REG - 3M Company - 3rd Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 2
02/11/2016 07:07
- Part 2: For the preceding part double click ID:nRSB0531Oa
associated
excess tax benefits being classified as operating activity in the same manner as other cash flows related to income taxes
in the statement of cash flows prospectively beginning January 1, 2016. Based on the adoption methodology applied, the
statement of cash flows classification of prior periods has not been adjusted. In addition, 3M did not change its
accounting principles relative to elements of this standard and continued its existing practice of estimating the number of
awards that will be forfeited.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises
guidance for the accounting for credit losses on financial instruments within its scope. The new standard introduces an
approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the
impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the
current expected credit losses model) applies to most financial assets measured at amortized cost and certain other
instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and
off-balance-sheet credit exposures. With respect to available-for-sale (AFS) debt securities, the ASU amends the current
other-than-temporary impairment model. For such securities with unrealized losses, entities will still consider if a
portion of any impairment is related only to credit losses and therefore recognized as a reduction in income. However,
rather than also reflecting that credit loss amount as a permanent reduction in cost (amortized cost) basis of that AFS
debt security, the ASU requires that credit losses be reflected as an allowance. As a result, under certain circumstances,
a recovery in value could result in previous allowances, or portions thereof, reversing back into income. For 3M, this ASU
is effective January 1, 2020, with early adoption permitted. Entities are required to apply the standard's provisions as a
cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance
is adopted. The Company is currently assessing this ASU's impact on 3M's consolidated result of operations and financial
condition.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is
intended to reduce diversity in practice in how certain cash receipts and payments are presented and classified in the
statement of cash flows. The standard provides guidance in a number of situations including, among others, settlement of
zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of
insurance claims, and distributions received from equity method investees. The ASU also provides guidance for classifying
cash receipts and payments that have aspects of more than one class of cash flows. For 3M, this ASU is effective January 1,
2018, with early adoption permitted. The standard requires application using a retrospective transition method. The Company
is currently assessing this ASU's impact on 3M's consolidated results of operations and financial condition.
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which modifies
existing guidance and is intended to reduce diversity in practice with respect to the accounting for the income tax
consequences of intra-entity transfers of assets. The ASU indicates that the current exception to income tax accounting
that requires companies to defer the income tax effects of certain intercompany transactions would apply only to
intercompany inventory transactions. That is, the exception would no longer apply to intercompany sales and transfers of
other assets (e.g., intangible assets). Under the existing exception, income tax expense associated with intra-entity
profits in an intercompany sale or transfer of assets is eliminated from earnings. Instead, that cost is deferred and
recorded on the balance sheet (e.g., as a prepaid asset) until the assets leave the consolidated group. Similarly, the
entity is prohibited from recognizing deferred tax assets for the increases in tax bases due to the intercompany sale or
transfer. For 3M, this ASU is effective January 1, 2018, with early adoption permitted as of January 1, 2017. The standard
requires modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period
of adoption. Upon adoption, a company would write off any income tax effects that had been deferred from past intercompany
transactions involving non-inventory assets to opening retained earnings. In addition, an entity would record deferred tax
assets with an offset to opening retained earnings for amounts that entity had previously not recognized under existing
guidance but would recognize under the new guidance. The Company does not expect this ASU to have a material impact on 3M's
consolidated results of operations and financial condition.
In October 2016, the FASB issued ASU No. 2016-17, Interests Held through Related Parties That Are under Common Control,
which modifies existing guidance with respect to how a decision maker that holds an indirect interest in a variable
interest entity (VIE) through a common control party determines whether it is the primary beneficiary of the VIE as part of
the analysis of whether the VIE would need to be consolidated. Under the ASU, a decision maker would need to consider only
its proportionate indirect interest in the VIE held through a common control party. Previous guidance had required the
decision maker to treat the common control party's interest in the VIE as if the decision maker held the interest itself.
As a result of the ASU, in certain cases, previous consolidation conclusions may change. For 3M, the standard is effective
January 1, 2017 with retrospective application to January 1, 2016. 3M does not have significant involvement with entities
subject to consolidation considerations impacted by VIE model factors. As a result, 3M does not expect this ASU to have a
material impact on the Company's consolidated results of operations and financial condition.
