical site infection.

 

As previously disclosed, 3M had been a named defendant in lawsuits in federal courts involving over 5,000 plaintiffs. The plaintiffs claim they underwent various joint arthroplasty, cardiovascular, and other surgeries and later developed surgical site infections due to the use of the Bair Hugger™ patient warming system. The plaintiffs seek damages and other relief based on theories of strict liability, negligence, breach of express and implied warranties, failure to warn, design and manufacturing defect, fraudulent and/or negligent misrepresentation/concealment, unjust enrichment, and violations of various state consumer fraud, deceptive or unlawful trade practices and/or false advertising acts.

 

The U.S. Judicial Panel on Multidistrict Litigation (JPML) consolidated all cases pending in federal courts to the U.S. District Court for the District of Minnesota to be managed in a multi-district litigation (MDL) proceeding. In July 2019, the court excluded several of the plaintiffs' causation experts, and granted summary judgment for 3M in all cases pending at that time in the MDL. Plaintiffs have appealed that decision to the U.S. Court of Appeals for the Eighth Circuit. Plaintiffs have also appealed a 2018 jury verdict in favor of 3M in the first bellwether trial in the MDL and appealed the dismissal of another bellwether case. The Eighth Circuit court heard oral argument on all pending appeals in March 2021.

 

Among the 26 remaining lawsuits in the United States, 23 are in the MDL court and three are in state court. The MDL has stayed all 23 remaining lawsuits pending the appeal of the summary judgment decision. In February 2020, the MDL court remanded two cases to state court in Jackson County, Missouri that combined Bair Hugger product liability claims with medical malpractice claims. There is also one case in Hidalgo County, Texas that combines Bair Hugger product liability claims with medical malpractice claims. In August 2019, the MDL court enjoined the individual plaintiff from pursuing his claims in Texas state court because he had previously filed and dismissed a claim in the MDL. That plaintiff has appealed the order to the U.S. Court of Appeals for the Eighth Circuit, which heard oral argument on this appeal in March 2021. The Texas state court has stayed the entire case while the appeal is pending.

 

As previously disclosed, 3M had been named a defendant in 61 cases in Minnesota state court. In January 2018, the Minnesota state court excluded plaintiffs' experts and granted 3M's motion for summary judgment on general causation. The Minnesota Court of Appeals affirmed the state court orders in their entirety and the Minnesota Supreme Court denied plaintiffs' petition for review and entered the finial dismissal in 2019, effectively ending the Minnesota state court cases.

 

In June 2016, the Company was served with a putative class action filed in the Ontario Superior Court of Justice for all Canadian residents who underwent various joint arthroplasty, cardiovascular, and other surgeries and later developed surgical site infections that the representative plaintiff claims was due to the use of the Bair Hugger™ patient warming system. The representative plaintiff seeks relief (including punitive damages) under Canadian law based on theories similar to those asserted in the MDL.

 

No liability has been recorded for the Bair Hugger™ litigation because the Company believes that any such liability is not probable and estimable at this time.

 

For product liability litigation matters described in this section for which a liability has been recorded, the amount recorded is not material to the Company's consolidated results of operations or financial condition. In addition, the Company is not able to estimate a possible loss or range of loss in excess of the established accruals at this time.

 

Stockholder Litigation

 

In July 2019, Heavy & General Laborers' Locals 472 & 172 Welfare Fund filed a putative securities class action against 3M Company, its former Chairman and CEO, current Chairman and CEO, and former CFO in the U.S. District Court for the District of New Jersey. In August 2019, an individual plaintiff filed a similar putative securities class action in the same district. Plaintiffs allege that defendants made false and misleading statements regarding 3M's exposure to liability associated with PFAS and bring claims for damages under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 against all defendants, and under Section 20(a) of the Securities and Exchange Act of 1934 against the individual defendants. In October 2019, the court consolidated the securities class actions and appointed a group of lead plaintiffs. In January 2020, the defendants filed a motion to transfer venue to the U.S. District Court for the District of Minnesota. In August 2020, the court denied the motion to transfer venue, and in September 2020, the defendants filed a petition for writ of mandamus to the U.S. Court of Appeals for the Third Circuit. In November 2020, the federal Court of Appeals granted 3M's petition for a writ of mandamus and directed the New Jersey federal court to transfer the action to the Minnesota federal court. The defendants filed a motion to dismiss the action in January 2021, which is not yet briefed. The suit is in the early stages of litigation.

