REG - 3M Company - 3rd Quarter Results <Origin Href="QuoteRef">MMM.N</Origin> - Part 3
03/11/2014 08:05
- Part 3: For the preceding part double click ID:nRSC9102Vb
272 - 8 280
Total other comprehensive income (loss),
before tax (403) 272 2 94 (35)
Tax effect (59) (92) (1) (33) (185)
Total other comprehensive income (loss),
net of tax (462) 180 1 61 (220)
Impact from purchase of subsidiary shares 41 (16) - - 25
Balance at September 30, 2014, net of tax $ (609) $ (3,551) $ (1) $ 53 $ (4,108)
Three months ended September 30, 2013
(Millions) Cumulative Translation Adjustment Defined Benefit Pension and Postretirement Plans Adjustment Debt and Equity Securities, Unrealized Gain (Loss) Cash Flow Hedging Instruments, Unrealized Gain (Loss) Total Accumulated Other Comprehen-sive Income (Loss)
Balance at June 30, 2013, net of tax $ (390) $ (4,779) $ (6) $ 9 $ (5,166)
Other comprehensive income (loss),
before tax:
Amounts before reclassifications 240 - 3 5 248
Amounts reclassified out - 144 - (43) 101
Total other comprehensive income (loss),
before tax 240 144 3 (38) 349
Tax effect 46 (52) (1) 14 7
Total other comprehensive income (loss),
net of tax 286 92 2 (24) 356
Balance at September 30, 2013, net of tax $ (104) $ (4,687) $ (4) $ (15) $ (4,810)
Nine months ended September 30, 2013
(Millions) Cumulative Translation Adjustment Defined Benefit Pension and Postretirement Plans Adjustment Debt and Equity Securities, Unrealized Gain (Loss) Cash Flow Hedging Instruments, Unrealized Gain (Loss) Total Accumulated Other Comprehen-sive Income (Loss)
Balance at December 31, 2012, net of tax $ 230 $ (4,955) $ (2) $ (23) $ (4,750)
Other comprehensive income (loss),
before tax:
Amounts before reclassifications (344) - (3) (109) (456)
Amounts reclassified out - 431 - 121 552
Total other comprehensive income (loss),
before tax (344) 431 (3) 12 96
Tax effect 10 (163) 1 (4) (156)
Total other comprehensive income (loss),
net of tax (334) 268 (2) 8 (60)
Balance at September 30, 2013, net of tax $ (104) $ (4,687) $ (4) $ (15) $ (4,810)
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.
The previously reported before-tax amounts of other comprehensive income before reclassifications and amounts reclassified
out of other comprehensive income for thethree and nine months ended September 30, 2013 relative to foreign currency
forward contracts in the table above and below were impacted by the immaterial revisions discussed in Note 9.
Reclassifications out of Accumulated Other Comprehensive Income Attributable to 3M
Amount Reclassified from
Accumulated Other Comprehensive Income
(Millions) Three months ended September 30, Nine months ended September 30, Location on Income Statement
Details about Accumulated Other Comprehensive Income Components 2014 2013 2014 2013
Gains (losses) associated with, defined benefit pension and postretirement plans amortization
Transition asset $ 1 $ - $ 1 $ 1 See Note 8
Prior service benefit 15 19 45 59 See Note 8
Net actuarial loss (105) (163) (318) (491) See Note 8
Total before tax (89) (144) (272) (431)
Tax effect 30 52 92 163 Provision for income taxes
Net of tax $ (59) $ (92) $ (180) $ (268)
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 $ (7) $ 1 $ (9) $ (8) Cost of sales
Foreign currency forward contracts - 44 - (111) Interest expense
Commodity price swap contracts (1) (1) 2 (1) Cost of sales
Interest rate swap contracts (1) (1) (1) (1) Interest expense
Total before tax (9) 43 (8) (121)
Tax effect 3 (15) 3 44 Provision for income taxes
Net of tax $ (6) $ 28 $ (5) $ (77)
Total reclassifications for the period, net of tax $ (65) $ (64) $ (185) $ (345)
Purchase and Sale of Subsidiary Shares
On September 1, 2014, 3M (via Sumitomo 3M Limited) acquired Sumitomo Electric Industries, Ltd.'s 25 percent interest in
3M's consolidated Sumitomo 3M Limited subsidiary for 90 billion Japanese Yen (approximately $865 million at closing date
exchange rates). Upon completion of the transaction, 3M owned 100 percent of Sumitomo 3M Limited. Approximately $694
million was recorded as a financing activity in the statement of cash flows while the remainder was recorded as a current
liability (paid in October 2014). This purchase of the remaining noncontrolling interest resulted in a decrease in 3M
Company shareholder's equity of $408 million and a decrease in noncontrolling interest equity of $457 million.