NOTE 2. Acquisitions and Divestitures
Acquisitions:
3M makes acquisitions of certain businesses from time to time that are aligned with its strategic intent with respect to,
among other factors, growth markets and adjacent product lines or technologies.
During the nine months ended September 30, 2016, the purchase price paid for business combinations inclusive of those
enumerated below and an immaterial acquisition was $17 million (net of cash acquired). Adjustments in the first nine months
of 2016 to the preliminary purchase price allocations of other acquisitions within the allocation period primarily related
to the identification of contingent liabilities and certain tax-related items aggregating to approximately $35 million
along with other balances related to the 2015 acquisition of Capital Safety Group S.A.R.L. The change to provisional
amounts resulted in an immaterial impact to the results of operations in the third quarter of 2016, a portion of which
relates to earlier quarters in the measurement period.
In September 2016, 3M (Health Care Business) acquired all of the outstanding shares of Semfinder AG and Sembrowser AG
(collectively, "Semfinder"), headquartered in Kreuzlingen, Switzerland. Semfinder is a leading developer of precision
software that enables efficient coding of medical procedures in multiple languages.
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.
In the first quarter of 2016, 3M (Safety and Graphics Business) completed the sale of the remainder of the assets of 3M's
library systems business to One Equity Partners Capital Advisors L.P. (OEP). 3M had previously sold the North American
business and the majority of the business outside of North America to OEP in the fourth quarter of 2015. The library
systems business delivers circulation management solutions to library customers with on-premise hardware and software,
maintenance and service, and an emerging cloud-based digital lending platform.
In the first quarter of 2016, 3M (Industrial Business) sold to Innovative Chemical Products Group, a portfolio company of
Audax Private Equity, the assets of 3M's pressurized polyurethane foam adhesives business (formerly known as Polyfoam).
This business is a provider of pressurized polyurethane foam adhesive formulations and systems into the residential
roofing, commercial roofing and insulation and industrial foam segments in the United States with annual sales of
approximately $20 million.
The Company recorded a pre-tax gain of $40 million in the first quarter of 2016 as a result of the sales of these
businesses (recorded in selling, general and administrative expenses).
In October 2016, 3M (Industrial Business) completed the sale of the assets of its temporary protective films business to
Pregis LLC. This business, with annual sales of approximately $50 million, is a provider of adhesive-backed temporary
protective films used in a broad range of industries. The Company expects a pre-tax gain of approximately $35 million as a
result of this transaction.
The aggregate operating income of the businesses described above included in the Company's operating results for the
periods presented and the amounts of major assets and liabilities of any associated disposal groups classified as
held-for-sale as of the respective balance sheet dates presented were not material.
Refer to Note 2 in 3M's Current Report on Form 8-K dated May 17, 2016 (which updated 3M's 2015 Annual Report on Form 10-K)
for more information on 3M's acquisitions and divestitures.
NOTE 3. Goodwill and Intangible Assets
Purchased goodwill from acquisitions totaled $17 million during the first nine month of 2016, none of which is deductible
for tax purposes. The acquisition activity in the following table also includes the net impact of adjustments to the
preliminary allocation of purchase price within the one year measurement-period following prior acquisitions, which
increased goodwill by $39 million during the nine months ended September 30, 2016. The amounts in the "Translation and
other" column in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balances
by business segment as of December 31, 2015 and September 30, 2016, follow:
Goodwill
December 31, 2015 Acquisition Translation September 30, 2016
(Millions) Balance activity and other Balance
Industrial $ 2,573 $ 1 $ 68 $ 2,642
Safety and Graphics 3,342 43 10 3,395
Health Care 1,624 12 20 1,656
Electronics and Energy 1,510 - 16 1,526
Consumer 200 - 11 211
Total Company $ 9,249 $ 56 $ 125 $ 9,430
Accounting standards require that goodwill be tested for impairment annually and between annual tests in certain
circumstances such as a change in reporting units or the testing of recoverability of a significant asset group within a
reporting unit. At 3M, reporting units generally correspond to a division.
