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REG - 3M Company - 3rd Quarter Results




 



RNS Number : 4048D
3M Company
27 October 2020
 

 

 

Click on, or paste the following link into your web browser, to view the associated PDF document.

http://www.rns-pdf.londonstockexchange.com/rns/4048D_1-2020-10-27.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 September 30, 2020

 

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.

0.375% Notes due 2022

 

MMM22A

 

New York Stock Exchange, Inc.

0.950% Notes due 2023

 

MMM23

 

New York Stock Exchange, Inc.

1.500% Notes due 2026

 

MMM26

 

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 September 30, 2020

Common Stock, $0.01 par value per share

 

576,821,878 shares

 

 

 

3M COMPANY

Form 10-Q for the Quarterly Period Ended September 30, 2020

 

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

13

 

Note 4. Goodwill and Intangible Assets

14

 

Note 5. Restructuring Actions

16

 

Note 6. Supplemental Income Statement Information

18

 

Note 7. Supplemental Equity and Comprehensive Income Information

19

 

Note 8. Income Taxes

23

 

Note 9. Marketable Securities and Held-to-Maturity Debt Securities

24

 

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

24

 

Note 11. Pension and Postretirement Benefit Plans

25

 

Note 12. Derivatives

27

 

Note 13. Fair Value Measurements

34

 

Note 14. Commitments and Contingencies

36

 

Note 15. Stock-Based Compensation

52

 

Note 16. Business Segments

55

 

 

 

ITEM 2.

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

 

 

Index to Management's Discussion and Analysis:

 

 

Overview

58

 

Results of Operations

67

 

Performance by Business Segment

71

 

Financial Condition and Liquidity

77

 

Cautionary Note Concerning Factors That May Affect Future Results

83

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

83

 

 

 

ITEM 4.

Controls and Procedures

84

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

85

 

 

 

ITEM 1A.

Risk Factors

85

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

89

 

 

 

ITEM 3.

Defaults Upon Senior Securities

90

 

 

 

ITEM 4.

Mine Safety Disclosures

90

 

 

 

ITEM 5.

Other Information

90

 

 

 

ITEM 6.

Exhibits

90

 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended September 30, 2020

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

    

Nine months ended 

 

 

 

September 30,

 

September 30,

 

(Millions, except per share amounts)

    

2020

    

2019

    

2020

 

2019

 

Net sales

 

$

 8,350

 

$

 7,991

 

$

 23,601

 

$

 24,025

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 4,303

 

 

 4,188

 

 

 12,217

 

 

 12,811

 

Selling, general and administrative expenses

 

 

 1,677

 

 

 1,455

 

 

 5,039

 

 

 5,089

 

Research, development and related expenses

 

 

 461

 

 

 443

 

 

 1,422

 

 

 1,390

 

Gain on sale of businesses

 

 

 -

 

 

 (106)

 

 

 (389)

 

 

 (114)

 

Total operating expenses

 

 

 6,441

 

 

 5,980

 

 

 18,289

 

 

 19,176

 

Operating income

 

 

 1,909

 

 

 2,011

 

 

 5,312

 

 

 4,849

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income), net

 

 

 104

 

 

 45

 

 

 311

 

 

 349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 1,805

 

 

 1,966

 

 

 5,001

 

 

 4,500

 

Provision for income taxes

 

 

 387

 

 

 378

 

 

 1,002

 

 

 888

 

Income of consolidated group

 

 

 1,418

 

 

 1,588

 

 

 3,999

 

 

 3,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from unconsolidated subsidiaries, net of taxes

 

 

 (1)

 

 

 -

 

 

 (1)

 

 

 -

 

Net income including noncontrolling interest

 

 

 1,417

 

 

 1,588

 

 

 3,998

 

 

 3,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net income (loss) attributable to noncontrolling interest

 

 

 4

 

 

 5

 

 

 3

 

 

 11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

 1,413

 

$

 1,583

 

$

 3,995

 

$

 3,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding - basic

 

 

 577.8

 

 

 576.5

 

 

 577.2

 

 

 577.2

 

Earnings per share attributable to 3M common shareholders - basic

 

$

 2.45

 

$

 2.75

 

$

 6.92

 

$

 6.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding - diluted

 

 

 582.4

 

 

 583.0

 

 

 581.6

 

 

 585.9

 

Earnings per share attributable to 3M common shareholders - diluted

 

$

 2.43

 

$

 2.72

 

$

 6.87

 

$

 6.15

 

 

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 

    

Nine months ended 

 

 

 

 

September 30,

 

September 30,

 

 

(Millions)

    

2020

    

2019

    

2020

    

2019

 

 

Net income including noncontrolling interest

 

$

 1,417

 

$

 1,588

 

$

 3,998

 

$

 3,612

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 271

 

 

 (202)

 

 

 (67)

 

 

 (2)

 

 

Defined benefit pension and postretirement plans adjustment

 

 

 127

 

 

 76

 

 

 304

 

 

 356

 

 

Cash flow hedging instruments

 

 

 (71)

 

 

 8

 

 

 (60)

 

 

 (24)

 

 

Total other comprehensive income (loss), net of tax

 

 

 327

 

 

 (118)

 

 

 177

 

 

 330

 

 

Comprehensive income (loss) including noncontrolling interest

 

 

 1,744

 

 

 1,470

 

 

 4,175

 

 

 3,942

 

 

Comprehensive (income) loss attributable to noncontrolling interest

 

 

 (5)

 

 

 (3)

 

 

 (1)

 

 

 (10)

 

 

Comprehensive income (loss) attributable to 3M

 

$

 1,739

 

$

 1,467

 

$

 4,174

 

$

 3,932

 

 

 

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

 

 

 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

(Dollars in millions, except per share amount)

    

2020

    

2019

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 4,121

 

$

 2,353

 

Marketable securities - current

 

 

 440

 

 

 98

 

Accounts receivable - net of allowances of $228 and $161

 

 

 4,623

 

 

 4,791

 

Inventories

 

 

 

 

 

 

 

Finished goods

 

 

 1,859

 

 

 2,003

 

Work in process

 

 

 1,224

 

 

 1,194

 

Raw materials and supplies

 

 

 901

 

 

 937

 

Total inventories

 

 

 3,984

 

 

 4,134

 

Prepaids

 

 

 516

 

 

 704

 

Other current assets

 

 

 426

 

 

 891

 

Total current assets

 

 

 14,110

 

 

 12,971

 

Property, plant and equipment

 

 

 26,452

 

 

 26,124

 

Less: Accumulated depreciation

 

 

 (17,236)

 

 

 (16,791)

 

Property, plant and equipment - net

 

 

 9,216

 

 

 9,333

 

Operating lease right of use assets

 

 

 844

 

 

 858

 

Goodwill

 

 

 13,535

 

 

 13,444

 

Intangible assets - net

 

 

 5,926

 

 

 6,379

 

Other assets

 

 

 1,759

 

 

 1,674

 

Total assets

 

$

 45,390

 

$

 44,659

 

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

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

 

$

 1,169

 

$

 2,795

 

Accounts payable

 

 

 2,208

 

 

 2,228

 

Accrued payroll

 

 

 721

 

 

 702

 

Accrued income taxes

 

 

 220

 

 

 194

 

Operating lease liabilities - current

 

 

 252

 

 

 247

 

Other current liabilities

 

 

 2,840

 

 

 3,056

 

Total current liabilities

 

 

 7,410

 

 

 9,222

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 18,429

 

 

 17,518

 

Pension and postretirement benefits

 

 

 3,679

 

 

 3,911

 

Operating lease liabilities

 

 

 605

 

 

 607

 

Other liabilities

 

 

 3,324

 

 

 3,275

 

Total liabilities

 

$

 33,447

 

$

 34,533

 

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 - September 30, 2020: 576,821,878

 

 

 

 

 

 

 

Shares outstanding - December 31, 2019: 575,184,835

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 6,116

 

 

 5,907

 

Retained earnings

 

 

 43,285

 

 

 42,135

 

Treasury stock, at cost:

 

 

 (29,570)

 

 

 (29,849)

 

Shares at September 30, 2020: 367,211,178

 

 

 

 

 

 

 

Shares at December 31, 2019: 368,848,221

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 (7,960)

 

 

 (8,139)

 

Total 3M Company shareholders' equity

 

 

 11,880

 

 

 10,063

 

Noncontrolling interest

 

 

 63

 

 

 63

 

Total equity

 

$

 11,943

 

$

 10,126

 

Total liabilities and equity

 

$

 45,390

 

$

 44,659

 

 

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

3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

Nine months ended 

 

 

 

September 30,

 

(Millions)

    

2020

    

2019

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

 3,998

 

$

 3,612

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 1,413

 

 

 1,130

 

Company pension and postretirement contributions

 

 

 (122)

 

 

 (129)

 

Company pension and postretirement expense

 

 

 295

 

 

 242

 

Stock-based compensation expense

 

 

 216

 

 

 230

 

Gain on sale of businesses

 

 

 (389)

 

 

 (111)

 

Deferred income taxes

 

 

 (57)

 

 

 (88)