In April 2014, 3M purchased the remaining noncontrolling interest in a consolidated 3M subsidiary for an immaterial amount,
which was classified as a financing activity in the consolidated statement of cash flows.
The following table summarizes the effects of these 2014 transactions on equity attributable to 3M Company shareholders for
the respective periods.
(Millions) Three months ended September 30, 2014 Nine months ended September 30, 2014
Net income attributable to 3M $ 1,303 $ 3,777
Impact of purchase of subsidiary shares (408) (409)
Change in 3M Company shareholders' equity from net income
attributable to 3M and impact of purchase of subsidiary shares $ 895 $ 3,368
In March 2013, 3M sold shares in 3M India Limited, a subsidiary of the Company, in return for $8 million. The
noncontrolling interest shares of this subsidiary trade on a public exchange in India. This sale of shares complied with an
amendment to Indian securities regulations that required 3M India Limited, as a listed company, to achieve a minimum public
shareholding of at least 25 percent. As a result of this transaction, 3M's ownership in 3M India Limited was reduced from
76 percent to 75 percent. The $8 million received in the first quarter of 2013 was classified as other financing activity
in the consolidated statement of cash flows. Because the Company retained its controlling interest, the sales resulted in
an increase in 3M Company shareholder's equity of $7 million and an increase in noncontrolling interest of $1 million.
NOTE 5. Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With
few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by
tax authorities for years before 2005.
The IRS completed its field examination of the Company's U.S. federal income tax returns for the years 2005 through 2007 in
the fourth quarter of 2009. The Company protested certain IRS positions within these tax years and entered into the
administrative appeals process with the IRS during the first quarter of 2010. During the first quarter of 2010, the IRS
completed its field examination of the Company's U.S. federal income tax return for the 2008 year. The Company protested
certain IRS positions for 2008 and entered into the administrative appeals process with the IRS during the second quarter
of 2010. During the first quarter of 2011, the IRS completed its field examination of the Company's U.S. federal income tax
return for the 2009 year. The Company protested certain IRS positions for 2009 and entered into the administrative appeals
process with the IRS during the second quarter of 2011. During the first quarter of 2012, the IRS completed its field
examination of the Company's U.S. federal income tax return for the 2010 year. The Company protested certain IRS positions
for 2010 and entered into the administrative appeals process with the IRS during the second quarter of 2012. 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. During the first quarter of 2014, the IRS completed its field
examination of the Company's U.S. federal income tax return for the 2011 and 2012 years. The Company protested certain IRS
positions for 2011 and 2012 and entered into the administrative appeals process with the IRS during the first quarter of
2014.
Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2013 and 2014.
It is anticipated that the IRS will complete its examination of the Company for 2013 by the end of the first quarter of
2015 and for 2014 by the end of the first quarter of 2016. As of September 30, 2014, the IRS has not proposed any
significant adjustments to the Company's tax positions for any open tax years for which the Company is not adequately
reserved.
During the first quarter of 2010, the Company paid the agreed upon assessments for the 2005 tax year. During the second
quarter of 2010, the Company paid the agreed upon assessments for the 2008 tax year. During the second quarter of 2011, the
Company received a refund from the IRS for the 2004 tax year. During the first quarter of 2012, the Company paid the agreed
upon assessments for the 2010 tax year. During the first quarter of 2014, the Company received refunds from the IRS for
the 2005, 2007, 2008, and 2009 tax years. In addition, during the first quarter of 2014, the Company paid the agreed upon
assessments for the 2011 and 2012 tax years. Payments or refunds relating to other proposed assessments arising from the
2005 through 2014 examinations may not be made until a final agreement is reached between the Company and the IRS on such
assessments or upon a final resolution resulting from the administrative appeals process or judicial action. In addition to
the U.S. federal examination, there is also limited audit activity in several U.S. state and foreign jurisdictions.
3M anticipates changes to the Company's uncertain tax positions due to the closing of various audit years mentioned above.