As described in Note 14, effective in the first quarter of 2016, the Company changed its business segment reporting in its
continuing effort to improve the alignment of its businesses around markets and customers. For any product changes that
resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill
of the associated reporting units. During the first quarter of 2016, the Company completed its assessment of any potential
goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.
Acquired Intangible Assets
The carrying amount and accumulated amortization of acquired finite-lived intangible assets, in addition to the balance of
non-amortizable intangible assets, as of September 30, 2016, and December 31, 2015, follow:
September 30, December 31,
(Millions) 2016 2015
Customer related intangible assets $ 1,977 $ 1,973
Patents 608 616
Other technology-based intangible assets 529 525
Definite-lived tradenames 425 421
Other amortizable intangible assets 214 216
Total gross carrying amount $ 3,753 $ 3,751
Accumulated amortization - customer related (773) (668)
Accumulated amortization - patents (496) (481)
Accumulated amortization - other technology based (293) (252)
Accumulated amortization - definite-lived tradenames (235) (215)
Accumulated amortization - other (172) (169)
Total accumulated amortization $ (1,969) $ (1,785)
Total finite-lived intangible assets - net $ 1,784 $ 1,966
Non-amortizable intangible assets (primarily tradenames) 638 635
Total intangible assets - net $ 2,422 $ 2,601
Certain tradenames acquired by 3M are not amortized because they have been in existence for over 55 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.
Amortization expense for acquired intangible assets for the three and nine months ended September 30, 2016 and 2015
follows:
Three months ended Nine months ended
September 30, September 30,
(Millions) 2016 2015 2016 2015
Amortization expense $ 63 $ 66 $ 195 $ 169
Expected amortization expense for acquired amortizable intangible assets recorded as of September 30, 2016:
Remainder
of After
(Millions) 2016 2017 2018 2019 2020 2021 2021
Amortization expense $ 62 $ 228 $ 205 $ 192 $ 182 $ 167 $ 748
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 4. Restructuring Actions
During the fourth quarter of 2015, management approved and committed to undertake certain restructuring actions primarily
focused on structural overhead, largely in the U.S. and slower-growing markets, with particular emphasis on Europe, Middle
East, and Africa (EMEA) and Latin America. This impacted approximately 1,700 positions worldwide and resulted in a fourth
quarter 2015 pre-tax charge of $114 million.
Components of these restructuring actions, including cash and non-cash impacts, follow:
(Millions) Employee-Related Asset-Related Total
Expense incurred $ 98 $ 16 $ 114
Non-cash changes (8) (16) (24)
Cash payments (27) - (27)
Accrued restructuring action balances as of December 31, 2015 $ 63 $ - $ 63
Cash payments (48) - (48)
Accrued restructuring action balances as of September 30, 2016 $ 15 $ - $ 15
Non-cash changes include certain pension settlements and special termination benefits recorded in accrued pension and
postretirement benefits and accelerated depreciation resulting from the cessation of use of certain long-lived assets.
Remaining activities related to the restructuring are expected to be substantially completed in 2016.