 

Loss on deconsolidation of Venezuelan subsidiary

 

 

 -

 

 

 162

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

 113

 

 

 (14)

 

Inventories

 

 

 43

 

 

 255

 

Accounts payable

 

 

 (48)

 

 

 (222)

 

Accrued income taxes (current and long-term)

 

 

 146

 

 

 (53)

 

Other - net

 

 

 (10)

 

 

 (282)

 

Net cash provided by (used in) operating activities

 

 

 5,598

 

 

 4,732

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

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

 

 

 (1,079)

 

 

 (1,161)

 

Proceeds from sale of PP&E and other assets

 

 

 29

 

 

 91

 

Acquisitions, net of cash acquired

 

 

 (25)

 

 

 (704)

 

Purchases of marketable securities and investments

 

 

 (1,069)

 

 

 (917)

 

Proceeds from maturities and sale of marketable securities and investments

 

 

 1,239

 

 

 1,265

 

Proceeds from sale of businesses, net of cash sold

 

 

 576

 

 

 236

 

Other - net

 

 

 8

 

 

 45

 

Net cash provided by (used in) investing activities

 

 

 (321)

 

 

 (1,145)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Change in short-term debt - net

 

 

 (138)

 

 

 (466)

 

Repayment of debt (maturities greater than 90 days)

 

 

 (2,477)

 

 

 (871)

 

Proceeds from debt (maturities greater than 90 days)

 

 

 1,745

 

 

 6,116

 

Purchases of treasury stock

 

 

 (366)

 

 

 (1,243)

 

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

 

 

 325

 

 

 437

 

Dividends paid to shareholders

 

 

 (2,540)

 

 

 (2,488)

 

Other - net

 

 

 (47)

 

 

 (158)

 

Net cash provided by (used in) financing activities

 

 

 (3,498)

 

 

 1,327

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 (11)

 

 

 (36)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

 1,768

 

 

 4,878

 

Cash and cash equivalents at beginning of year

 

 

 2,353

 

 

 2,853

 

Cash and cash equivalents at end of period

 

$

 4,121

 

$

 7,731

 

 

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.

 

As described in Note 16, effective in the second quarter of 2020, the measure of segment operating performance used by 3M's chief operating decision maker changed and, as a result, the Company's disclosed measure of segment profit/loss has been updated. Also, effective in the first quarter of 2020, the Company changed its business segment reporting in its continuing effort to improve the alignment of businesses around markets and customers. Additionally, the Company consolidated the way it presents geographic area net sales by providing an aggregate Americas geographic region (combining former United States and Latin America and Canada areas). Information provided herein reflects the impact of these changes for all periods presented.

 

Use of estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company considered the coronavirus (COVID-19) related impacts on its estimates, as appropriate, within its consolidated financial statements and there may be changes to those estimates in future periods. 3M believes that the accounting estimates are appropriate after giving consideration to the increased uncertainties surrounding the severity and duration of the COVID-19 pandemic. Such estimates and assumptions are subject to inherent uncertainties which may result in actual amounts differing from these estimates.

 

Changes to Significant Accounting Policies

 

The following significant accounting policies have been added or changed as applicable since the Company's 2019 Annual Report on Form 10-K as a result of adoption of new accounting pronouncements as described in the "New Accounting Pronouncements" section.

 

Accounts receivable and allowances: Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains allowances for bad debts, cash discounts, and various other items. The allowances for bad debts and cash discounts are based on the best estimate of the amount of expected credit losses in existing accounts receivable and anticipated cash discounts. The Company determines the allowances based on historical write-off experience by industry and regional economic data, current expectations of future credit losses, and historical cash discounts. The Company reviews the allowances monthly. The allowances for bad debts as well as the provision for credit losses, write-off activity and recoveries for the periods presented are not material. The Company does not have any significant off-balance-sheet credit exposure related to its customers. The Company has long-term customer receivables that do not have significant credit risk, and the origination dates of which are typically not older than five years. These long-term receivables are subject to an allowance methodology similar to other receivables.

 

Marketable securities: Marketable securities include available-for-sale debt securities and are recorded at fair value. Cost of securities sold use the first in, first out (FIFO) method. The classification of marketable securities as current or non-current is based on the availability for use in current operations. 3M reviews impairments associated with its marketable securities in accordance with the measurement guidance provided by ASC 320, Investments-Debt Securities and ASC 326-30, Available-for-Sale Debt Securities, when determining whether a decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. An impairment relating to credit losses is recorded through an allowance for credit losses. The allowance is limited by the amount that the fair value is less than the amortized cost basis. A change in the allowance for credit losses is recorded into earnings in the period of the change. Any impairment that has not been recorded through an allowance for credit losses is recorded through accumulated other comprehensive income as a component of shareholders' equity. The factors considered in determining whether a credit loss exists can include the extent to which fair value is less than the amortized cost basis, changes in the credit quality of the underlying loan obligors, credit ratings actions, as well as other factors. When a credit loss exists, the Company compares the present value of cash flows expected to be collected from the debt security with the amortized cost basis of the security to determine what allowance amount, if any, should be recorded. Amounts are reclassified out of accumulated other comprehensive income and into earnings upon sale or a change in the portions of impairment related to credit losses and not related to credit losses.

 

Property, plant and equipment: 3M's accounting policy with respect to property, plant and equipment, is disclosed in the Company's notes to consolidated financial statements included in its most recent Annual Report on Form 10-K. In addition, 3M records capital-related government grants earned as reductions to the cost of property, plant and equipment; and associated unpaid liabilities and grant proceeds receivable are considered non-cash changes in such balances for purposes of preparation of statement of cash flows.

 

Foreign Currency Translation

 

Local currencies generally are considered the functional currencies outside the United States with the exception of 3M's subsidiaries in Argentina, the economy of which was considered highly inflationary beginning in 2018, and accordingly the financial statements of these subsidiaries are remeasured as if their functional currency is that of their parent. Assets and liabilities for operations in local-currency environments are translated at month-end exchange rates of the period reported. Income and expense items are translated at average monthly currency exchange rates in effect during the period. Cumulative translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in shareholders' equity.

 

3M had a consolidated subsidiary in Venezuela, the financial statements of which were remeasured as if its functional currency were that of its parent because Venezuela's economic environment is considered highly inflationary. The operating income of this subsidiary was immaterial as a percent of 3M's consolidated operating income for the periods presented. In light of circumstances, including the country's unstable environment and heightened unrest leading to sustained lack of demand, and expectation that these circumstances will continue for the foreseeable future, during May 2019, 3M concluded it no longer met the criteria of control in order to continue consolidating its Venezuelan operations. As a result, as of May 31, 2019, the Company began reflecting its interest in the Venezuelan subsidiary as an equity investment that does not have a readily determinable fair value. This resulted in a pre-tax charge of $162 million within other expense (income) in the second quarter of 2019. The charge primarily relates to $144 million of foreign currency translation losses associated with foreign currency movements before Venezuela was accounted for as a highly inflationary economy and pension elements previously included in accumulated other comprehensive loss along with write-down of intercompany receivable and investment balances associated with this subsidiary. Beginning May 31, 2019, 3M's consolidated balance sheets and statements of operations no longer include the Venezuelan entity's operations other than an immaterial equity investment and associated loss or income thereon largely only to the extent, if any, that 3M provides support or materials and receives funding or dividends.

 

Earnings Per Share

 

The difference in the weighted average 3M shares outstanding for calculating basic and diluted earnings per share attributable to 3M common shareholders is a result of the dilution associated with the Company's stock-based compensation plans. Certain options outstanding under these stock-based compensation plans were not included in the computation of diluted earnings per share attributable to 3M common shareholders because they would have had an anti-dilutive effect (18.8 million average options for the three months ended September 30, 2020; 19.6 million average options for the nine months ended September 30, 2020; 11.9 million average options for the three months ended September 30, 2019; 8.0 million average options for the nine months ended September 30, 2019). The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

    

Nine months ended 

 

 

 

September 30,

 

September 30,

 

(Amounts in millions, except per share amounts)

    

2020

    

2019

    

2020

    

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

 1,413

 

$

 1,583

 

$

 3,995

 

$

 3,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding - basic

 

 

 577.8

 

 

 576.5

 

 

 577.2

 

 

 577.2

 

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

 

 

 4.6

 

 

 6.5

 

 

 4.4

 

 

 8.7

 

Denominator for weighted average 3M common shares outstanding - diluted

 

 

 582.4

 

 

 583.0

 

 

 581.6

 

 

 585.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders - basic

 

$

 2.45

 

$

 2.75

 

$

 6.92

 

$

 6.24

 

Earnings per share attributable to 3M common shareholders - diluted

 

$

 2.43

 

$

 2.72

 

$

 6.87

 

$

 6.15

 

 

New Accounting Pronouncements

 

See the Company's 2019 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. 2016-13, Measurement of Credit Losses on Financial Instruments (in conjunction with ASU Nos. 2018-19, 2019-04, 2019-05, 2019-11, and 2020-03)

Introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities.