Currently, the Company is not able to reasonably estimate the amount by which the liability for unrecognized tax benefits
will increase or decrease during the next 12 months as a result of the ongoing income tax authority examinations. The total
amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of September 30, 2014 and
December 31, 2013, respectively, are $238 million and $262 million.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company
recognized in the consolidated statement of income on a gross basis approximately $1 million of benefit and $7 million of
expense for the three months ended September 30, 2014 and September 30, 2013, respectively, and approximately $14 million
in benefit and $12 million of expense for the nine months ended September 30, 2014 and September 30, 2013, respectively. At
September 30, 2014 and December 31, 2013, accrued interest and penalties in the consolidated balance sheet on a gross basis
were $43 million and $62 million, respectively. Included in these interest and penalty amounts are interest and penalties
related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about
the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the
disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the
payment of cash to the taxing authority to an earlier period.
The effective tax rate for the third quarter of 2014 was 30.3 percent, compared to 27.4 percent in the third quarter of
2013, an increase of 2.9 percentage points. Factors that increased the Company's effective tax rate on a combined basis by
3.3 percentage points year-on-year included a one-time international tax impact related to the establishment of the
distribution center of expertise in Europe, increased domestic manufacturer's deduction in 2013, the 2013 restoration of
tax basis on certain assets for which depreciation was previously limited, lapse of the U.S. research and development
credit as of January 1, 2014, adjustments to the Company's income tax reserves, and other items. Factors that decreased the
Company's effective tax rate on a combined basis by 0.4 percentage points year-on-year included international taxes as a
result of changes to the geographic mix of income before taxes.
The effective tax rate for the first nine months of 2014 was 29.1 percent, compared to 28.0 percent in the first nine
months of 2013, an increase of 1.1 percentage points. Factors which increased the Company's effective tax rate by 1.7
percentage points for the first nine months of 2014 when compared to the same period for 2013 included the lapse of the
U.S. research and development credit as of January 1, 2014, adjustments to the Company's income tax reserves, increased
domestic manufacturer's deduction in 2013, the 2013 restoration of tax basis on certain assets for which depreciation was
previously limited, a one-time international tax impact related to the establishment of the distribution center of
expertise in Europe, and other items. This increase was partially offset by a 0.6 percentage point decrease in
international taxes as a result of changes to the geographic mix of income before taxes.
The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income
taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of
assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty
regarding their realizability exists. As of September 30, 2014 and December 31, 2013, the Company had valuation allowances
of $30 million and $23 million on its deferred tax assets, respectively.
NOTE 6. Marketable Securities
The Company invests in agency securities, corporate securities, asset-backed securities, treasury securities and other
securities. The following is a summary of amounts recorded on the Consolidated Balance Sheet for marketable securities
(current and non-current).
September 30, December 31,
(Millions) 2014 2013
U.S. government agency securities $ 78 $ 103
Foreign government agency securities 85 30
Corporate debt securities 250 143
Commercial paper 14 60
Certificates of deposit/time deposits 43 20
U.S. municipal securities - 2
Asset-backed securities:
Automobile loan related 162 287
Credit card related 74 52
Equipment lease related 42 30
Other 19 29
Asset-backed securities total 297 398
Current marketable securities $ 767 $ 756
U.S. government agency securities $ 70 $ 131
Foreign government agency securities 20 95
Corporate debt securities 539 638
Certificates of deposit/time deposits - 20
U.S. treasury securities 49 49
Auction rate securities 12 11
Asset-backed securities:
Automobile loan related 221 298
Credit card related 118 128
Equipment lease related 30 37
Other 46 46
Asset-backed securities total 415 509
Non-current marketable securities $ 1,105 $ 1,453
Total marketable securities $ 1,872 $ 2,209
Classification of marketable securities as current or non-current is dependent upon management's intended holding period,
the security's maturity date and liquidity considerations based on market conditions. If management intends to hold the
securities for longer than one year as of the balance sheet date, they are classified as non-current. At September 30,
2014, gross unrealized losses totaled approximately $2 million (pre-tax), while gross unrealized gains totaled
approximately $1 million (pre-tax). At December 31, 2013, gross unrealized losses totaled approximately $5 million
(pre-tax), while gross unrealized gains totaled approximately $1 million (pre-tax). Refer to Note 4 for a table that
provides the net realized gains (losses) related to sales or impairments of debt and equity securities, which includes
marketable securities. The gross amounts of the realized gains or losses were not material. Cost of securities sold use the
first in, first out (FIFO) method. Since these marketable securities are classified as available-for-sale securities,
changes in fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive
income into earnings upon sale or "other-than-temporary" impairment.