NOTE 5. Supplemental Equity and Comprehensive Income Information
Consolidated Statement of Changes in Equity
Three months ended September 30, 2016
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 June 30, 2016 $ 11,937 $ 4,972 $ 37,194 $ (24,088) $ (6,184) $ 43
Net income 1,331 1,329 2
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment 17 16 1
Defined benefit pension and post-retirement plans adjustment 67 67 -
Debt and equity securities - unrealized gain (loss) - - -
Cash flow hedging instruments - unrealized gain (loss) (45) (45) -
Total other comprehensive income (loss), net of tax 39
Dividends declared (670) (670)
Stock-based compensation 49 49
Reacquired stock (771) (771)
Issuances pursuant to stock option and benefit plans 133 (108) 241
Balance at September 30, 2016 $ 12,048 $ 5,021 $ 37,745 $ (24,618) $ (6,146) $ 46
Nine months ended September 30, 2016
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, 2015 $ 11,747 $ 4,800 $ 36,575 $ (23,308) $ (6,359) $ 39
Net income 3,902 3,895 7
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment 192 192 -
Defined benefit pension and post-retirement plans adjustment 203 203 -
Debt and equity securities - unrealized gain (loss) - - -
Cash flow hedging instruments - unrealized gain (loss) (182) (182) -
Total other comprehensive income (loss), net of tax 213
Dividends declared (2,014) (2,014)
Stock-based compensation 221 221
Reacquired stock (2,771) (2,771)
Issuances pursuant to stock option and benefit plans 750 (711) 1,461
Balance at September 30, 2016 $ 12,048 $ 5,021 $ 37,745 $ (24,618) $ (6,146) $ 46
Three months ended September 30, 2015
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 June 30, 2015 $ 13,130 $ 4,694 $ 35,615 $ (20,983) $ (6,233) $ 37
Net income 1,298 1,296 2
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (472) (471) (1)
Defined benefit pension and post-retirement plans adjustment 236 236 -
Debt and equity securities - unrealized gain (loss) - - -
Cash flow hedging instruments - unrealized gain (loss) 1 1 -
Total other comprehensive income (loss), net of tax (235)
Dividends declared (635) (635)
Stock-based compensation, net of tax impacts 46 46
Reacquired stock (1,449) (1,449)
Issuances pursuant to stock option and benefit plans 69 (41) 110
Balance at September 30, 2015 $ 12,224 $ 4,740 $ 36,235 $ (22,322) $ (6,467) $ 38
Nine months ended September 30, 2015
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, 2014 $ 13,142 $ 4,388 $ 34,317 $ (19,307) $ (6,289) $ 33
Net income 3,802 3,795 7
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (642) (640) (2)
Defined benefit pension and post-retirement plans adjustment 423 423 -
Debt and equity securities - unrealized gain (loss) - - -
Cash flow hedging instruments - unrealized gain (loss) 39 39 -
Total other comprehensive income (loss), net of tax (180)
Dividends declared (1,284) (1,284)
Stock-based compensation, net of tax impacts 352 352
Reacquired stock (4,132) (4,132)
Issuances pursuant to stock option and benefit plans 524 (593) 1,117
Balance at September 30, 2015 $ 12,224 $ 4,740 $ 36,235 $ (22,322) $ (6,467) $ 38
In December 2014, 3M's Board of Directors declared a first quarter 2015 dividend of $1.025 per share (paid in March 2015).
This reduced 3M's stockholder equity and increased other current liabilities as of December 31, 2014, by approximately $0.6
billion.
Changes in Accumulated Other Comprehensive Income (Loss) Attributable to 3M by Component
Three months ended September 30, 2016
Total
Defined Benefit Debt and Cash Flow Accumulated
Pension and Equity Hedging Other
Cumulative Postretirement Securities, Instruments, Comprehensive
Translation Plans Unrealized Unrealized Income
(Millions) Adjustment Adjustment Gain (Loss) Gain (Loss) (Loss)
Balance at June 30, 2016, net of tax: $ (1,503) $ (4,668) $ - $ (13) $ (6,184)
Other comprehensive income (loss), before tax:
Amounts before reclassifications (8) - - (44) (52)
Amounts reclassified out - 103 - (24) 79
Total other comprehensive income (loss), before tax (8) 103 - (68) 27
Tax effect 24 (36) - 23 11
Total other comprehensive income (loss), net of tax 16 67 - (45) 38
Balance at September 30, 2016, net of tax: $ (1,487) $ (4,601) $ - $ (58) $ (6,146)
Nine months ended September 30, 2016
Total
Defined Benefit Debt and Cash Flow Accumulated
Pension and Equity Hedging Other
Cumulative Postretirement Securities, Instruments, Comprehensive