 

Amends the current other-than-temporary impairment model for available-for-sale debt securities. For such securities with unrealized losses, entities will still consider if a portion of any impairment is related only to credit losses and therefore recognized as a reduction in income.

January 1, 2020

Adopted using the modified retrospective approach. Adoption of this ASU did not have a material impact due to the nature and extent of 3M's financial instruments in scope for this ASU (primarily accounts receivable) and the historical, current and expected credit quality of its customers as of the date of adoption.

 

See Note 1 Significant Accounting Policies for updated applicable accounting policies.

ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement

Eliminates, amends, and adds disclosure requirements for fair value measurements, primarily related to Level 3 fair value measurements.

January 1, 2020

This ASU relates to disclosure only. The nature and extent of 3M's financial instruments in scope for this ASU (primarily Level 3 fair value measurements) are immaterial to 3M's consolidated results of operations and financial condition.

ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

Aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service arrangement (i.e. hosting arrangement) with the guidance on capitalizing costs in ASC 350-40, Internal-Use Software.

January 1, 2020

Adopted on a prospective basis. Relevant capitalizable costs are included in prepaid expenses or other non-current asset, as applicable, prospectively beginning in 2020.

 

 

 

 

           

 

 

 

 

 

 

 

 

Standards Issued and Not Yet Adopted

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

3M previously disclosed it does not expect this ASU to have a material impact on its 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

3M previously disclosed it does not expect this ASU to have a material impact on its consolidated results of operations and financial condition, but will apply such guidance, where applicable, to future circumstances.

 

 

 

 

 

Relevant New Standards Issued Subsequent to Most Recent Annual Report

 

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU 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 in 2021, to alternate reference rates, such as SOFR. The standard was effective upon issuance and allowed application to contract changes as early as January 1, 2020. The provisions have impact as contract modifications and other changes occur while LIBOR is phased out. The Company is in the process of evaluating the optional relief guidance provided within this ASU and is also reviewing its debt securities, bank facilities, derivative instruments and commercial contracts that utilize LIBOR as the reference rate. 3M will continue its assessment and monitor regulatory 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 September 30, 2020 and December 31, 2019 was $390 million and $430 million, respectively. Approximately $100 million and $370 million of the December 31, 2019 balance was recognized as revenue during the three and nine months ended September 30, 2020, respectively, while approximately $80 million and $560 million of the December 31, 2018 balance was recognized as revenue during the three and nine months ended September 30, 2019, respectively.

 

Operating Lease Revenue:

Net sales includes rental revenue from durable medical devices as part of operating lease arrangements, which was $153 million and $428 million during the three and nine months ended September 30, 2020. Applicable rental revenue for the three and nine months ended September 30, 2019 was not material.

 

 

 

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 

 

Nine months ended 

 

 

 

September 30,

 

September 30,

 

Net Sales (Millions)

 

2020

    

2019

    

2020

    

2019

 

Abrasives

 

$

 290

 

$

 338

 

$

 863

 

$

 1,059

 

Automotive Aftermarket

 

 

 309

 

 

 307

 

 

 796

 

 

 917

 

Closure and Masking Systems

 

 

 242

 

 

 282

 

 

 745

 

 

 835

 

Electrical Markets

 

 

 285

 

 

 299

 

 

 829

 

 

 912

 

Industrial Adhesives and Tapes

 

 

 647

 

 

 684

 

 

 1,873

 

 

 2,041

 

Personal Safety

 

 

 1,136

 

 

 812

 

 

 3,221

 

 

 2,653

 

Roofing Granules

 

 

 114

 

 

 101

 

 

 295

 

 

 293

 

Other Safety and Industrial

 

 

 1

 

 

 6

 

 

 5

 

 

 19

 

Total Safety and Industrial Business Segment

 

$

 3,024

 

$

 2,829

 

$

 8,627

 

$

 8,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advanced Materials

 

$

 246

 

$

 319

 

$

 770

 

$

 961

 

Automotive and Aerospace

 

 

 410

 

 

 477

 

 

 1,125

 

 

 1,463

 

Commercial Solutions

 

 

 390

 

 

 443

 

 

 1,147

 

 

 1,382

 

Electronics

 

 

 1,024

 

 

 1,001

 

 

 2,771

 

 

 2,760

 

Transportation Safety

 

 

 245

 

 

 260

 

 

 678

 

 

 741

 

Other Transportation and Electronics

 

 

 (1)

 

 

 -

 

 

 (2)

 

 

 (2)

 

Total Transportation and Electronics Business Segment

 

$

 2,314

 

$

 2,500

 

$

 6,489

 

$

 7,305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Drug Delivery

 

$

 -

 

$

 93

 

$

 146

 

$

 277

 

Food Safety

 

 

 82

 

 

 86

 

 

 252

 

 

 254

 

Health Information Systems

 

 

 280

 

 

 296

 

 

 833

 

 

 853

 

Medical Solutions

 

 

 1,251

 

 

 745

 

 

 3,472

 

 

 2,319

 

Oral Care

 

 

 320

 

 

 312

 

 

 741

 

 

 991

 

Separation and Purification Sciences

 

 

 221

 

 

 191

 

 

 639

 

 

 602

 

Other Health Care

 

 

 6

 

 

 (2)

 

 

 5

 

 

 (6)

 

Total Health Care Business Group

 

$

 2,160

 

$

 1,721

 

$

 6,088

 

$

 5,290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Health Care

 

$

 96

 

$

 97

 

$

 278

 

$

 295

 

Home Care

 

 

 268

 

 

 243

 

 

 796

 

 

 747

 

Home Improvement

 

 

 686

 

 

 612

 

 

 1,863

 

 

 1,729

 

Stationery and Office

 

 

 323

 

 

 362

 

 

 859

 

 

 1,008

 

Other Consumer

 

 

 44

 

 

 28

 

 

 115

 

 

 83

 

Total Consumer Business Group

 

$

 1,417

 

$

 1,342

 

$

 3,911

 

$

 3,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and Unallocated

 

$

 -

 

$

 28

 

$

 (1)

 

$

 98

 

Elimination of Dual Credit

 

 

 (565)

 

 

 (429)

 

 

 (1,513)

 

 

 (1,259)

 

Total Company

 

$

 8,350

 

$

 7,991

 

$

 23,601

 

$

 24,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2020

 

 Net Sales (Millions)

    

Americas

 

Asia Pacific

    

Europe, Middle East and Africa

    

Other Unallocated

    

Worldwide

 

Safety and Industrial

 

$

 1,623

 

$

 706

 

$

 695

 

$

 -

 

$

 3,024

 

Transportation and Electronics

 

 

 640

 

 

 1,357

 

 

 317

 

 

 -

 

 

 2,314

 

Health Care

 

 

 1,335

 

 

 377

 

 

 448

 

 

 -

 

 

 2,160

 

Consumer

 

 

 1,032

 

 

 231

 

 

 154

 

 

 -

 

 

 1,417

 

Corporate and Unallocated

 

 

 (1)

 

 

 -

 

 

 -

 

 

 1

 

 

 -

 

Elimination of Dual Credit

 

 

 (282)

 

 

 (197)

 

 

 (86)

 

 

 -

 

 

 (565)

 

Total Company

 

$

 4,347

 

$

 2,474

 

$

 1,528

 

$

 1

 

$

 8,350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2020

 

 Net Sales (Millions)

    

Americas

 

Asia Pacific

    

Europe, Middle East and Africa

    

Other Unallocated

    

Worldwide

 

Safety and Industrial

 

$

 4,509

 

$

 2,080

 

$

 2,038

 

$

 -

 

$

 8,627

 

Transportation and Electronics

 

 

 1,847

 

 

 3,709

 

 

 933

 

 

 -

 

 

 6,489

 

Health Care

 

 

 3,690

 

 

 1,091

 

 

 1,307

 

 

 -

 

 

 6,088

 

Consumer

 

 

 2,801

 

 

 699

 

 

 411

 

 

 -

 

 

 3,911

 

Corporate and Unallocated

 

 

 (1)

 

 

 -

 

 

 -

 

 

 -

 

 

 (1)

 

Elimination of Dual Credit

 

 

 (724)

 

 

 (550)

 

 

 (239)

 

 

 -

 

 

 (1,513)

 

Total Company

 

$

 12,122

 

$

 7,029

 

$

 4,450

 

$

 -

 

$

 23,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2019

 

 Net Sales (Millions)

    

Americas

 

Asia Pacific

    

Europe, Middle East and Africa

    

Other Unallocated

    

Worldwide

 

Safety and Industrial

 

$

 1,497

 

$

 706

 

$

 626

 

$

 -

 

$

 2,829

 

Transportation and Electronics

 

 

 749

 

 

 1,388

 

 

 362

 

 

 1

 

 

 2,500

 

Health Care

 

 

 973

 

 

 360

 

 

 388

 

 

 -

 

 

 1,721

 

Consumer

 

 

 975

 

 

 228

 

 

 140

 

 

 (1)

 

 

 1,342

 

Corporate and Unallocated

 

 

 27

 

 

 1

 

 

 1

 

 

 (1)

 

 

 28

 

Elimination of Dual Credit

 