3M reviews impairments associated with its marketable securities in accordance with the measurement guidance provided by
ASC 320, Investments-Debt and Equity Securities, when determining the classification of the impairment as "temporary" or
"other-than-temporary". A temporary impairment charge results in an unrealized loss being recorded in the other
comprehensive income component of shareholders' equity. Such an unrealized loss does not reduce net income attributable to
3M for the applicable accounting period because the loss is not viewed as other-than-temporary. The factors evaluated to
differentiate between temporary and other-than-temporary include the projected future cash flows, credit ratings actions,
and assessment of the credit quality of the underlying collateral, as well as other factors.
The balances at September 30, 2014 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) September 30, 2014
Due in one year or less $ 427
Due after one year through five years 1,421
Due after five years through ten years 24
Due after ten years -
Total marketable securities $ 1,872
3M has a diversified marketable securities portfolio with a fair market value of $1.872 billion as of September 30, 2014.
Within this portfolio, current and long-term asset-backed securities (estimated fair value of $712 million) primarily
include interests in automobile loans, credit cards and equipment leases. 3M's investment policy allows investments in
asset-backed securities with minimum credit ratings of Aa2 by Moody's Investors Service or AA by Standard & Poor's or Fitch
Ratings or DBRS. Asset-backed securities must be rated by at least two of the aforementioned rating agencies, one of which
must be Moody's Investors Service or Standard & Poor's. At September 30, 2014, all asset-backed security investments were
in compliance with this policy. Approximately 96.0 percent of all asset-backed security investments were rated AAA or A-1+
by Standard & Poor's and/or Aaa or P-1 by Moody's Investors Service and/or AAA or F1+ by Fitch Ratings.
3M's marketable securities portfolio includes auction rate securities that represent interests in investment grade credit
default swaps; however, currently these holdings comprise less than one percent of this portfolio. The estimated fair value
of auction rate securities was $12 million at September 30, 2014 and $11 million at December 31, 2013. Gross unrealized
losses within accumulated other comprehensive income related to auction rate securities totaled $1 million (pre-tax) at
September 30, 2014 and $2 million (pre-tax) at December 31, 2013. As of September 30, 2014, auction rate securities
associated with these balances have been in a loss position for more than 12 months. Since the second half of 2007, these
auction rate securities failed to auction due to sell orders exceeding buy orders. Liquidity for these auction-rate
securities is typically provided by an auction process that resets the applicable interest rate at pre-determined
intervals, usually every 7, 28, 35, or 90 days. The funds associated with failed auctions will not be accessible until a
successful auction occurs or a buyer is found outside of the auction process. Refer to Note 10 for a table that reconciles
the beginning and ending balances of auction rate securities.
NOTE 7. Long-Term Debt and Short-Term Borrowings
The Company has a "well-known seasoned issuer" shelf registration statement, effective May 16, 2014, which registers an
indeterminate amount of debt or equity securities for future sales. This replaced 3M's previous shelf registration dated
August 5, 2011. In June 2014, in connection with the May 16, 2014 shelf registration, 3M re-commenced its medium-term notes
program (Series F) under which 3M may issue, from time to time, up to $9 billion aggregate principal amount of notes.
Included in this $9 billion are $2.25 billion of notes previously issued in 2011 and 2012 as part of Series F. In June
2014, 3M issued $625 million aggregate principal amount of five-year fixed rate medium-term notes due 2019 with a coupon
rate of 1.625%. Upon debt issuance, the Company entered into an interest rate swap to convert $600 million of this amount
to an interest rate based on a floating LIBOR index. In addition, in June 2014, 3M issued $325 million aggregate principal
amount of thirty-year fixed rate medium-term notes due 2044 with a coupon rate of 3.875%. Both June 2014 debt issuances
were from the medium-term notes program (Series F).
In July 2014, 3M repaid 1.025 billion Euros of maturing Eurobond notes. In August 2014, 3M amended and extended the
existing $1.5 billion five-year revolving credit facility expiring in September 2017 to a $2.25 billion five-year agreement
expiring in August 2019. This credit agreement includes a provision under which 3M may request an increase of up to $2.25
billion, bringing the total facility up to $4.5 billion (at the lender's discretion). This revolving credit facility is
undrawn at September 30, 2014. Under the $2.25 billion credit agreement, the Company is required to maintain its EBITDA to
Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to 1. This is calculated (as defined in the
agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense
on all funded debt for the same period. At September 30, 2014, this ratio was approximately 59 to 1. Debt covenants do not
restrict the payment of dividends.