Translation Plans Unrealized Unrealized Income
(Millions) Adjustment Adjustment Gain (Loss) Gain (Loss) (Loss)
Balance at December 31, 2015, net of tax: $ (1,679) $ (4,804) $ - $ 124 $ (6,359)
Other comprehensive income (loss), before tax:
Amounts before reclassifications 111 - - (180) (69)
Amounts reclassified out - 307 - (104) 203
Total other comprehensive income (loss), before tax 111 307 - (284) 134
Tax effect 81 (104) - 102 79
Total other comprehensive income (loss), net of tax 192 203 - (182) 213
Balance at September 30, 2016, net of tax: $ (1,487) $ (4,601) $ - $ (58) $ (6,146)
Three months ended September 30, 2015
Total
Defined Benefit Debt and Cash Flow Accumulated
Pension and Equity Hedging Other
Cumulative Postretirement Securities, Instruments, Comprehensive
Translation Plans Unrealized Unrealized Income
(Millions) Adjustment Adjustment Gain (Loss) Gain (Loss) (Loss)
Balance at June 30, 2015, net of tax: $ (1,264) $ (5,106) $ - $ 137 $ (6,233)
Other comprehensive income (loss), before tax:
Amounts before reclassifications (477) 233 - 57 (187)
Amounts reclassified out - 134 - (55) 79
Total other comprehensive income (loss), before tax (477) 367 - 2 (108)
Tax effect 6 (131) - (1) (126)
Total other comprehensive income (loss), net of tax (471) 236 - 1 (234)
Balance at September 30, 2015, net of tax: $ (1,735) $ (4,870) $ - $ 138 $ (6,467)
Nine months ended September 30, 2015
Total
Defined Benefit Debt and Cash Flow Accumulated
Pension and Equity Hedging Other
Cumulative Postretirement Securities, Instruments, Comprehensive
Translation Plans Unrealized Unrealized Income
(Millions) Adjustment Adjustment Gain (Loss) Gain (Loss) (Loss)
Balance at December 31, 2014, net of tax: $ (1,095) $ (5,293) $ - $ 99 $ (6,289)
Other comprehensive income (loss), before tax:
Amounts before reclassifications (533) 257 - 177 (99)
Amounts reclassified out - 399 - (116) 283
Total other comprehensive income (loss), before tax (533) 656 - 61 184
Tax effect (107) (233) - (22) (362)
Total other comprehensive income (loss), net of tax (640) 423 - 39 (178)
Balance at September 30, 2015, net of tax $ (1,735) $ (4,870) $ - $ 138 $ (6,467)
Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but
tax effects within cumulative translation does include impacts from items such as net investment hedge transactions.
Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part
of net income.
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 September 30, Nine months ended September 30, Location on Income
(Millions) 2016 2015 2016 2015 Statement
Gains (losses) associated with, defined benefit pension and postretirement plans amortization
Transition asset $ - $ - $ 1 $ 1 See Note 9
Prior service benefit 22 19 69 54 See Note 9
Net actuarial loss (125) (153) (377) (471) See Note 9
Curtailments/Settlements - - - 17 See Note 9
Total before tax (103) (134) (307) (399)
Tax effect 36 44 104 135 Provision for income taxes
Net of tax $ (67) $ (90) $ (203) $ (264)
Debt and equity security gains (losses)
Sales or impairments of securities $ - $ - $ - $ - Selling, general and administrative expenses
Total before tax - - - -
Tax effect - - - - Provision for income taxes
Net of tax $ - $ - $ - $ -
Cash flow hedging instruments gains (losses)
Foreign currency forward/option contracts $ 24 $ 55 $ 105 $ 120 Cost of sales
Commodity price swap contracts - - - (2) Cost of sales
Interest rate swap contracts - - (1) (2) Interest expense
Total before tax 24 55 104 116
Tax effect (9) (20) (38) (42) Provision for income taxes
Net of tax $ 15 $ 35 $ 66 $ 74
Total reclassifications for the period, net of tax $ (52) $ (55) $ (137) $ (190)
NOTE 6. Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With
few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by
tax authorities for years before 2005.
The IRS has completed its field examination of the Company's U.S. federal income tax returns for the years 2005 through
2014. The Company protested certain IRS positions within these tax years and entered into the administrative appeals
process with the IRS. In December 2012, the Company received a statutory notice of deficiency for the 2006 year. The
Company filed a petition in Tax Court in the first quarter of 2013 relating to the 2006 tax year.
Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the
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