 

 (185)

 

 

 (193)

 

 

 (52)

 

 

 1

 

 

 (429)

 

Total Company

 

$

 4,036

 

$

 2,490

 

$

 1,465

 

$

 -

 

$

 7,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 Net Sales (Millions)

    

Americas

 

Asia Pacific

    

Europe, Middle East and Africa

    

Other Unallocated

    

Worldwide

 

Safety and Industrial

 

$

 4,532

 

$

 2,165

 

$

 2,033

 

$

 (1)

 

$

 8,729

 

Transportation and Electronics

 

 

 2,256

 

 

 3,912

 

 

 1,137

 

 

 -

 

 

 7,305

 

Health Care

 

 

 2,916

 

 

 1,121

 

 

 1,253

 

 

 -

 

 

 5,290

 

Consumer

 

 

 2,723

 

 

 718

 

 

 422

 

 

 (1)

 

 

 3,862

 

Corporate and Unallocated

 

 

 97

 

 

 1

 

 

 1

 

 

 (1)

 

 

 98

 

Elimination of Dual Credit

 

 

 (562)

 

 

 (534)

 

 

 (164)

 

 

 1

 

 

 (1,259)

 

Total Company

 

$

 11,962

 

$

 7,383

 

$

 4,682

 

$

 (2)

 

$

 24,025

 

 

 

 

Americas included United States net sales to customers of $3.7 billion and $3.3 billion for the three months ended September 30, 2020 and 2019, respectively, and $10.2 billion and $9.7 billion for the nine months ended September 30, 2020 and 2019, respectively.
 

 

NOTE 3.  Acquisitions and Divestitures

 

Refer to Note 3 in 3M's 2019 Annual Report on Form 10-K for more information on relevant pre-2020 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.

 

2020 acquisitions:

 

There were no acquisitions that closed during the nine months ended September 30, 2020.

 

2019 acquisitions:

 

In February 2019, 3M completed the acquisition of the technology business of M*Modal for $0.7 billion of cash, net of cash acquired, and assumption of $0.3 billion of M*Modal's debt. The allocation of purchase consideration related to M*Modal was completed in the fourth quarter of 2019. Net sales and operating loss (inclusive of transaction and integration costs) of this business included in 3M's consolidated results of operations for the third quarter of 2019 were approximately $75 million and $5 million, respectively. Net sales and operating loss (inclusive of transaction and integration costs) of this business included in 3M's consolidated results of operations for the first nine months of 2019 were approximately $200 million and $40 million, respectively. M*Modal is reported within the Company's Health Care business.

 

In October 2019, the Company completed the acquisition of all of the ownership interests of Acelity Inc. and its KCI subsidiaries and in the first quarter of 2020 paid certain consideration previously accrued under the terms of related agreements. Adjustments in 2020 to the purchase price allocation were approximately $34 million and related to identification and valuation of certain acquired assets and liabilities. The change to provisional amounts did not result in material impacts to results of operations in 2020 or any portion related to earlier quarters in the measurement period. The allocation of purchase consideration related to Acelity was completed in the third quarter of 2020. Net sales and operating loss (inclusive of transaction and integration costs) of this business included in 3M's consolidated results of operations in the fourth quarter of 2019 were approximately $350 million and $45 million, respectively. Acelity is reported within the Company's Health Care business.

 

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. As discussed in Note 16 (Business Segments), gains/losses on sale of businesses are reflected in Corporate and Unallocated.

 

2020 divestitures:

 

In January 2020, 3M completed the sale of its advanced ballistic-protection business, formerly part of the Transportation and Electronics business, to Avon Rubber p.l.c for $86 million in cash and recognized certain contingent consideration from the outcome of pending tenders. Further contingent consideration of less than $25 million may be recognized depending on outcomes in the future. The business, with annual sales of approximately $85 million, consists of ballistic helmets, body armor, flat armor and related helmet-attachment products serving government and law enforcement. 3M reflected immaterial impacts in the third quarter of 2019 as a result of measuring this disposal group at the lower of its carrying amount or fair value less cost to sell and in the first quarter 2020 related to completion of the divestiture and recognition of contingent consideration.

 

In May 2020, 3M completed the sale of substantially all of its drug delivery business, formerly part of the Health Care business, to an affiliate of Altaris Capital Partners, LLC for $617 million in consideration including $487 million of cash, approximately $70 million in the form of an interest-bearing security, and approximately $60 million in the form of a 17 percent noncontrolling interest in the new company, Kindeva Drug Delivery (Kindeva). Non-cash consideration was valued at time of initial recognition on an income-based approach using relevant estimated future cash flows and applicable market interest rates while considering impacts of restrictions related to transferability. The divested business had annual sales of approximately $380 million. 3M retained its transdermal drug delivery components business. 3M reflected a pre-tax gain of $387 million as a result of the divestiture. The Company reflects its ownership interest in Kindeva using the equity method of accounting incorporating the recording of 3M's share of earnings/losses on a lag-basis based on availability of Kindeva financial statements. As a result, income/loss from this unconsolidated subsidiary began to be reflected in 3M's financial statements in the third quarter of 2020. Kindeva and 3M entered into certain limited-term agreements related to post-divestiture transition and supply services.

 

In the third quarter of 2020, 3M completed the sale of a small dermatology products business, formerly part of the Health Care business, for immaterial proceeds that approximated the business's book value.

 

2019 divestitures:

 

During 2019, as described in Note 3 in 3M's 2019 Annual Report on Form 10-K, the Company divested a number of businesses including: certain oral care technology comprising a business and the gas and flame detection business. 3M also reflected an earnout on a previous divestiture.

 

Operating income and held for sale amounts:

The aggregate operating income of these businesses was approximately $40 million and $25 million in the first nine months of 2020 and 2019, respectively. The approximate amounts of major assets and liabilities associated with disposal groups classified as held-for-sale as of December 31, 2019 included the following:

 

 

 

 

 

 

 

    

December 31,

 

(Millions)

    

2019

 

Inventory

 

 

 70

 

Property, plant and equipment

 

 

 150

 

Intangible assets

 

 

 35

 

 

In addition, approximately $30 million of goodwill was estimated to be attributable to disposal groups classified as held-for-sale as of December 31, 2019 based upon relative fair value. The amounts above have not been segregated and are classified within the existing corresponding line items on the Company's consolidated balance sheet.

 

NOTE 4.  Goodwill and Intangible Assets

 

There was no goodwill recorded from acquisitions during the first nine months of 2020. The acquisition activity in the following table relates to the net impact of adjustments to the preliminary allocation of purchase price within the one year measurement period following prior acquisitions, which decreased goodwill by $34 million during the nine months ended September 30, 2020. 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, 2019 and September 30, 2020, follow:

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

 

Safety and Industrial

 

Transportation and Electronics

 

Health Care

 

Consumer

 

Total Company

 

Balance as of December 31, 2019

 

$

 4,621

 

$

 1,830

 

$

 6,739

 

$

 254

 

$

 13,444

 

Acquisition activity

 

 

 -

 

 

 -

 

 

 (34)

 

 

 -

 

 

 (34)

 

Divestiture activity

 

 

 -

 

 

 (10)

 

 

 (19)

 

 

 -

 

 

 (29)

 

Translation and other

 

 

 (7)

 

 

 13

 

 

 143

 

 

 5

 

 

 154

 

Balance as of September 30, 2020

 

$

 4,614

 

$

 1,833

 

$

 6,829

 

$

 259

 

$

 13,535

 

 

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 2020, 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. In conjunction with the change in segment reporting, 3M completed an assessment indicating no goodwill impairment existed as a result of this new segment structure.

 

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, 2020, and December 31, 2019, follow:

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

(Millions)

    

2020

    

2019

 

Customer related intangible assets

 

$

 4,232

 

$

 4,316

 

Patents

 

 

 530

 

 

 538

 

Other technology-based intangible assets

 

 

 2,099

 

 

 2,124

 

Definite-lived tradenames

 

 

 1,175

 

 

 1,158

 

Other amortizable intangible assets

 

 

 121

 

 

 125

 

Total gross carrying amount

 

$

 8,157

 

$

 8,261

 

 

 

 

 

 

 

 

 

Accumulated amortization - customer related

 

 

 (1,337)

 

 

 (1,180)

 

Accumulated amortization - patents

 

 

 (502)

 

 

 (499)

 

Accumulated amortization - other technology-based

 

 

 (576)

 

 

 (435)

 

Accumulated amortization - definite-lived tradenames

 

 

 (367)

 

 

 (316)

 

Accumulated amortization - other

 

 

 (87)

 

 

 (90)

 

Total accumulated amortization

 

$

 (2,869)

 

$

 (2,520)

 

 

 

 

 

 

 

 

 

Total finite-lived intangible assets - net

 

$

 5,288

 

$

 5,741

 

 

 

 

 

 

 

 

 

Non-amortizable intangible assets (primarily tradenames)

 

 

 638

 

 

 638

 

Total intangible assets - net

 

$

 5,926

 

$

 6,379

 

 

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 and nine months ended September 30, 2020 and 2019 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

    