 

In October 2019, a stockholder derivative lawsuit was filed in the U.S. District Court for the District of New Jersey against 3M and several of its current and former executives and directors. In November and December 2019, two additional derivative lawsuits were filed in a Minnesota state court. The derivative lawsuits rely on similar factual allegations as the putative securities class action discussed above. The state court plaintiffs have agreed to stay these cases pending a ruling on a motion to dismiss the securities class action. In October 2020, the derivative action pending in the U.S. District Court for the District of New Jersey was dismissed, without prejudice, for failure to serve the complaint within the required time period.

 

In August 2020, a stockholder who had previously submitted a books and records demand filed an additional follow-on derivative lawsuit in the U.S. District Court for the District of New Jersey against 3M and several of its current and former executives and directors. This derivative lawsuit, having been transferred to Minnesota federal court, also relies on similar factual allegations as the putative securities class action discussed above. In February 2021, an additional stockholder derivative lawsuit was filed in the District of Minnesota, making similar factual allegations as the putative securities class action discussed above.

 

Federal False Claims Act / Qui Tam Litigation

 

In October 2019, 3M acquired Acelity, Inc. and its KCI subsidiaries, including Kinetic Concepts, Inc. and KCI USA, Inc. As previously disclosed in the SEC filings by the KCI entities, in 2009, Kinetic Concepts, Inc. received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General. In 2011, following the completion of the government's review and its decision declining to intervene in two qui tam actions described further below, the qui tam relator-plaintiffs' pleadings were unsealed.

 

The government inquiry followed two qui tam actions filed in 2008 by two former employees against Kinetic Concepts, Inc. and KCI USA, Inc. (collectively, the "KCI defendants") under seal in the U.S. District Court for the Central District of California. The complaints contain allegations that the KCI Defendants violated the federal False Claims Act by submitting false or fraudulent claims to federal healthcare programs by billing for V.A.C.® Therapy in a manner that was not consistent with the Local Coverage Determinations issued by the Durable Medical Equipment Medicare Administrative Contractors and seek monetary damages. One complaint (the "Godecke case") also contains allegations that the KCI Defendants retaliated against the relator-plaintiff for alleged whistle-blowing behavior.

 

In October 2016, the KCI Defendants filed counterclaims in the Godecke case, asserting breach of contract and conversion. In August 2017, the relator-plaintiff's fraud claim in the Godecke case was dismissed in favor of the KCI defendants. In January 2018, the district court stayed the retaliation claim and the KCI Defendants' counterclaims pending the relator-plaintiff's appeal. In September 2019, the U.S. Court of Appeals for the Ninth Circuit reversed and remanded the case to the district court for further proceedings. In March 2021, the court held another status conference and allowed the KCI defendants to send an official request for information and documents to the government, but the court has not ordered further discovery to commence. Separately, in June 2019, following discovery, the district court in the second case (the "Hartpence case") entered summary judgment in the KCI Defendants' favor on all of the relator-plaintiff's claims. The relator-plaintiff then filed an appeal in the U.S. Court of Appeals for the Ninth Circuit. Oral argument in the Hartpence case was held in July 2020. The appellate court's opinion remains pending.

 

For the matters described in this section for which a liability has been recorded, the amount recorded is not material to the Company's consolidated results of operations or financial condition.

 

Compliance Matter

 

The Company, through its internal processes, discovered certain travel activities and related funding and record keeping issues raising concerns, arising from marketing efforts by certain business groups based in China. The Company initiated an internal investigation to determine whether the expenditures may have violated the U.S. Foreign Corrupt Practices Act (FCPA) or other potentially applicable anti-corruption laws. The Company has retained outside counsel and a forensic accounting firm to assist with the investigation. In July 2019, the Company voluntarily disclosed this investigation to both the Department of Justice and Securities and Exchange Commission and is cooperating with both agencies. The Company cannot predict at this time the outcome of its investigation or what potential actions may be taken by the Department of Justice or Securities and Exchange Commission. 