NOTE 8. Pension and Postretirement Benefit Plans
Net periodic benefit cost is recorded in cost of sales, selling, general and administrative expenses, and research,
development and related expenses. Components of net periodic benefit cost and other supplemental information for the three
and nine months ended September 30, 2014 and 2013 follow:
Benefit Plan Information
Three months ended September 30,
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2014 2013 2014 2013 2014 2013
Net periodic benefit cost (benefit)
Service cost $ 60 $ 64 $ 36 $ 37 $ 16 $ 20
Interest cost 169 150 65 61 24 22
Expected return on plan assets (261) (262) (79) (75) (22) (22)
Amortization of transition (asset) obligation - - (1) - - -
Amortization of prior service cost (benefit) 1 1 (4) (4) (12) (16)
Amortization of net actuarial (gain) loss 60 100 31 39 14 24
Net periodic benefit cost (benefit) $ 29 $ 53 $ 48 $ 58 $ 20 $ 28
Settlements, curtailments, special termination benefits and other - - - - - -
Net periodic benefit cost (benefit) after settlements, curtailments,
special termination benefits and other $ 29 $ 53 $ 48 $ 58 $ 20 $ 28
Nine months ended September 30,
Qualified and Non-qualified
Pension Benefits Postretirement
United States International Benefits
(Millions) 2014 2013 2014 2013 2014 2013
Net periodic benefit cost (benefit)
Service cost $ 180 $ 192 $ 107 $ 109 $ 49 $ 60
Interest cost 507 449 194 183 72 66
Expected return on plan assets (783) (784) (238) (225) (67) (67)
Amortization of transition (asset) obligation - - (1) (1) - -
Amortization of prior service cost (benefit) 3 3 (12) (13) (36) (49)
Amortization of net actuarial (gain) loss 182 300 93 119 43 72
Net periodic benefit cost (benefit) $ 89 $ 160 $ 143 $ 172 $ 61 $ 82
Settlements, curtailments, special termination benefits and other - - - - - -
Net periodic benefit cost (benefit) after settlements, curtailments,
special termination benefits and other $ 89 $ 160 $ 143 $ 172 $ 61 $ 82
For the nine months ended September 30, 2014, contributions totaling $107 million were made to the Company's U.S. and
international pension plans and $5 million to its postretirement plans. For total year 2014, the Company expects to
contribute approximately $200 million of cash to its global pension and postretirement plans. The Company does not have a
required minimum cash pension contribution obligation for its U.S. plans in 2014. Therefore, the amount of future
discretionary pension contributions could vary significantly depending on the U.S. plans' funded status and the anticipated
tax deductibility of the contributions. Future contributions will also 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.
In the third quarter of 2014, former U.S. employees who have a pension benefit for which they have not begun receiving
payment (term vested) were offered a lump sum payout of their pension benefit. As a result of this action, the projected
benefit obligation (PBO) liability is expected to be reduced in the fourth quarter of 2014 by $270 million, with the actual
cash payout of approximately the same amount to be paid from the plan's assets in the fourth quarter of 2014. The PBO
liability reduction is 34% of the term vested eligible PBO and a 2% reduction in the overall U.S. pension PBO liability
based on the December 31, 2013 valuation. There is no pension expense impact as a result of this action on 3M's
consolidated statement of income in 2014.
3M was informed during the first quarter of 2009 that the general partners of WG Trading Company, in which 3M's benefit
plans hold limited partnership interests, are the subject of a criminal investigation as well as civil proceedings by the
SEC and CFTC (Commodity Futures Trading Commission). In March 2011, over the objections of 3M and six other limited
partners of WG Trading Company, the district court judge ruled in favor of the court appointed receiver's proposed
distribution plan (and in April 2013, the United States Court of Appeals for the Second Circuit affirmed the district
court's ruling). The benefit plan trustee holdings of WG Trading Company interests were adjusted to reflect the decreased
estimated fair market value, inclusive of estimated insurance proceeds, as of the annual measurement dates. The Company has
insurance that it believes, based on what is currently known, will result in the recovery of a
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