Nine months ended 

 

 

 

September 30,

 

September 30,

 

(Millions)

    

2020

    

2019

    

2020

 

2019

 

Amortization expense

 

$

 137

 

$

 69

 

$

 405

 

$

 208

 

 

Expected amortization expense for acquired amortizable intangible assets recorded as of September 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remainder of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After

 

(Millions)

 

2020

 

2021

 

2022

 

2023

 

2024

 

2025

 

2025

 

Amortization expense

 

$

 132

 

$

 524

 

$

 511

 

$

 485

 

$

 460

 

$

 428

 

$

 2,748

 

 

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 5.  Restructuring Actions

2020 Restructuring Actions:

 

Divestiture-Related Restructuring

 

During the second quarter of 2020, following the divestiture of substantially all of the drug delivery business (see Note 3) 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. The divestiture-related restructuring actions were recorded in the income statement as follows:

 

 

 

 

 

 

(Millions)

    

Second Quarter 2020

 

Cost of sales

 

$

 42

 

Selling, general and administrative expenses

 

 

 12

 

Research, development and related expenses

 

 

 1

 

Total operating income impact

 

$

 55

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

    

Employee-Related

    

Asset-Related and Other

    

Total

 

Expense incurred in the second quarter of 2020

 

$

 32

 

$

 23

 

$

 55

 

Non-cash changes

 

 

 -

 

 

 (14)

 

 

 (14)

 

Cash payments

 

 

 (7)

 

 

 -

 

 

 (7)

 

Accrued divestiture-related restructuring action balances as of September 30, 2020

 

$

 25

 

$

 9

 

$

 34

 

 

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

 

Other Restructuring

 

Additionally, 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. The restructuring charges were recorded in the income statement as follows:

 

 

 

 

 

 

(Millions)

    

Second Quarter 2020

 

Cost of sales

 

$

 13

 

Selling, general and administrative expenses

 

 

 37

 

Research, development and related expenses

 

 

 8

 

Total operating income impact

 

$

 58

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter 2020

 

(Millions)

    

Employee-Related

    

Asset-Related

    

Total

 

Safety and Industrial

 

$

 7

 

$

 -

 

$

 7

 

Transportation and Electronics

 

 

 11

 

 

 -

 

 

 11

 

Health Care

 

 

 12

 

 

 -

 

 

 12

 

Consumer

 

 

 5

 

 

 -

 

 

 5

 

Corporate and Unallocated

 

 

 -

 

 

23

 

 

 23

 

Total Operating Expense

 

$

 35

 

$

 23

 

$

 58

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

    

Employee-Related

    

Asset-Related

    

Total

 

Expense incurred in the second quarter of 2020

 

$

 35

 

$

 23

 

$

 58

 

Non-cash changes

 

 

 -

 

 

 (23)

 

 

 (23)

 

Adjustments

 

 

 (9)

 

 

 -

 

 

 (9)

 

Accrued restructuring action balances as of September 30, 2020

 

$

 26

 

$

 -

 

$

 26

 

 

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

 

2019 Restructuring Actions:

 

As described in Note 5 in 3M's 2019 Annual Report on Form 10-K, during the second quarter of 2019, in light of slower than expected 2019 sales, management approved and committed to undertake certain restructuring actions. These actions impacted approximately 2,000 positions worldwide, including attrition. The Company recorded second quarter 2019 pre-tax charges of $148 million. The restructuring charges were recorded in the income statement as follows:

 

 

 

 

 

 

(Millions)

    

Second Quarter 2019

 

Cost of sales

 

$

 18

 

Selling, general and administrative expenses

 

 

 89

 

Research, development and related expenses

 

 

 5

 

Total operating income impact

 

 

 112

 

Other expense (income), net

 

 

 36

 

Total income before taxes impact

 

$

 148

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter 2019

 

(Millions)

    

Employee-Related

    

Asset-Related

    

Total

 

Safety and Industrial

 

$

 11

 

$

 -

 

$

 11

 

Transportation and Electronics

 

 

 8

 

 

 -

 

 

 8

 

Health Care

 

 

 6

 

 

 -

 

 

 6

 

Consumer

 

 

 5

 

 

 -

 

 

 5

 

Corporate and Unallocated

 

 

 42

 

 

 40

 

 

 82

 

Total Operating Expense

 

$

 72

 

$

 40

 

$

 112

 

 

The second quarter 2019 actions included a voluntary early retirement incentive (further discussed in Note 11), the charge for which is included in other expense (income), net above.

 

 

 

Restructuring action activity from 2019, which includes both second and fourth quarter actions, including cash and non-cash impacts, follow:

 

 

 

 

 

 

(Millions)

    

Employee-Related

 

Accrued restructuring action balances as of December 31, 2019

 

$

 140

 

Cash Payments

 

 

 (25)

 

Adjustments

 

 

 (55)

 

Accrued restructuring action balances as of September 30, 2020

 

$

 60

 

 

Adjustments in the table above reflect changes in estimates from factors such as additional natural attrition and redeployment as COVID-19 delayed the start of plan execution and update of costs associated with the mix of impacted roles. Remaining activities related to this restructuring are expected to be completed largely through early 2021.

 

NOTE 6.  Supplemental Income Statement Information

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

    

Nine months ended 

 

 

 

September 30,

 

September 30,

 

(Millions)

 

2020

    

2019

    

2020

 

2019

 

Interest expense

 

$

 128

 

$

 109

 

$

 388

 

$

 324

 

Interest income

 

 

 (5)

 

 

 (26)

 

 

 (24)

 

 

 (64)

 

Pension and postretirement net periodic benefit cost (benefit)

 

 

 (19)

 

 

 (38)

 

 

 (53)

 

 

 (73)

 

Loss on deconsolidation of Venezuelan subsidiary

 

 

 -

 

 

 -

 

 

 -

 

 

 162

 

Total

 

$

 104

 

$

 45

 

$

 311

 

$

 349

 

 

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. Pension and postretirement net periodic benefit costs include a second quarter 2019 charge related to the voluntary early retirement incentive program announced in May 2019. Refer to Note 11 for additional details on the voluntary early retirement incentive program in addition to the components of pension and postretirement net periodic benefit costs.

 

In the second quarter of 2019, the Company incurred a charge of $162 million related to the deconsolidation of its Venezuelan subsidiary. Refer to Note 1 for additional details.

 

 

 

NOTE 7.  Supplemental Equity and Comprehensive Income Information

 

Cash dividends declared and paid totaled $1.47 and $1.44 per share for the first, second, and third quarters 2020 and 2019, respectively, or $4.41 and $4.32 per share for the first nine months of 2020 and 2019, respectively.

 

Consolidated Changes in Equity

 

Three months ended September 30, 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 June 30, 2020

 

$

 10,915

 

$

 6,083

 

$

 42,759

 

$

 (29,699)

 

$

 (8,286)

 

$

 58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 1,417

 

 

 

 

 

 1,413

 

 

 

 

 

 

 

 

 4

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 271

 

 

 

 

 

 

 

 

 

 

 

 270

 

 

 1

 

Defined benefit pension and post-retirement plans adjustment

 

 

 127

 

 

 

 

 

 

 

 

 

 

 

 127

 

 

 -

 

Cash flow hedging instruments

 

 

 (71)

 

 

 

 

 

 

 

 

 

 

 

 (71)

 

 

 -

 

Total other comprehensive income (loss), net of tax

 

 

 327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 (847)

 

 

 

 

 

 (847)

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 42

 

 

 42

 

 

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

 

 (1)

 

 

 

 

 

 

 

 

 (1)

 

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

 

 90

 

 

 

 

 

 (40)

 

 

 130

 

 

 

 

 

 

 

Balance at September 30, 2020

 

$

 11,943

 

$

 6,125

 

$

 43,285

 

$

 (29,570)

 

$

 (7,960)

 

$

 63

 

 

 

Nine months ended September 30, 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

 

$

 42,135

 

$

 (29,849)

 

$

 (8,139)

 

$

 63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 3,998

 

 

 

 

 

 3,995

 

 

 

 

 

 

 

 

 3

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 (67)

 

 

 

 

 

 

 

 

 

 

 

 (65)

 

 

 (2)

 

Defined benefit pension and post-retirement plans adjustment

 

 

 304

 

 

 

 

 

 

 

 

 

 

 

 304

 

 

 -

 

Cash flow hedging instruments

 

 

 (60)

 

 

 

 

 

 

 

 

 

 

 

 (60)

 

 

 -

 

Total other comprehensive income (loss), net of tax

 

 

 177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 (2,540)

 

 

 

 

 

 (2,540)

 

 

 

 

 

 

 

 

 

 

Purchase of subsidiary shares

 

 

 (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (1)

 

Stock-based compensation

 

 

 209

 

 

 209

 

 

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

 

 (357)

 

 

 

 

 

 

 

 

 (357)

 

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

 

 331

 

 

 

 

 

 (305)

 

 

 636

 

 

 

 

 

 

 

Balance at September 30, 2020

 

$

 11,943

 

$

 6,125

 

$

 43,285

 

$

 (29,570)

 