 

 

NOTE 15.  Stock-Based Compensation

 

The 3M 2016 Long-Term Incentive Plan provides for the issuance or delivery of up to 123,965,000 shares of 3M common stock pursuant to awards granted under the plan. Awards may be issued in the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock awards, and performance units and performance shares. As of March 31, 2021, the remaining shares available for grant under the LTIP Program are 10.7 million.

 

The Company's annual stock option and restricted stock unit grant is made in February to provide a strong and immediate link between the performance of individuals during the preceding year and the size of their annual stock compensation grants. The grant to eligible employees uses the closing stock price on the grant date. Accounting rules require recognition of expense under a non-substantive vesting period approach, requiring compensation expense recognition when an employee is eligible to retire. Employees are considered eligible to retire at age 55 and after having completed ten years of service. This retiree-eligible population represents 35 percent of the annual grant stock-based compensation expense; therefore, higher stock-based compensation expense is recognized in the first quarter.

 

In addition to the annual grants, the Company makes other minor grants of stock options, restricted stock units and other stock-based grants. The Company issues cash settled restricted stock units and stock appreciation rights in certain countries. These grants do not result in the issuance of common stock and are considered immaterial by the Company.

 

Amounts recognized in the financial statements with respect to stock-based compensation programs, which include stock options, restricted stock, restricted stock units, performance shares and the General Employees' Stock Purchase Plan (GESPP), are provided in the following table. Capitalized stock-based compensation amounts were not material for the three months ended March 31, 2021 and 2020.

 

Stock-Based Compensation Expense

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

 

March 31,

 

 

(Millions)

    

2021

    

2020

    

 

Cost of sales

 

$

 22

 

$

 22

 

 

Selling, general and administrative expenses

 

 

 84

 

 

 73

 

 

Research, development and related expenses

 

 

 25

 

 

 25

 

 

Stock-based compensation expenses

 

$

 131

 

$

 120

 

 

Income tax benefits

 

 

 (51)

 

 

 (39)

 

 

Stock-based compensation expenses (benefits), net of tax

 

$

 80

 

$

 81

 

 

 

Stock Option Program

 

The following table summarizes stock option activity during the three months ended March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

    

Weighted

    

Remaining

    

Aggregate

 

 

Number of

 

Average

 

Contractual

 

Intrinsic Value

 

(Options in thousands)

Options

 

Exercise Price

 

Life (months)

 

(millions)

 

Under option -

 

 

 

 

 

 

 

 

 

 

January 1

 35,401

 

$

 156.23

 

 

 

 

 

 

Granted

 3,612

 

 

 175.04

 

 

 

 

 

 

Exercised

 (2,323)

 

 

 104.16

 

 

 

 

 

 

Forfeited

 (104)

 

 

 174.71

 

 

 

 

 

 

March 31

 36,586

 

$

 161.34

 

 68

 

$

 1,299

 

Options exercisable

 

 

 

 

 

 

 

 

 

 

March 31

 28,819

 

$

 158.58

 

 57

 

$

 1,126

 

 

Stock options vest over a period from one year to three years with the expiration date at 10 years from date of grant. As of March 31, 2021, there was $93 million of compensation expense that has yet to be recognized related to non-vested stock option based awards. This expense is expected to be recognized over the remaining weighted-average vesting period of 25 months. The total intrinsic values of stock options exercised were $180 million and $98 million during the three months ended March 31, 2021 and 2020, respectively. Cash received from options exercised was $240 million and $100 million for the three months ended March 31, 2021 and 2020, respectively. The Company's actual tax benefits realized for the tax deductions related to the exercise of employee stock options were $38 million and $20 million for the three months ended March 31, 2021 and 2020, respectively.

 

For the primary 2021 annual stock option grant, the weighted average fair value at the date of grant was calculated using the Black-Scholes option-pricing model and the assumptions that follow.

 

Stock Option Assumptions

 

 

 

 

 

 

 

Annual

 

 

    

2021

 

Exercise price

 

$

 175.04

 

Risk-free interest rate

 

 

 0.8

%

Dividend yield

 

 

 2.8

%

Expected volatility

 

 

 22.6

%

Expected life (months)

 

 

 83

 

Black-Scholes fair value

 

$

 25.33

 

 

Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. For the 2021 annual grant date, the Company estimated the expected volatility based upon the following three volatilities of 3M stock: the median of the term of the expected life rolling volatility; the median of the most recent term of the expected life volatility; and the implied volatility on the grant date. The expected term assumption is based on the weighted average of historical grants.

 

Restricted Stock and Restricted Stock Units

 

The following table summarizes restricted stock and restricted stock unit activity during the three months ended March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

(Shares in thousands)

 

Shares

 

Fair Value

 

Nonvested balance -

 

 

 

 

 

 

As of January 1

 

 1,722

 

$

 189.78

 

Granted

 

           721

 

 

       175.09

 

Vested

 

 (433)

 

 

 232.62

 

Forfeited

 

 (33)

 

 

 173.54

 

As of March 31

 

 1,977

 

$

 175.31

 

 

As of March 31, 2021, there was $141 million of compensation expense that has yet to be recognized related to non-vested restricted stock and restricted stock units. This expense is expected to be recognized over the remaining weighted-average vesting period of 27 months. The total fair value of restricted stock and restricted stock units that vested during the three months ended March 31, 2021 and 2020 was $78 million and $88 million, respectively. The Company's actual tax benefits realized for the tax deductions related to the vesting of restricted stock and restricted stock units was $14 million and $16 million for the three months ended March 31, 2021 and 2020, respectively.

 

Restricted stock units granted generally vest three years following the grant date assuming continued employment. Dividend equivalents equal to the dividends payable on the same number of shares of 3M common stock accrue on these restricted stock units during the vesting period, although no dividend equivalents are paid on any of these restricted stock units that are forfeited prior to the vesting date. Dividends are paid out in cash at the vest date on restricted stock units. Since the rights to dividends are forfeitable, there is no impact on basic earnings per share calculations. Weighted average restricted stock unit shares outstanding are included in the computation of diluted earnings per share.

 

Performance Shares

 

Instead of restricted stock units, the Company makes annual grants of performance shares to members of its executive management. The 2021 performance criteria for these performance shares (organic volume growth, return on invested capital, free cash flow conversion, and earnings per share growth) were selected because the Company believes that they are important drivers of long-term stockholder value. The number of shares of 3M common stock that could actually be delivered at the end of the three-year performance period may be anywhere from 0% to 200% of each performance share granted, depending on the performance of the Company during such performance period. When granted, these performance shares are awarded at 100% of the estimated number of shares at the end of the three-year performance period and are reflected under "Granted" in the table below. Non-substantive vesting requires that expense for the performance shares be recognized over one or three years depending on when each individual became a 3M executive. The performance share grants accrue dividends; therefore, the grant date fair value is equal to the closing stock price on the date of grant. Since the rights to dividends are forfeitable, there is no impact on basic earnings per share calculations. Weighted average performance shares whose performance period is complete are included in computation of diluted earnings per share.

 

The following table summarizes performance share activity during the three months ended March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

    

    

Weighted

 

 

 

 

Average

 

 

Number of

 

Grant Date

 

(Shares in thousands)

Shares

 

Fair Value

 

Undistributed balance -

 

 

 

 

 

As of January 1

 423

 

$

 188.61

 

Granted

 163

 

 

 176.41

 

Distributed

 (115)

 

 

 228.80

 

Performance change

 17

 

 

 178.43

 

Forfeited

 (4)

 

 

 172.92

 

As of March 31

 484

 

$

 174.75

 

 

As of March 31, 2021, there was $40 million of compensation expense that has yet to be recognized related to performance shares. This expense is expected to be recognized over the remaining weighted-average earnings period of 21 months. The total fair value of performance shares that were distributed were $22 million and $35 million for the three months ended March 31, 2021 and 2020, respectively. The Company's actual tax benefits realized for the tax deductions related to the distribution of performance shares were $4 million and $7 million for the three months ended March 31, 2021 and 2020, respectively.

 

NOTE 16.  Business Segments

 

3M's businesses are organized, managed and internally grouped into segments based on differences in markets, products, technologies and services. 3M manages its operations in four business segments: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. 3M's four business segments bring together common or related 3M technologies, enhancing the development of innovative products and services and providing for efficient sharing of business resources. Transactions among reportable segments are recorded at cost. 3M is an integrated enterprise characterized by substantial intersegment cooperation, cost allocations and inventory transfers. Therefore, management does not represent that these segments, if operated independently, would report the operating income information shown.

 

3M discloses business segment operating income as its measure of segment profit/loss, reconciled to both total 3M operating income and income before taxes. Business segment operating income includes dual credit for certain related operating income (as described below in "Elimination of Dual Credit"). Business segment operating income excludes certain expenses and income that are not allocated to business segments (as described below in "Corporate and Unallocated"). Additionally, the following special items are excluded from business segment operating income and, instead, are included within Corporate and Unallocated: significant litigation-related charges/benefits, gain/loss on sale of businesses (see Note 3), and divestiture-related restructuring actions (see Note 5).

 

Effective in the first quarter of 2021, the measure of segment operating performance used by 3M's CODM changed and, as a result, 3M's disclosed measure of segment profit/loss (business segment operating income) was updated. The change to business segment operating income aligns with the update to how the CODM assesses performance and allocates resources for the Company's business segments. The change included the following:

 

Changes in cost attribution

 

The extent of allocation and method of attribution of certain net costs were updated to result in fewer items remaining in Corporate and Unallocated and, instead, including them in 3M's business segments' operating performance. See the updated description of Corporate and Unallocated below. Previously, a larger portion of ongoing corporate staff costs and costs associated with centrally managed material resource centers was retained in Corporate and Unallocated. In addition, portions of pension costs and costs associated with certain centrally managed but ongoing business-related legal matters, along with certain insurance-related costs, were retained in Corporate and Unallocated.

 

Continued alignment of customer account activity

 

As part of 3M's regular customer-focus initiatives, the Company realigned certain customer account activity ("sales district") to correlate with the primary divisional product offerings in various countries and reduce complexity for customers when interacting with multiple 3M businesses. This impacted the amount of dual credit certain business segments receive as a result of sales district attribution. 

 

Also effective in the first quarter of 2021, within 3M's Consumer business segment, certain safety products formerly within the Construction and Home Improvement Division and the Stationery and Office Division were moved to the newly-named Consumer Health and Safety Division (formerly the Consumer Health Care Division).

 

The financial information presented herein reflects the impact of the preceding changes for all periods presented.

 

Business Segment Information

 

 

 

 

 

 

 

 

 

Three months ended 

(Millions)

 

March 31,

Net Sales

    

2021

    

2020

Safety and Industrial

 

$

 3,327

 

$

 2,927

Transportation and Electronics

 

 

 2,531

 

 

 2,239

Health Care

 

 

 2,248

 

 

 2,104

Consumer

 

 

 1,373

 

 

 1,250

Corporate and Unallocated

 

 

 (2)

 

 

 -

Elimination of Dual Credit

 

 

 (626)

 

 

 (445)

Total Company

 

$

 8,851

 

$

 8,075

 

 

 

 

 

 

 

Operating Performance

 

 

 

 

 

 

Safety and Industrial

 

$

 811

 

$

 694

Transportation and Electronics

 

 

 591

 

 

 464

Health Care

 

 

 509

 

 

 452

Consumer

 

 

 289

 

 

 265

Elimination of Dual Credit

 

 

 (159)

 

 

 (113)

Total business segment operating income

 

$

 2,041

 

$

 1,762

Corporate and Unallocated

 

 

 

 

 

 

Special items:

 

 

 

 

 

 

Significant litigation-related (charges)/benefits

 

 

 -

 

 

 (17)

Gain/(loss) on sale of businesses

 

 

 -

 

 

 2

Other corporate expense - net

 

 

 (47)

 

 

 (84)

Total Corporate and Unallocated

 

 

 (47)

 

 

 (99)

Total Company operating income

 

$

 1,994

 

$

 1,663

 

 

 

 

 

 

 

Other expense/(income), net

 

$

 49

 

$

 75

Income before income taxes

 

$

 1,945

 

$

 1,588

Corporate and Unallocated

 

Corporate and Unallocated operating income includes "special items" and "other corporate expense-net". Special items include significant litigation-related charges/benefits, gain/loss on sale of businesses, and divestiture-related restructuring costs. Other corporate expense-net includes items such as net costs related to limited unallocated corporate staff and centrally managed material resource centers of expertise costs, certain litigation and environmental expenses largely related to legacy products/businesses not allocated to business segments, corporate philanthropic activity, and other net costs that 3M may choose not to allocate directly to its business segments. Other corporate expense-net also includes costs and income from contract manufacturing, transition services and other arrangements with the acquirer of the Communication Markets Division following its 2018 divestiture through 2019 and the acquirer of the former Drug Delivery business following its 2020 divestiture. Items classified as revenue from this activity are included in Corporate and Unallocated net sales. Because Corporate and Unallocated includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.

 

Elimination of Dual Credit

 

3M business segment reporting measures include dual credit to business segments for certain sales and related operating income. Management evaluates each of its four business segments based on net sales and operating income performance, including dual credit reporting to further incentivize sales growth. As a result, 3M reflects additional ("dual") credit to another business segment when the customer account activity ("sales district") with respect to the particular product sold to the external customer is provided by a different business segment. This additional dual credit is largely reflected at the division level. For example, privacy screen protection products are primarily sold by the Display Materials and Systems Division within the Transportation and Electronics business segment; however, certain sales districts within the Consumer business segment provide the customer account activity for sales of the product to particular customers. In this example, the non-primary selling segment (Consumer) would also receive credit for the associated net sales initiated through its sales district and the related approximate operating income. The assigned operating income related to dual credit activity may differ from operating income that would result from actual costs associated with such sales. The offset to the dual credit business segment reporting is reflected as a reconciling item entitled "Elimination of Dual Credit," such that sales and operating income in total are unchanged.

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of 3M's financial statements with a narrative from the perspective of management. 3M's MD&A is presented in the following sections:

·      Overview

·      Results of Operations

·      Performance by Business Segment

·      Financial Condition and Liquidity

·      Cautionary Note Concerning Factors That May Affect Future Results

 

Forward-looking statements in Part I, Item 2 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to the section entitled "Cautionary Note Concerning Factors That May Affect Future Results" in Part I, Item 2 and the risk factors provided in Part II, Item 1A for discussion of these risks and uncertainties).

 

OVERVIEW

 

3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. Effective in the first quarter of 2021, 3M made the following changes. Information provided herein reflects the impact of these changes for all periods presented.

·      Change in accounting principle for net periodic pension and postretirement plan cost. See detailed discussion in Note 1.

·      Change in measure of segment operating performance used by 3M's chief operating decision maker-impacting 3M's disclosed measure of segment profit/loss (business segment operating income). See additional information in Note 16.

·      Change in alignment of certain products within 3M's Consumer business segment-creating the Consumer Health and Safety Division. See additional information in Note 16.

 

3M manages its operations in four operating business segments: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis.

 

Consideration of COVID-19:

 

As described in the Overview-Consideration of COVID-19 section of Part II, Item 7 of the Company's 2020 Annual Report on Form 10-K, 3M is impacted by the global pandemic and related effects associated with the coronavirus (COVID-19). In addition, risk factors with respect to COVID-19, can be found in Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. Given the diversity of 3M's businesses, some of the factors described in that Overview-Consideration of COVID-19 section have increased the demand for 3M products, while others have decreased demand or made it more difficult for 3M to serve customers.

 

Overall, 3M experienced broad-based growth across all business segments in the first quarter of 2021, benefiting from continued improvements in certain end markets. 3M's total sales increased 9.6% year-on-year in the first quarter of 2021 with organic local-currency sales growth of 8.0%. 3M experienced the strongest sales growth in personal safety, as well as in other areas such as home improvement, oral care, electronics, and separation and purification sciences. COVID-related respirator sales are estimated to have impacted year-on-year organic local-currency sales growth by approximately 2.4 percent for the first quarter of 2021. In the first quarter of 2020, as effects of COVID-19 emerged, weak demand in a number of end markets began to negatively impact oral care, automotive OEM and aftermarket, general industrial, commercial solutions and stationery and office, while demand was increasing in areas such as personal safety, home imp