$

 (7,960)

 

$

 63

 

 

 

 

Three months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2019

 

$

 10,142

 

$

 5,821

 

$

 41,362

 

$

 (29,828)

 

$

 (7,272)

 

$

 59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 1,588

 

 

 

 

 

 1,583

 

 

 

 

 

 

 

 

 5

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 (202)

 

 

 

 

 

 

 

 

 

 

 

 (200)

 

 

 (2)

 

Defined benefit pension and post-retirement plans adjustment

 

 

 76

 

 

 

 

 

 

 

 

 

 

 

 76

 

 

 -

 

Cash flow hedging instruments

 

 

 8

 

 

 

 

 

 

 

 

 

 

 

 8

 

 

 -

 

Total other comprehensive income (loss), net of tax

 

 

 (118)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 (828)

 

 

 

 

 

 (828)

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 49

 

 

 49

 

 

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

 

 (141)

 

 

 

 

 

 

 

 

 (141)

 

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

 

 72

 

 

 

 

 

 (32)

 

 

 104

 

 

 

 

 

 

 

Balance at September 30, 2019

 

$

 10,764

 

$

 5,870

 

$

 42,085

 

$

 (29,865)

 

$

 (7,388)

 

$

 62

 

 

 

Nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2018

 

$

 9,848

 

$

 5,652

 

$

 40,636

 

$

 (29,626)

 

$

 (6,866)

 

$

 52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of adoption of ASU No. 2018-02*

 

 

 -

 

 

 

 

 

 853

 

 

 

 

 

 (853)

 

 

 

 

Impact of adoption of ASU No. 2016-02*

 

 

 14

 

 

 

 

 

 14

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 3,612

 

 

 

 

 

 3,601

 

 

 

 

 

 

 

 

 11

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

 (2)

 

 

 

 

 

 

 

 

 

 

 

 (1)

 

 

 (1)

 

Defined benefit pension and post-retirement plans adjustment

 

 

 356

 

 

 

 

 

 

 

 

 

 

 

 356

 

 

 -

 

Cash flow hedging instruments

 

 

 (24)

 

 

 

 

 

 

 

 

 

 

 

 (24)

 

 

 -

 

Total other comprehensive income (loss), net of tax

 

 

 330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 (2,488)

 

 

 

 

 

 (2,488)

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 218

 

 

 218

 

 

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

 

 (1,211)

 

 

 

 

 

 

 

 

 (1,211)

 

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

 

 441

 

 

 

 

 

 (531)

 

 

 972

 

 

 

 

 

 

 

Balance at September 30, 2019

 

$

 10,764

 

$

 5,870

 

$

 42,085

 

$

 (29,865)

 

$

 (7,388)

 

$

 62

 

*See Note 1 in 3M's 2019 Annual Report on Form 10-K.

 

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

 

Three months ended September 30, 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 June 30, 2020, net of tax:

 

$

 (2,234)

 

$

 (6,032)

 

$

 (20)

 

$

 (8,286)

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

 

 237

 

 

 -

 

 

 (72)

 

 

 165

 

Amounts reclassified out

 

 

 -

 

 

 163

 

 

 (21)

 

 

 142

 

Total other comprehensive income (loss), before tax

 

 

 237

 

 

 163

 

 

 (93)

 

 

 307

 

Tax effect

 

 

 33

 

 

 (36)

 

 

 22

 

 

 19

 

Total other comprehensive income (loss), net of tax

 

 

 270

 

 

 127

 

 

 (71)

 

 

 326

 

Balance at September 30, 2020, net of tax:

 

$

 (1,964)

 

$

 (5,905)

 

$

 (91)

 

$

 (7,960)

 

 

Nine months ended September 30, 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)

 

$

 (6,209)

 

$

 (31)

 

$

 (8,139)

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

 

 (98)

 

 

 (80)

 

 

 (10)

 

 

 (188)

 

Amounts reclassified out

 

 

 -

 

 

 489

 

 

 (68)

 

 

 421

 

Total other comprehensive income (loss), before tax

 

 

 (98)

 

 

 409

 

 

 (78)

 

 

 233

 

Tax effect

 

 

 33

 

 

 (105)

 

 

 18

 

 

 (54)

 

Total other comprehensive income (loss), net of tax

 

 

 (65)

 

 

 304

 

 

 (60)

 

 

 179

 

Balance at September 30, 2020, net of tax:

 

$

 (1,964)

 

$

 (5,905)

 

$

 (91)

 

$

 (7,960)

 

 

Three months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

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 June 30, 2019, net of tax:

 

$

 (1,912)

 

$

 (5,369)

 

$

 9

 

$

 (7,272)

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

 

 (149)

 

 

 -

 

 

 31

 

 

 (118)

 

Amounts reclassified out

 

 

 -

 

 

 101

 

 

 (21)

 

 

 80

 

Total other comprehensive income (loss), before tax

 

 

 (149)

 

 

 101

 

 

 10

 

 

 (38)

 

Tax effect

 

 

 (51)

 

 

 (25)

 

 

 (2)

 

 

 (78)

 

Total other comprehensive income (loss), net of tax

 

 

 (200)

 

 

 76

 

 

 8

 

 

 (116)

 

Balance at September 30, 2019, net of tax:

 

$

 (2,112)

 

$

 (5,293)

 

$

 17

 

$

 (7,388)

 

 

 

 

Nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

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, 2018, net of tax:

 

$

 (2,098)

 

$

 (4,832)

 

$

 64

 

$

 (6,866)

 

Impact of adoption of ASU No. 2018-02*

 

 

 (13)

 

 

 (817)

 

 

 (23)

 

 

 (853)

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

 

 (86)

 

 

 153

 

 

 14

 

 

 81

 

Amounts reclassified out

 

 

 142

 

 

 310

 

 

 (48)

 

 

 404

 

Total other comprehensive income (loss), before tax

 

 

 56

 

 

 463

 

 

 (34)

 

 

 485

 

Tax effect

 

 

 (57)

 

 

 (107)

 

 

 10

 

 

 (154)

 

Total other comprehensive income (loss), net of tax

 

 

 (1)

 

 

 356

 

 

 (24)

 

 

 331

 

Balance at September 30, 2019, net of tax

 

$

 (2,112)

 

$

 (5,293)

 

$

 17

 

$

 (7,388)

 

*See Note 1 in 3M's 2019 Annual Report on Form 10-K.

 

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 September 30,

 

Nine months ended September 30,

 

Location on Income

 

(Millions)

 

2020

    

2019

    

2020

    

2019

 

Statement

 

Cumulative translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deconsolidation of Venezuelan subsidiary

 

$

 -

 

$

 -

 

$

 -

 

$

 (142)

 

Other income (expense), net

 

Total before tax

 

 

 -

 

 

 -

 

 

 -

 

 

 (142)

 

 

 

Tax effect

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Provision for income taxes

 

Net of tax

 

$

 -

 

$

 -

 

$

 -

 

$

 (142)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension and postretirement plans adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transition asset

 

$

 (1)

 

$

 -

 

$

 (2)

 

$

 -

 

See Note 11

 

Prior service benefit

 

 

 15

 

 

 18

 

 

 46

 

 

 50

 

See Note 11

 

Net actuarial loss

 

 

 (176)

 

 

 (119)

 

 

 (530)

 

 

 (358)

 

See Note 11

 

Curtailments/Settlements

 

 

 (1)

 

 

 -

 

 

 (3)

 

 

 -

 

See Note 11

 

Deconsolidation of Venezuelan subsidiary

 

 

 -

 

 

 -

 

 

 -

 

 

 (2)

 

Other income (expense), net

 

Total before tax

 

 

 (163)

 

 

 (101)

 

 

 (489)

 

 

 (310)

 

 

 

Tax effect

 

 

 36

 

 

 25

 

 

 118

 

 

 70

 

Provision for income taxes

 

Net of tax

 

$

 (127)

 

$

 (76)

 

$

 (371)

 

$

 (240)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments gains (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

$

 23

 

$

 22

 

$

 74

 

$

 50

 

Cost of sales

 

Interest rate contracts

 

 

 (2)

 

 

 (1)

 

 

 (6)

 

 

 (2)

 

Interest expense

 

Total before tax

 

 

 21

 

 

 21

 

 

 68

 

 

 48

 

 

 

Tax effect

 

 

 (5)

 

 

 (4)

 

 

 (16)

 

 

 (9)

 

Provision for income taxes

 

Net of tax

 

$

 16

 

$

 17

 

$

 52

 

$

 39

 

 

 

Total reclassifications for the period, net of tax

 

$

 (111)

 

$

 (59)

 

$

 (319)

 

$

 (343)

 

 

 

 

 

 

 

 

 

NOTE 8.  Income Taxes

 

The Company is under IRS examination or appeals for the tax years 2017 through 2018. The IRS has completed its field examination of the U.S. federal income tax returns for all years for 2005 through 2016, but the years 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 September 30, 2020, no taxing authority has 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 September 30, 2020 and December 31, 2019 are $1,155 million and $1,178 million, respectively. The change in unrecognized tax benefits during 2020 includes a $52 million decrease associated with the tax treatment of the 2018 agreement reached with the State of Minnesota that resolved the Natural Resources Damages (NRD) lawsuit.

 

As of September 30, 2020 and December 31, 2019, the Company had valuation allowances of $124 million and $158 million on its deferred tax assets, respectively.

 

The effective tax rate for the third quarter of 2020 was 21.4 percent, compared to 19.3 percent in the third quarter of 2019, an increase of 2.1 percentage points. The primary factor contributing to the increase was nonrepeating 2019 favorable adjustments related to international tax provisions of U.S. tax reform.

 

The effective tax rate for the first nine months of 2020 was 20.0 percent, compared to 19.7 percent in the first nine months of 2019, largely consistent year-on-year.

 

The Company previously disclosed as of December 31, 2019 that approximately $14 billion of the undistributed earnings of its foreign subsidiaries were considered indefinitely reinvested. During the third quarter of 2020, 3M determined that approximately $5 billion of these earnings are no longer considered permanently reinvested. The incremental tax cost to repatriate these earnings to the US is immaterial. The Company has not provided deferred taxes on approximately $9 billion of undistributed earnings from non-U.S. subsidiaries as of September 30, 2020 which are indefinitely reinvested in operations. Because of the multiple avenues by which to repatriate the earnings to minimize tax cost, and because a large portion of these earnings are not liquid, it is not practical to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.

 

In March 2020, in response to the impact of the COVID-19 pandemic in the U.S. and across the globe, the United States Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. The enactment period impacts to 3M were immaterial to income tax expense.

NOTE 9.  Marketable Securities and Held-to-Maturity Debt Securities

 

The following is a summary of the types of investments and amounts recorded on the Consolidated Balance Sheet for marketable securities (current and non-current).

 

 

 

 

 

 

 

 

 

(Millions)

 

September 30, 2020

 

December 31, 2019

 

Corporate debt securities

 

$

 7

 

$

 -

 

Commercial paper

 

 

 233

 

 

 85

 

Certificates of deposit/time deposits

 

 

 47

 

 

 10

 

U.S. treasury securities

 

 

 150

 

 

 -

 

U.S. municipal securities

 

 

 3

 

 

 3

 

Current marketable securities

 

$

 440

 

$

 98

 

 

 

 

 

 

 

 

 

U.S. municipal securities

 

$

 34

 

$

 43

 

Non-current marketable securities

 

$

 34

 

$

 43

 

 

 

 

 

 

 

 

 

Total marketable securities

 

$

 474

 

$

 141

 

 

At September 30, 2020 and December 31, 2019, gross unrealized, gross realized, and net realized gains and/or losses (pre-tax) were not material.

 

The balances at September 30, 2020 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, 2020

 

Due in one year or less

 

$

 440

 

Due after one year through five years

 

 

 14

 

Due after five years through ten years

 

 

 20

 

Total marketable securities

 

$

 474

 

 

Held-to-Maturity Debt Securities

 

In connection with the in-substance debt defeasance of the Third Lien Notes described in Note 10, the Company purchased a $0.5 billion U.S. Treasury security in the fourth quarter of 2019 and transferred it to a trust with irrevocable instructions to use the proceeds from its maturity to satisfy the redemption of the Third Lien Notes that occurred in May 2020. This debt security was considered held-to-maturity due to the restrictions in satisfying and discharging the Third Lien Notes, was carried at amortized cost, and was reflected in other current assets on the Company's consolidated balance sheet. Upon the maturity of the debt security in May 2020, the Company has no held-to-maturity debt securities.

 

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

 

In March 2020, 3M issued $1.75 billion aggregate principal amount of fixed rate registered notes. These were comprised of $500 million of 5-year notes due 2025 with a coupon rate of 2.65%, $600 million of 10-year notes due 2030 with a coupon rate of 3.05%, and $650 million of 30-year notes due 2050 with a coupon rate of 3.70%.

 

As of September 30, 2020, the Company had no commercial paper outstanding, compared to $150 million in commercial paper outstanding as of December 31, 2019.

 

In July 2020, 3M extended a credit facility initially expiring in July 2020 to August 2021 in the amount of 80 billion Japanese yen. In November 2019, 3M entered into a credit facility expiring in November 2020 in the amount of 150 million euros. During the third quarter of 2020, the Company paid the outstanding balances and closed these credit facilities.

 

In conjunction with the October 2019 acquisition of Acelity (see Note 3), 3M assumed outstanding debt of the business, of which $445 million in principal amount of third lien senior secured notes (Third Lien Notes) maturing in 2021 with a coupon rate of 12.5% was not immediately redeemed at closing. Instead, at closing, 3M satisfied and discharged the Third Lien Notes via an in-substance defeasance, whereby 3M transferred cash equivalents and marketable securities to a trust with irrevocable instructions to redeem the Third Lien Notes on May 1, 2020. The trust assets were restricted from use in 3M's operations and were only used for the redemption of the Third Lien Notes that occurred in May 2020. These actions, however, did not represent a legal defeasance. Therefore, this debt was included in current portion of long-term debt and the related trust assets were included in current assets on the Company's consolidated balance sheet as of December 31, 2019.

 

In May 2020, 3M repaid the aggregate $445 million principal amount of Third Lien Notes subject to the in-substance defeasance above and repaid 650 million euros aggregate principal amount of floating-rate medium-term notes that matured. In August 2020, 3M repaid $500 million aggregate principal amount of floating rate medium-term notes that matured.

 

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 September 30, 2020. The maturities of long-term debt for the periods subsequent to September 30, 2020 are as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remainder of

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

After

    

 

 

 

2020

 

2021

 

2022

 

2023

 

2024

 

2025

 

2025

 

Total

 

$

 149

 

$

 1,710

 

$

 1,629

 

$

 1,842

 

$

 1,101

 

$

 1,789

 

$

 11,362

 

$

 19,582

 

 

 

NOTE 11.  Pension and Postretirement Benefit Plans

 

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 and nine months ended September 30, 2020 and 2019 follow:

 

Benefit Plan Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

 

 

Qualified and Non-qualified

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Postretirement

 

 

 

United States

International

 

Benefits

 

(Millions)

    

2020

    

2019

    

2020

    

2019

    

2020

    

2019

 

Net periodic benefit cost (benefit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 66

 

$

 63

 

$

 39

 

$

 32

 

$

 11

 

$

 10

 

Non-operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

$

 124

 

$

 155

 

$

 31

 

$

 40

 

$

 16

 

$

 20

 

Expected return on plan assets

 

 

 (255)

 

 

 (260)

 

 

 (77)

 

 

 (75)

 

 

 (20)

 

 

 (20)

 

Amortization of transition asset

 

 

 -

 

 

 -

 

 

 1

 

 

 -

 

 

 -

 

 

 -

 

Amortization of prior service benefit

 

 

 (6)

 

 

 (6)

 

 

 (1)

 

 

 (3)

 

 

 (8)

 

 

 (9)

 

Amortization of net actuarial loss

 

 

 134

 

 

 91

 

 

 30

 

 

 20

 

 

 12

 

 

 8

 

Settlements, curtailments, special termination benefits and other

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 1

 

 

 -

 

Total non-operating expense (benefit)

 

 

 (3)

 

 

 (20)

 

 

 (16)

 

 

 (18)

 

 

 1

 

 

 (1)

 

Total net periodic benefit cost (benefit)

 

$

 63

 

$

 43

 

$

 23

 

$

 14

 

$

 12

 

$

 9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

Qualified and Non-qualified

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Postretirement

 

 

 

United States

International

 

Benefits

 

(Millions)

    

2020

    

2019

    

2020

    

2019

    

2020

    

2019

 

Net periodic benefit cost (benefit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 197

 

$

 188

 

$

 115

 

$

 98

 

$

 33

 

$

 32

 

Non-operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

$

 374

 

$

 466

 

$

 95

 

$

 118

 

$

 48

 

$

 62

 

Expected return on plan assets

 

 

 (765)

 

 

 (780)

 

 

 (231)

 

 

 (225)

 

 

 (60)

 

 

 (61)

 

Amortization of transition asset

 

 

 -

 

 

 -

 

 

 2

 

 

 -

 

 

 -

 

 

 -

 

Amortization of prior service benefit

 

 

 (18)

 

 

 (18)

 

 

 (4)

 

 

 (9)

 

 

 (24)

 

 

 (23)

 

Amortization of net actuarial loss

 

 

 402

 

 

 274

 

 

 92

 

 

 59

 

 

 36

 

 

 25

 

Settlements, curtailments, special termination benefits and other

 

 

 -

 

 

 35

 

 

 -

 

 

 1

 

 

 3

 

 

 -

 

Total non-operating expense (benefit)

 

 

 (7)

 

 

 (23)

 

 

 (46)

 

 

 (56)

 

 

 3

 

 

 3

 

Total net periodic benefit cost (benefit)

 

$

 190

 

$

 165

 

$

 69

 

$

 42

 

$

 36

 

$

 35

 

 

For the nine months ended September 30, 2020 contributions totaling $119 million were made to the Company's U.S. and international pension plans and $3 million to its postretirement plans. For total year 2020, 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 2020. 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.

 

In May 2019 (as part of the 2019 restructuring actions discussed in Note 5), the Company began offering a voluntary early retirement incentive program to certain eligible participants of its U.S. pension plans who meet age and years of pension service requirements. The eligible participants who accepted the offer and retired by July 1, 2019 received an enhanced pension benefit. Pension benefits were enhanced by adding one additional year of pension service and one additional year of age for certain benefit calculations. Approximately 800 participants accepted the offer and retired before July 1, 2019. As a result, the Company incurred a $35 million charge related to these special termination benefits in the second quarter of 2019.

 

In May 2019, 3M modified the 3M Retiree Life Insurance Plan postretirement benefit to close it to new participants effective August 1, 2019 (which results in employees who retire on or after August 1, 2019 not being eligible to participate in the plan) and reducing the maximum life insurance and death benefit to $8,000 for deaths on or after August 1, 2019. Due to these changes, the plan was re-measured in the second quarter of 2019, resulting in a decrease to the accumulated projected benefit obligation liability of approximately $150 million and a related increase to shareholders' equity, specifically accumulated other comprehensive income in addition to an immaterial income statement benefit prospectively.

 

In the second quarter of 2020, as a result of the divestiture of the drug delivery business, the Company recognized a curtailment in its United Kingdom Pension Plan. The resulting re-measurement of the pension plan funded status reduced long-term prepaid pension and post retirement assets (located within "other assets" of the Company's balance sheet) by approximately $80 million, which was offset within accumulated other comprehensive income (located within the equity section of the Company's balance sheet). The expense impact of this re-measurement was immaterial for the second quarter of 2020 and subsequent periods.

 

 

NOTE 12.  Derivatives

 

The Company uses interest rate swaps, currency swaps, commodity price 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 2019 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 swap or treasury rate lock contracts to hedge exposure to variability in cash flows from interest payments on forecasted debt issuances. 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 2019 Annual Report on Form 10-K.

 

In March 2020, the Company entered into treasury rate lock contracts with a notional amount of $500 million that were terminated concurrently with the March 2020 issuance of registered notes as discussed in Note 10. The termination resulted in an immaterial net loss within accumulated other comprehensive income that will be amortized over the respective lives of the debt.

 

The amortization of gains and losses on forward starting interest rate swap and treasury rate lock contracts is included in the tables below as part of the gain/(loss) reclassified from accumulated other comprehensive income into income.

 

As of September 30, 2020, the Company had a balance of $91 million after-tax net unrealized loss associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This includes a remaining balance of $109 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 September 30, 2020, 3M expects to reclassify approximately $7 million, $3 million, and $4 million of the after-tax net unrealized cash flow hedging gains to earnings over the next 12 months, over the remainder of 2020, and in 2021, respectively, in addition to reclassifying approximately $98 million of the after-tax net unrealized cash flow hedging losses to earnings after 2021 (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

 

 

 

Comprehensive

 

from Accumulated Other

 

 

 

Income on Derivative

 

Comprehensive Income into Income

 

Three months ended September 30, 2020 (Millions)

    

Amount

    

Location

    

Amount

 

Foreign currency forward/option contracts

 

$

 (72)

 

Cost of sales

 

$

 23

 

Interest rate contracts

 

 

 -

 

Interest expense

 

 

 (2)

 

Total

 

$

 (72)

 

 

 

$

 21

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2020 (Millions)

    

Amount

    

Location

    

Amount

 

Foreign currency forward/option contracts

 

$

 (8)

 

Cost of sales

 

$

 74

 

Interest rate contracts

 

 

 (2)

 

Interest expense

 

 

 (6)

 

Total

 

$

 (10)

 

 

 

$

 68

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2019 (Millions)

    

Amount

    

Location

    

Amount

 

Foreign currency forward/option contracts

 

$

 105

 

Cost of sales

 

$

 22

 

Interest rate contracts

 

 

 (74)

 

Interest expense

 

 

 (1)

 

Total

 

$

 31

 

 

 

$

 21

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019 (Millions)

    

Amount

    

Location

    

Amount

 

Foreign currency forward/option contracts

 

$

 137

 

Cost of sales

 

$

 50

 

Interest rate contracts

 

 

 (123)

 

Interest expense

 

 

 (2)

 

Total

 

$

 14

 

 

 

$

 48

 

 

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 2019 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 and nine months ended September 30, 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

 

 

 

Hedged Liabilities (in millions)

 

of the Hedged Liabilities (in millions)

 

Location on the Consolidated Balance Sheet

    

September 30, 2020

    

December 31, 2019

    

September 30, 2020

    

December 31, 2019

 

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

 

$

 205

 

$

 499

 

$

 5

 

$

 -

 

Long-term debt

 

 

 581

 

 

 775

 

 

 13

 

 

 22

 

Total

 

$

 786

 

$

 1,274

 

$

 18

 

$

 22

 

 

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. Amounts excluded from the assessment of hedge effectiveness, including the time value of the forward contract at the inception of the hedge, are recognized in earnings using an amortization approach over the life of the hedging instrument on a straight-line basis. Any difference between the change in the fair value of the excluded component and the amount amortized into earnings during the period is recorded in cumulative translation within other comprehensive income. 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 September 30, 2020, 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 as

 

 

 

 

 

 

 

 

Cumulative Translation

 

Amount of Gain (Loss) Excluded

 

 

 

within Other

 

from Effectiveness Testing

 

 

 

Comprehensive Income

 

Recognized in Income

 

Three months ended September 30, 2020 (Millions)

    

Amount

    

Location

    

Amount

 

Foreign currency denominated debt

 

$

 (154)

 

Cost of sales

 

$

 -

 

Foreign currency forward contracts

 

 

 (3)

 

Cost of sales

 

 

 -

 

Total

 

$

 (157)

 

 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2020 (Millions)

    

Amount

    

Location

    

Amount

 

Foreign currency denominated debt

 

$

 (150)

 

Cost of sales

 

$

 -

 

Foreign currency forward contracts

 

 

 2

 

Cost of sales

 

 

 5

 

Total

 

$

 (148)

 

 

 

$

 5

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2019 (Millions)

    

Amount

    

Location

    

Amount

 

Foreign currency denominated debt

 

$

 177

 

Cost of sales

 

$

 -

 

Foreign currency forward contracts

 

 

 38

 

Cost of sales

 

 

 6

 

Total

 

$

 215

 

 

 

$

 6

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019 (Millions)

    

Amount

    

Location

    

Amount

 

Foreign currency denominated debt

 

$

 205

 

Cost of sales

 

$

 -

 

Foreign currency forward contracts

 

 

 43

 

Cost of sales

 

 

 18

 

Total

 

$

 248

 

 

 

$

 18

 

 

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 forward contracts to offset, in part, the impacts of certain intercompany activities and enters into commodity price swaps to offset, in part, fluctuations in costs associated with the use of certain commodities and precious metals. 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2020

 

 

Nine months ended September 30, 2020

 

 

 

Gain (Loss) on Derivative Recognized in

 

 

Gain (Loss) on Derivative Recognized in

 

 

 

Income

 

 

Income

 

(Millions)

    

Location

    

Amount

    

 

Location

    

Amount

 

Foreign currency forward/option contracts

 

Cost of sales

 

$

 1

 

 

Cost of sales

 

$

 3

 

Foreign currency forward contracts

 

Interest expense

 

 

 29

 

 

Interest expense

 

 

 2

 

Total

 

 

 

$

 30

 

 

 

 

$

 5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2019

 

 

Nine months ended September 30, 2019

 

 

 

Gain (Loss) on Derivative Recognized in

 

 

Gain (Loss) on Derivative Recognized in

 

 

 

Income

 

 

Income

 

(Millions)

    

Location

    

Amount

    

 

Location

    

Amount

 

Foreign currency forward/option contracts

 

Cost of sales

 

$

 6

 

 

Cost of sales

 

$

 4

 

Foreign currency forward contracts

 

Interest expense

 

 

 (8)

 

 

Interest expense

 

 

 (26)

 

Total

 

 

 

$

 (2)

 

 

 

 

$

 (22)

 

 

 

 

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 September 30, 2020

 

Nine months ended September 30, 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

 

$

 4,303

 

$

 104

 

$

 12,217

 

$

 311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 23

 

$

 -

 

$

 74

 

$

 -

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 -

 

 

 (2)

 

 

 -

 

 

 (6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain or (loss) on fair value hedging relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedged items

 

$

 -

 

$

 3

 

$

 -

 

$

 3

 

Derivatives designated as hedging instruments

 

 

 -

 

 

 (3)

 

 

 -

 

 

 (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location and Amount of Gain (Loss) Recognized in Income

 

Location and Amount of Gain (Loss) Recognized in Income

 

 

 

Three months ended September 30, 2019

 

Nine months ended September 30, 2019

 

(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

 

$

 4,188

 

$

 45

 

$

 12,811

 

$

 349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The effects of cash flow and fair value hedging:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain or (loss) on cash flow hedging relationships: