REG - 3M Company - Annual Financial Report - Part 1 <Origin Href="QuoteRef">MMM.N</Origin> - Part 7
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that
enable identity verification and authentication, as well as secure materials
and document readers. In June 2017, 3M also completed the sale of its tolling
and automated license/number plate recognition business, with annual sales of
approximately $40 million, to Neology, Inc. 3M's tolling and automated
license/number plate recognition business includes RFID readers and tags,
automatic vehicle classification systems, lane controller and host software,
and back office software and services. It also provides mobile and fixed
cameras, software, and services in automated license/number plate recognition.
3M received proceeds of $833 million, or $809 million net of cash sold, and
reflected a pre-tax gain of $458 million as a result of these two
divestitures, which was reported within the Company's Safety and Graphics
business.
In October 2017, 3M sold its electronic monitoring business to an affiliate of
Apax Partners. This business, with annual sales of approximately $95 million,
is a provider of electronic monitoring technologies, serving hundreds of
correctional and law enforcement agencies around the world. 3M received
proceeds of $201 million, net of cash sold, and reflected a pre-tax gain of
$98 million in the fourth quarter of 2017 as a result of this divestiture,
which was reported within the Company's Safety and Graphics business.
In the fourth quarter of 2017, 3M sold the assets of an electrical
marking/labeling business within its Electronics and Energy business. The
former activity, proceeds and gain were not considered material.
In December 2017, 3M agreed to sell substantially all of its Communication
Markets Division to Corning Incorporated, for $900 million, subject to closing
and other adjustments. This business, with annual sales of approximately $400
million consists of optical fiber and copper passive connectivity solutions
for the telecommunications industry including 3M's xDSL, FTTx, and structured
cabling solutions and, in certain countries, telecommunications system
integration services. This sale is expected to close in 2018, subject to
consultation or information requirements with relevant works councils and to
customary closing conditions and regulatory approvals. The 3M expects a
pre-tax gain of approximately $500 million as a result of this divestiture
that will be reported within the Company's Electronics and Energy business.
In February 2018, 3M closed on the sale of certain personal safety product
offerings primarily focused on noise, environmental, and heat stress
monitoring to TSI, Inc. This business has annual sales of approximately $15
million. The transaction is expected to result in a pre-tax gain of less than
$20 million that will be reported within the Company's Safety and Graphics
business.
The aggregate operating income of these businesses was approximately $45
million, $50 million and not significant in 2017, 2016 and 2015, respectively.
The approximate amounts of major assets and liabilities associated with
disposal groups classified as held-for-sale as of December 31, 2017 and
December 31, 2016, included the following:
December 31, December 31,
(Millions) 2017 2016
Accounts receivable $ 25 $ 25
Property, plant and equipment (net) 20 25
Intangible assets - 35
Deferred revenue (other current liabilities) - 35
In addition, approximately $270 million of goodwill was estimated to be
attributable to disposal groups classified as held-for-sale as of both
December 31, 2017 and December 31, 2016, 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 3. Goodwill and Intangible Assets
Purchased goodwill from acquisitions totaled $1.3 billion in 2017, none of
which is deductible for tax purposes. Purchased goodwill from acquisitions
totaled $14 million in 2016, none of which is deductible for tax purposes. The
acquisition activity in the following table also includes the net impact of
adjustments to the preliminary allocation of purchase price within the one
year measurement-period following prior acquisitions, which increased goodwill
by $39 million during 2016. The amounts in the "Translation and other" column
in the following table primarily relate to changes in foreign currency
exchange rates. The goodwill balance by business segment follows:
Goodwill
Dec. 31, 2016 2016 Dec. 31, 2017 2017 2017 Dec. 31,
2015 acquisition translation 2016 acquisition divestiture translation 2017
(Millions) Balance activity and other Balance activity activity and other Balance
Industrial $ 2,573 $ - $ (37) $ 2,536 $ - $ - $ 142 $ 2,678
Safety and Graphics 3,342 41 (59) 3,324 1,296 (323) 122 4,419
Health Care 1,624 12 (27) 1,609 6 - 67 1,682
Electronics and Energy 1,510 - (21) 1,489 - - 35 1,524
Consumer 200 - 8 208 - - 2 210
Total Company $ 9,249 $ 53 $ (136) $ 9,166 $ 1,302 $ (323) $ 368 $ 10,513
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 17, effective in the first quarter of 2017, the Company
changed its business segment reporting in its continuing effort to improve the
alignment of its businesses around markets and customers. For any product
changes that resulted in reporting unit changes, the Company applied the
relative fair value method to determine the impact on goodwill of the
associated reporting units. During the first quarter of 2017, the Company
completed its assessment of any potential goodwill impairment for reporting
units impacted by this new structure and determined that no impairment
existed. The Company also completed its annual goodwill impairment test in the
fourth quarter of 2017 for all reporting units and determined that no
impairment existed. In addition, the Company had no impairments of goodwill in
prior years.
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 December 31, follow:
December 31, December 31,
(Millions) 2017 2016
Customer related intangible assets $ 2,332 $ 1,939
Patents 561 602
Other technology-based intangible assets 583 524
Definite-lived tradenames 678 420
Other amortizable intangible assets 207 211
Total gross carrying amount $ 4,361 $ 3,696
Accumulated amortization - customer related (874) (797)
Accumulated amortization - patents (489) (497)
Accumulated amortization - other technology based (292) (302)
Accumulated amortization - definite-lived tradenames (256) (236)
Accumulated amortization - other (162) (173)
Total accumulated amortization $ (2,073) $ (2,005)
Total finite-lived intangible assets - net $ 2,288 $ 1,691
Non-amortizable intangible assets (primarily tradenames) 648 629
Total intangible assets - net $ 2,936 $ 2,320
Certain tradenames acquired by 3M are not amortized because they have been in
existence for over 55 years, have a history of leading-market share positions,
have been and are intended to be continuously renewed, and the associated
products of which are expected to generate cash flows for 3M for an indefinite
period of time.
Amortization expense for the years ended December 31 follows:
(Millions) 2017 2016 2015
Amortization expense $ 238 $ 262 $ 229
Expected amortization expense for acquired amortizable intangible assets
recorded as of December 31, 2017 follows:
After
(Millions) 2018 2019 2020 2021 2022 2022
Amortization expense $ 252 $ 242 $ 231 $ 221 $ 208 $ 1,134
The preceding expected amortization expense is an estimate. Actual amounts of
amortization expense may differ from estimated amounts due to additional
intangible asset acquisitions, changes in foreign currency exchange rates,
impairment of intangible assets, accelerated amortization of intangible assets
and other events. 3M expenses the costs incurred to renew or extend the term
of intangible assets.
NOTE 4. Restructuring Actions and Exit Activities
2017 Restructuring Actions:
During the second quarter of 2017, management approved and committed to
undertake certain restructuring actions primarily focused on portfolio and
footprint optimization. These actions affected approximately 1,300 positions
worldwide and resulted in a second quarter 2017 pre-tax charge of $99 million.
Remaining activities related to restructuring are expected to be completed by
the end of 2018.
Restructuring charges are summarized by business segment as follows:
Second Quarter 2017
(Millions) Employee-Related
Industrial $ 39
Safety and Graphics 9
Health Care 2
Electronics and Energy 7
Consumer 36
Corporate and Unallocated 6
Total Expense $ 99
The preceding restructuring charges were recorded in the income statement as
follows:
(Millions) Second Quarter 2017
Cost of sales $ 86
Selling, general and administrative expenses 5
Research, development and related expenses 8
Total $ 99
Restructuring actions, including cash and non-cash impacts, follow:
(Millions) Employee-Related
Expense incurred in the second quarter of 2017 $ 99
Cash payments (8)
Adjustments (3)
Accrued restructuring action balances as of December 31, 2017 $ 88
2017 Exit Activities:
During the first quarter of 2017, the Company recorded net pre-tax charges of
$24 million related to exit activities. These charges related to employee
reductions, primarily in Western Europe. During the fourth quarter of 2017,
the Company recorded net pre-tax charges of $23 million related to exit
activities. These charges related to employee reductions, primarily in the
United States and Western Europe.
2015 Restructuring Actions:
During the fourth quarter of 2015, management approved and committed to
undertake certain restructuring actions primarily focused on structural
overhead, largely in the U.S. and slower-growing markets, with particular
emphasis on Europe, Middle East, and Africa (EMEA) and Latin America. This
impacted approximately 1,700 positions worldwide and resulted in a
fourth-quarter 2015 pre-tax charge of $114 million.
Components of these restructuring charges are summarized by business segment
as follows:
2015
(Millions) Employee-Related Asset-Related Total
Industrial $ 30 $ 12 $ 42
Safety and Graphics 11 - 11
Health Care 9 - 9
Electronics and Energy 8 4 12
Consumer 3 - 3
Corporate and Unallocated 37 - 37
Total Expense $ 98 $ 16 $ 114
The preceding restructuring charges were recorded in the income statement as
follows:
(Millions) 2015
Cost of sales 40
Selling, general and administrative expenses 62
Research, development and related expenses 12
Total $ 114
Components of these restructuring actions, including cash and non-cash
impacts, follow:
(Millions) Employee-Related Asset-Related Total
Expense incurred $ 98 $ 16 $ 114
Non-cash changes (8) (16) (24)
Cash payments (27) - (27)
Accrued restructuring action balances as of December 31, 2015 $ 63 $ - $ 63
Cash payments (57) - (57)
Accrued restructuring action balances as of December 31, 2016 $ 6 $ - $ 6
Cash payments (6) - (6)
Accrued restructuring action balances as of December 31, 2017 $ - $ - $ -
Non-cash changes include certain pension settlements and special termination
benefits recorded in accrued defined benefit pension and postretirement
benefits and accelerated deprecation resulting from the cessation of use of
certain long-lived assets.
NOTE 5. Supplemental Income Statement Information
Other expense (income), net consists of the following:
(Millions) 2017 2016 2015
Interest expense $ 322 $ 199 $ 149
Interest income (50) (29) (26)
Total $ 272 $ 170 $ 123
The Company recorded an early debt extinguishment charge of approximately $96
million which was included within interest expense in the fourth quarter of
2017.
NOTE 6. Supplemental Balance Sheet Information
Accounts payable (included as a separate line item in the Consolidated Balance
Sheet) includes drafts payable on demand of $74 million at December 31, 2017,
and $88 million at December 31, 2016. Accumulated depreciation for capital
leases totaled $48 million and $89 million as of December 31, 2017, and 2016,
respectively. Additional supplemental balance sheet information is provided in
the table that follows.
(Millions) 2017 2016
Other current assets
Derivative assets-current $ 37 $ 148
Insurance related (receivables, prepaid expenses and other) 71 109
Other 158 193
Total other current assets $ 266 $ 450
Property, plant and equipment - at cost
Land $ 348 $ 341
Buildings and leasehold improvements 7,681 7,252
Machinery and equipment 15,907 14,935
Construction in progress 843 809
Capital leases 135 162
Gross property, plant and equipment 24,914 23,499
Accumulated depreciation (16,048) (14,983)
Property, plant and equipment - net $ 8,866 $ 8,516
Other assets
Deferred income taxes $ 511 $ 422
Prepaid pension and post retirement 237 52
Insurance related receivables and other 63 68
Cash surrender value of life insurance policies 241 236
Equity method investments 70 60
Cost method and other investments 80 68
Other 193 272
Total other assets $ 1,395 $ 1,178
Other current liabilities
Accrued rebates $ 516 $ 458
Deferred income 513 551
Derivative liabilities 135 92
Employee benefits and withholdings 208 155
Contingent liability claims and other 179 201
Property, sales-related and other taxes 277 248
Pension and postretirement benefits 69 66
Other 812 701
Total other current liabilities $ 2,709 $ 2,472
Other liabilities
Long term income taxes payable $ 1,287 $ 244
Employee benefits 319 256
Contingent liability claims and other 727 719
Capital lease obligations 60 45
Deferred income 37 15
Deferred income taxes 235 145
Other 297 224
Total other liabilities $ 2,962 $ 1,648
NOTE 7. Supplemental Equity and Comprehensive Income Information
Common stock ($.01 par value per share) of 3.0 billion shares is authorized,
with 944,033,056 shares issued. Preferred stock, without par value, of 10
million shares is authorized but unissued.
Cash dividends declared and paid totaled $1.175 and $1.11 per share for each
quarter in 2017 and 2016, respectively, which resulted in total year declared
dividends of $4.70 and $4.44 per share, respectively. In 2015, 3M's Board of
Directors declared a second, third, and fourth quarter dividend of $1.025 per
share, which resulted in total year 2015 declared dividends of $3.075 per
share. In December 2014, 3M's Board of Directors declared a first quarter
2015 dividend of $1.025 per share (paid in March 2015).
Changes in Accumulated Other Comprehensive Income (Loss) Attributable to 3M by
Component
Defined Benefit Cash Flow Total
Pension and Hedging Accumulated
Cumulative Postretirement Instruments, Other
Translation Plans Unrealized Comprehensive
(Millions) Adjustment Adjustment Gain (Loss) Income (Loss)
Balance at December 31, 2014, net of tax: $ (1,095) $ (5,293) $ 99 $ (6,289)
Other comprehensive income (loss), before tax:
Amounts before reclassifications (447) 367 212 132
Amounts reclassified out - 537 (174) 363
Total other comprehensive income (loss), before tax (447) 904 38 495
Tax effect (137) (415) (13) (565)
Total other comprehensive income (loss), net of tax (584) 489 25 (70)
Balance at December 31, 2015, net of tax: $ (1,679) $ (4,804) $ 124 $ (6,359)
Other comprehensive income (loss), before tax:
Amounts before reclassifications (244) (1,122) 57 (1,309)
Amounts reclassified out - 421 (109) 312
Total other comprehensive income (loss), before tax (244) (701) (52) (997)
Tax effect (85) 177 19 111
Total other comprehensive income (loss), net of tax (329) (524) (33) (886)
Balance at December 31, 2016, net of tax: $ (2,008) $ (5,328) $ 91 $ (7,245)
Other comprehensive income (loss), before tax:
Amounts before reclassifications 91 (600) (311) (820)
Amounts reclassified out - 483 (7) 476
Total other comprehensive income (loss), before tax 91 (117) (318) (344)
Tax effect 279 169 115 563
Total other comprehensive income (loss), net of tax 370 52 (203) 219
Balance at December 31, 2017, net of tax: $ (1,638) $ (5,276) $ (112) $ (7,026)
Income taxes are not provided for foreign translation relating to permanent
investments in international subsidiaries, but tax effects within cumulative
translation does include impacts from items such as net investment hedge
transactions. Reclassification adjustments are made to avoid double counting
in comprehensive income items that are also recorded as part of net income.
Reclassifications out of Accumulated Other Comprehensive Income Attributable
to 3M
Amounts Reclassified from
Details about Accumulated Other Accumulated Other Comprehensive Income
Comprehensive Income Components Year ended December 31, Location on Income
(Millions) 2017 2016 2015 Statement
Gains (losses) associated with defined benefit pension and postretirement
plans amortization
Transition asset $ - $ 1 $ 1 See Note 12
Prior service benefit 89 92 79 See Note 12
Net actuarial loss (570) (506) (626) See Note 12
Curtailments/Settlements (2) (8) 9 See Note 12
Total before tax (483) (421) (537)
Tax effect 116 148 176 Provision for income taxes
Net of tax $ (367) $ (273) $ (361)
Cash flow hedging instruments gains (losses)
Foreign currency forward/option contracts $ 8 $ 110 $ 178 Cost of sales
Commodity price swap contracts - - (2) Cost of sales
Interest rate swap contracts (1) (1) (2) Interest expense
Total before tax 7 109 174
Tax effect (3) (39) (63) Provision for income taxes
Net of tax $ 4 $ 70 $ 111
Total reclassifications for the period, net of tax $ (363) $ (203) $ (250)
NOTE 8. Supplemental Cash Flow Information
(Millions) 2017 2016 2015
Cash income tax payments, net of refunds $ 1,604 $ 1,888 $ 2,331
Cash interest payments 214 194 134
Cash interest payments include interest paid on debt and capital lease
balances, including net interest payments/receipts related to accreted debt
discounts/premiums, payment of debt issue costs, as well as net interest
payments/receipts associated with interest rate swap contracts. Cash interest
payments exclude the cash paid for early debt extinguishment costs. Additional
details are described in Note 11.
Individual amounts in the Consolidated Statement of Cash Flows exclude the
impacts of acquisitions, divestitures and exchange rate impacts, which are
presented separately.
Transactions related to investing and financing activities with significant
non-cash components are as follows:
· 3M sold and leased-back, under a capital lease, certain recently
constructed machinery and equipment in return for municipal bonds with the
City of Nevada, Missouri during 2017 and 2016 valued at approximately $13
million and $12 million, respectively, as of the transaction date.
In addition, as discussed in Note 7, in the fourth quarter of 2014, 3M's Board
of Directors declared a first quarter 2015 dividend of $1.025 per share (paid
in March 2015).
NOTE 9. Income Taxes
Income Before Income Taxes
(Millions) 2017 2016 2015
United States $ 4,149 $ 4,366 $ 4,399
International 3,399 2,687 2,424
Total $ 7,548 $ 7,053 $ 6,823
Provision for Income Taxes
(Millions) 2017 2016 2015
Currently payable
Federal $ 1,022 $ 1,192 $ 1,338
State 59 75 101
International 722 733 566
Tax Cuts and Jobs Act (TCJA) non-current transition tax provision 623 - -
Deferred
Federal 162 (3) (55)
State 15 9 6
International 76 (11) 26
Total $ 2,679 $ 1,995 $ 1,982
Components of Deferred Tax Assets and Liabilities
(Millions) 2017 2016
Deferred tax assets:
Accruals not currently deductible
Employee benefit costs $ 178 $ 195
Product and other claims 204 326
Miscellaneous accruals 98 92
Pension costs 760 1,217
Stock-based compensation 210 302
Net operating/capital loss carryforwards 89 93
Foreign tax credits 32 22
Currency translation 59 -
Inventory 51 53
Gross deferred tax assets 1,681 2,300
Valuation allowance (81) (47)
Total deferred tax assets $ 1,600 $ 2,253
Deferred tax liabilities:
Product and other insurance receivables $ (6) $ (27)
Accelerated depreciation (447) (730)
Intangible amortization (784) (903)
Currency translation - (276)
Other (87) (40)
Total deferred tax liabilities $ (1,324) $ (1,976)
Net deferred tax assets $ 276 $ 277
The net deferred tax assets are included as components of Other Assets and
Other Liabilities within the Consolidated Balance Sheet. See Note 6
"Supplemental Balance Sheet Information" for further details.
As of December 31, 2017, the Company had tax effected operating losses,
capital losses, and tax credit carryovers for federal (approximately $7
million), state (approximately $12 million), and international (approximately
$70 million), with all amounts net before valuation allowances. The federal
tax attribute carryovers will expire after 15 to 20 years, the state after 5
to 10 years, and the international after one to three years or have an
indefinite carryover period. The tax attributes being carried over arise as
certain jurisdictions may have tax losses or may have inabilities to utilize
certain losses without the same type of taxable income. As of December 31,
2017, the Company has provided $81 million of valuation allowance against
certain of these deferred tax assets based on management's determination that
it is more-likely-than-not that the tax benefits related to these assets will
not be realized.
Reconciliation of Effective Income Tax Rate
2017 2016 2015
Statutory U.S. tax rate 35.0 % 35.0 % 35.0 %
State income taxes - net of federal benefit 0.8 0.9 1.1
International income taxes - net (6.3) (2.7) (3.9)
U.S. TCJA - net impacts 10.1 - -
U.S. research and development credit (0.7) (0.5) (0.5)
Reserves for tax contingencies 2.2 0.2 (1.0)
Domestic Manufacturer's deduction (1.8) (1.8) (1.8)
Employee share-based payments (3.2) (2.8) (0.1)
All other - net (0.6) - 0.3
Effective worldwide tax rate 35.5 % 28.3 % 29.1 %
The effective tax rate for 2017 was 35.5 percent, compared to 28.3 percent in
2016, an increase of 7.2 percentage points, impacted by several factors.
Primary factors that increased the Company's effective tax rate included the
impacts due to the Tax Cuts and Jobs Act (TCJA) being enacted in 2017 (see
further information below) and remeasurements and establishment of 3M's
uncertain tax positions. Combined, these factors increased the Company's
effective tax rate by 12.1 percentage points. The increase was partially
offset by a 4.9 percentage point decrease, which related to international
taxes that were impacted by increasing benefits from the Company's supply
chain centers of expertise, changes to the geographic mix of income before
taxes and prior year cash optimization actions, higher year-on-year excess tax
benefit for employee share-based payment, increased benefits from the R&D
tax credit, a reduction of state taxes, and other items.
The effective tax rate for 2016 was 28.3 percent, compared to 29.1 percent in
2015, a decrease of 0.8 percentage points, impacted by several factors.
Primary factors that decreased the Company's effective tax rate included the
recognition of excess tax benefits beginning in 2016 related to employee
share-based payments (resulting from the adoption of ASU No. 2016-09, as
discussed in Note 1) and a reduction in state taxes. Combined, these factors
decreased the Company's effective tax rate by 3.2 percentage points. The
decrease was partially offset by a 2.4 percentage point increase, which
related to remeasurements of 3M's uncertain tax positions and international
taxes that were impacted by changes to both the geographic mix of income
before taxes and additional tax expense related to global cash optimization
actions.
The TCJA was enacted in December 2017. Among other things, the TCJA reduces
the U.S. federal corporate tax rate from 35 percent to 21 percent beginning in
2018, requires companies to pay a one-time transition tax on previously
unremitted earnings of non-U.S. subsidiaries that were previously tax deferred
and creates new taxes on certain foreign sourced earnings. The SEC staff
issued Staff Accounting Bulletin (SAB) 118, which provides guidance on
accounting for enactment effects of the TCJA. SAB 118 provides a measurement
period of up to one year from the TCJA's enactment date for companies to
complete their accounting under ASC 740. In accordance with SAB 118, to the
extent that a company's accounting for certain income tax effects of the TCJA
is incomplete but it is able to determine a reasonable estimate, it must
record a provisional estimate in its financial statements. If a company cannot
determine a provisional estimate to be included in its financial statements,
it should continue to apply ASC 740 on the basis of the provisions of the tax
laws that were in effect immediately before the enactment of the TCJA.
In connection with 3M's initial analysis of the impact of the enactment of the
TCJA, the Company recorded a net tax expense of $762 million in the fourth
quarter of 2017. For various reasons that are discussed more fully below,
including the issuance of additional technical and interpretive guidance, 3M
has not completed its accounting for the income tax effects of certain
elements of the TCJA. However, with respect to the following, 3M was able to
make reasonable estimates of the TCJA's effects and, as such, recorded
provisional amounts:
Transition tax: The transition tax is a tax on previously untaxed accumulated
and current earnings and profits (E&P) of certain of the Company's
non-U.S. subsidiaries. To determine the amount of the transition tax, 3M must
determine, in addition to other factors, the amount of post-1986 E&P of
the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid
on such earnings. Further, the transition tax is based in part on the amount
of those earnings held in cash and other specified assets. 3M was able to make
a reasonable estimate of the transition tax and recorded a provisional
obligation and additional income tax expense of $745 million in the fourth
quarter of 2017. However, the Company is continuing to gather additional
information and will consider additional technical guidance to more precisely
compute and account for the amount of the transition tax. This amount may
change when 3M finalizes the calculation of post-1986 foreign E&P
previously deferred from U.S. federal taxation and finalizes the amounts held
in cash or other specified assets. The TCJA's transition tax is payable over
eight years beginning in 2018. As of December 31, 2017, 3M reflected $122
million and $623 million in current accrued income taxes and long term income
taxes payable, respectively.
Remeasurement of deferred tax assets/liabilities and other impacts: 3M
remeasured certain deferred tax assets and liabilities based on the rates at
which they are expected to reverse in the future, which is generally 21
percent under the TCJA. 3M is still analyzing certain aspects of the TCJA,
considering additional technical guidance, and refining its calculations,
which could potentially affect the measurement of these balances or
potentially give rise to new deferred tax amounts. This includes the potential
impacts of the global low-taxed income ("GILTI") provision within the TCJA on
deferred tax assets/liabilities. 3M also is considering other impacts of the
2017 enactment of the TCJA including, but not limited to effects on the
Company's indefinite reinvestment assertion. As discussed further below in
this Note 9, 3M previously has not provided deferred taxes on unremitted
earnings attributable to international companies that have been considered to
be reinvested indefinitely. The full effects of underlying tax rates of the
TCJA causes some reassessment of previous indefinite reinvestment assertions
with respect to certain jurisdictions. While 3M was able to make a reasonable
estimate of these impacts, it may be affected by other analyses related to the
TCJA, including, but not limited to, the calculation of the transition tax on
deferred foreign income. The provisional amount recorded in the fourth quarter
of 2017 related to deferred tax assets/liabilities and other impacts was a net
additional income tax expense of $17 million.
3M has not completed its full analysis with respect to the GILTI provision
within the TCJA and is not yet able to make reasonable estimates of its
related effects. Therefore, no provisional adjustments relative to GILTI were
recorded. Currently, 3M has not yet elected a policy as to whether it will
recognize deferred taxes for basis differences expected to reverse as GILTI or
whether 3M will account for GILTI as period costs if and when incurred. 3M is
not aware of other elements of the TCJA for which the Company was not yet able
to make reasonable estimates of the enactment impact and for which it would
continue accounting for them in accordance with ASC 740 on the basis of the
tax laws in effect before the TCJA.
The Company files income tax returns in the U.S. federal jurisdiction, and
various states and foreign jurisdictions. With few exceptions, the Company is
no longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for years before 2005.
The IRS has completed its field examination of the Company's U.S. federal
income tax returns for the years 2005 through 2014. The Company protested
certain IRS positions within these tax years and entered into the
administrative appeals process with the IRS. In December 2012, the Company
received a statutory notice of deficiency for the 2006 year. The Company filed
a petition in Tax Court in the first quarter of 2013 relating to the 2006 tax
year.
Currently, the Company is under examination by the IRS for its U.S. federal
income tax returns for the years 2015, 2016, and 2017. It is anticipated that
the IRS will complete its examination of the Company for 2015 by the end of
the third quarter of 2018, for 2016 by the end of the first quarter of 2018,
and for 2017 by the end of the first quarter of 2019. As of December 31,
2017, the IRS has not proposed any significant adjustments to the Company's
tax positions for which the Company is not adequately reserved.
Payments relating to other proposed assessments arising from the 2005 through
2017 examinations may not be made until a final agreement is reached between
the Company and the IRS on such assessments or upon a final resolution
resulting from the administrative appeals process or judicial action. In
addition to the U.S. federal examination, there is also audit activity in
several U.S. state and foreign jurisdictions.
3M anticipates changes to the Company's uncertain tax positions due to the
closing and resolution of audit issues for various audit years mentioned above
and closure of statutes. Currently, the Company is estimating a decrease in
unrecognized tax benefits during the next 12 months as a result of anticipated
resolutions of audit issues.
A reconciliation of the beginning and ending amount of gross unrecognized tax
benefits (UTB) is as follows:
Federal, State and Foreign Tax
(Millions) 2017 2016 2015
Gross UTB Balance at January 1 $ 319 $ 381 $ 583
Additions based on tax positions related to the current year 119 67 77
Additions for tax positions of prior years 149 43 140
Reductions for tax positions of prior years (38) (66) (399)
Settlements (3) (95) (4)
Reductions due to lapse of applicable statute of limitations (16) (11) (16)
Gross UTB Balance at December 31 $ 530 $ 319 $ 381
Net UTB impacting the effective tax rate at December 31 $ 526 $ 333 $ 369
The total amount of UTB, if recognized, would affect the effective tax rate by
$526 million as of December 31, 2017, $333 million as of December 31, 2016,
and $369 million as of December 31, 2015. The ending net UTB results from
adjusting the gross balance for items such as Federal, State, and non-U.S.
deferred items, interest and penalties, and deductible taxes. The net UTB is
included as components of Other Assets, Accrued Income Taxes, and Other
Liabilities within the Consolidated Balance Sheet.
The Company recognizes interest and penalties accrued related to unrecognized
tax benefits in tax expense. The Company recognized in the consolidated
statement of income on a gross basis approximately $20 million of expense, $10
million of expense, and $2 million of expense in 2017, 2016, and 2015,
respectively. The amount of interest and penalties recognized may be an
expense or benefit due to new or remeasured unrecognized tax benefit accruals.
At December 31, 2017, and December 31, 2016, accrued interest and penalties
in the consolidated balance sheet on a gross basis were $68 million and $52
million, respectively. Included in these interest and penalty amounts are
interest and penalties related to tax positions for which the ultimate
deductibility is highly certain but for which there is uncertainty about the
timing of such deductibility. Because of the impact of deferred tax
accounting, other than interest and penalties, the disallowance of the shorter
deductibility period would not affect the annual effective tax rate but would
accelerate the payment of cash to the taxing authority to an earlier period.
As a result of certain employment commitments and capital investments made by
3M, income from certain manufacturing activities in the following countries is
subject to reduced tax rates or, in some cases, is exempt from tax for years
through the following: Thailand (2018), China (2019), Korea (2019),
Switzerland (2023), Singapore (2025), and Brazil (2073). The income tax
benefits attributable to the tax status of these subsidiaries are estimated to
be $228 million (37 cents per diluted share) in 2017, $142 million (23 cents
per diluted share) in 2016, and $114 million (18 cents per diluted share) in
2015.
The Company has not provided deferred taxes on unremitted earnings
attributable to international companies that have been considered to be
reinvested indefinitely. As noted above, the effects of the TCJA caused some
reassessment of previous indefinite reinvestment assertions with respect to
certain jurisdictions. While 3M was able to make a reasonable estimate of
these impacts, it may be affected by other analyses related to the TCJA. The
unremitted earnings relate to ongoing operations and were approximately $15
billion as of December 31, 2017. Because of the multiple avenues in 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.
NOTE 10. Marketable Securities
The Company invests in asset-backed securities, certificates of deposit/time
deposits, commercial paper, and other securities. The following is a summary
of amounts recorded on the Consolidated Balance Sheet for marketable
securities (current and non-current).
December 31, December 31,
(Millions) 2017 2016
Corporate debt securities $ 14 $ 10
Commercial paper 899 14
Certificates of deposit/time deposits 76 197
U.S. municipal securities 3 3
Asset-backed securities:
Automobile loan related 16 31
Credit card related 68 18
Other - 7
Asset-backed securities total 84 56
Current marketable securities $ 1,076 $ 280
U.S. municipal securities $ 27 $ 17
Non-current marketable securities $ 27 $ 17
Total marketable securities $ 1,103 $ 297
At December 31, 2017 and 2016, gross unrealized, gross realized, and net
realized gains and/or losses (pre-tax) were not material.
The balance at December 31, 2017, 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) December 31, 2017
Due in one year or less $ 1,071
Due after one year through five years 18
Due after five years through ten years 14
Total marketable securities $ 1,103
3M has a diversified marketable securities portfolio. Within this portfolio,
asset-backed securities primarily include interests in automobile loans,
credit cards and other asset-backed securities. 3M's investment policy allows
investments in asset-backed securities with minimum credit ratings of Aa3 by
Moody's Investors Service or AA- by Standard & Poor's or Fitch Ratings or
DBRS. Asset-backed securities must be rated by at least two of the
aforementioned rating agencies, one of which must be Moody's Investors Service
or Standard & Poor's. At December 31, 2017, all asset-backed security
investments were in compliance with this policy. Approximately 90 percent of
all asset-backed security investments were rated AAA or A-1+ by
Standard & Poor's and/or Aaa or P-1 by Moody's Investors Service and/or
AAA or F1+ by Fitch Ratings. Interest rate risk and credit risk related to the
underlying collateral may impact the value of investments in asset-backed
securities, while factors such as general conditions in the overall credit
market and the nature of the underlying collateral may affect the liquidity of
investments in asset-backed securities. 3M does not currently expect risk
related to its holding in asset-backed securities to materially impact its
financial condition or liquidity.
NOTE 11. Long-Term Debt and Short-Term Borrowings
The following debt tables reflect effective interest rates, which include the
impact of interest rate swaps, as of December 31, 2017. If the debt was
issued on a combined basis, the debt has been separated to show the impact of
the fixed versus floating effective interest rates. Carrying value includes
the impact of debt issuance costs and fair value hedging activity. Long-term
debt and short-term borrowings as of December 31 consisted of the following:
Long-Term Debt
Currency/ Effective Final
(Millions) Fixed vs. Interest Maturity Carrying Value
Description / 2017 Principal Amount Floating Rate Date 2017 2016
Medium-term note (repaid in 2017) USD Fixed - % - $ - $ 649
Medium-term note (500 million Euros) Euro Floating - % 2018 600 523
Medium-term note ($450 million) USD Floating 1.50 % 2018 448 448
Medium-term note ($600 million) USD Floating 1.63 % 2019 596 598
Medium-term note ($25 million) USD Fixed 1.74 % 2019 25 25
Medium-term note (650 million Euros) Euro Floating - % 2020 779 680
Medium-term note ($300 million) USD Floating 1.58 % 2020 296 297
Medium-term note ($200 million) USD Floating 1.49 % 2020 198 199
Eurobond (300 million Euros) Euro Floating - % 2021 378 336
Eurobond (300 million Euros) Euro Fixed 1.97 % 2021 358 312
Medium-term note ($600 million) USD Fixed 1.63 % 2021 598 598
Medium-term note (500 million Euros) Euro Fixed 0.45 % 2022 597 520
Medium-term note ($600 million) USD Fixed 2.17 % 2022 595 593
Medium-term note (600 million Euros) Euro Fixed 1.14 % 2023 712 619
Medium-term note ($650 million) USD Fixed 2.26 % 2023 647 -
Medium-term note ($550 million) USD Fixed 3.04 % 2025 546 546
Medium-term note (750 million Euros) Euro Fixed 1.71 % 2026 885 770
Medium-term note ($650 million) USD Fixed 2.25 % 2026 641 640
Medium-term note ($850 million) USD Fixed 2.95 % 2027 839 -
30-year debenture ($220 million) USD Fixed 6.01 % 2028 227 342
Medium-term note (500 million Euros) Euro Fixed 1.90 % 2030 589
- More to follow, for following part double click ID:nRSM6559Eh eatures and are callable at a fixed price and preset date. The amendments do not require an
accounting change for securities held at a discount. For 3M, this ASU is effective January 1, 2019 with a modified
retrospective transition resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first
reporting period in which the guidance is adopted. Early adoption is permitted. 3M's marketable security portfolio includes
very limited instances of callable debt securities held at a premium. As a result, the Company does not expect this ASU to
have a material impact on 3M's consolidated results of operations and financial condition.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, that clarifies when changes to the terms or
conditions of a share-based payment award must be accounted for as a modification. The general model for accounting for
modifications of share-based payment awards is to record the incremental value arising from the changes as additional
compensation cost. Under the new standard, fewer changes to the terms of an award would require accounting under this
modification model. For 3M, this ASU is effective January 1, 2018, with early adoption permitted. Because the Company does
not typically make changes to the terms or conditions of its issued share-based payment awards, 3M does not expect this ASU
to have a material impact on its consolidated results of operations and financial condition.
In May 2017, the FASB issued ASU No. 2017-10, Determining the Customer of the Operation Services, that clarifies how an
operating entity determines the customer of the operation services for transactions within the scope of a service
concession arrangement. Service concession arrangements are typically agreements between a grantor and an operating entity
whereby the operating entity will operate the grantor's infrastructure (i.e. airports, roadways, bridges, and prisons) for
a specified period of time. The operating entity also may be required to maintain the infrastructure and provide
capital-intensive maintenance to enhance or extend its life. In such arrangements, typically the operation services (i.e.
operation and maintenance of a roadway) would be used by third parties (i.e. drivers). The ASU clarifies that the grantor,
not the third party, is the customer of the operation services in such arrangements. For 3M, this new standard is effective
coincident with the Company's January 1, 2018 adoption of ASU No. 2014-09. Because the Company is not typically a party to
agreements within the scope of accounting for service concession arrangements, 3M does not expect this ASU to have a
material impact on its consolidated results of operations and financial condition.
In July 2017, the FASB issued ASU No. 2017-11, (Part I) Accounting for Certain Financial Instruments with Down Round
Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain
Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The new standard
applies to issuers of financial instruments with down-round features. A down-round provision is a term in an equity-linked
financial instrument (i.e. a freestanding warrant contract or an equity conversion feature embedded within a host debt or
equity contract) that triggers a downward adjustment to the instrument's strike price (or conversion price) if equity
shares are issued at a lower price (or equity-linked financial instruments are issued at a lower strike price) than the
instrument's then-current strike price. The purpose of the feature is typically to protect the instrument's counterparty
from future issuances of equity shares at a more favorable price. The ASU amends (1) the classification of such instruments
as liabilities or equity by revising the certain guidance relative to evaluating if they must be accounted for as
derivative instruments and (2) the guidance on recognition and measurement of freestanding equity-classified instruments.
For 3M, this ASU is effective January 1, 2019, with early adoption permitted. Because the Company has not issued financial
instruments with down-round features, 3M does not expect this ASU to have a material impact on its consolidated results of
operations and financial condition.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The ASU amends
existing guidance to simplify the application of hedge accounting in certain situations and allow companies to better align
their hedge accounting with their risk management activities. Existing standards contain certain requirements for an
instrument to qualify for hedge accounting relative to initial and ongoing assessments of hedge effectiveness. While an
initial quantitative test to establish the hedge relationship is highly effective would still be required, the new ASU
permits subsequent qualitative assessments for certain hedges instead of a quantitative test and expands the timeline for
performing the initial quantitative assessment. The ASU also simplifies related accounting by eliminating the requirement
to separately measure and report hedge ineffectiveness. Instead, for qualifying cash flow and net investment hedges, the
entire change in fair value (including the amount attributable to ineffectiveness) will be recorded within other
comprehensive income and reclassified to earnings in the same income statement line that is used to present the earnings
effect of the hedged item when the hedged item affects earnings. For fair value hedges, generally, the entire change in
fair value of the hedging instrument would also be presented in the same income statement line as the hedged item. The new
standard also simplifies the accounting for fair value hedges of interest rate risks and expands an entity's ability to
hedge nonfinancial and financial risk components. In addition, the guidance also eases certain documentation requirements,
modifies the accounting for components excluded from the assessment of hedge effectiveness, and requires additional tabular
disclosures of derivative and hedge-related information. For 3M, this ASU is effective January 1, 2019, with a modified
retrospective transition resulting in a cumulative-effect adjustment recorded to the opening balance of retained earnings
as of the adoption date. Early adoption is permitted. The Company is currently assessing this ASU's impact on 3M's
consolidated results of operations and financial condition.
NOTE 2. Acquisitions and Divestitures
Acquisitions:
3M makes acquisitions of certain businesses from time to time that are aligned with its strategic intent with respect to,
among other factors, growth markets and adjacent product lines or technologies. 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.
In addition to business combinations, 3M periodically acquires certain tangible and/or intangible assets and purchases
interests in certain enterprises that do not otherwise qualify for accounting as business combinations. These transactions
are largely reflected as additional asset purchase and investment activity.
2017 acquisitions:
In September 2017, 3M purchased all of the ownership interests of Elution Technologies, LLC, a Vermont-based manufacturer
of test kits that help enable food and beverage companies ensure their products are free from certain potentially harmful
allergens such as peanuts, soy or milk. Elution is reported within the Company's Health Care business.
In October 2017, 3M completed the acquisition of the underlying legal entities and associated assets of Scott Safety, which
is headquartered in Monroe, North Carolina, from Johnson Controls for $2.0 billion of cash, net of cash acquired. Scott
Safety is a premier manufacturer of innovative products, including self-contained breathing apparatus systems, gas and
flame detection instruments, and other safety devices that complement 3M's personal safety portfolio. The business had
revenues of approximately $570 million in 2016. Scott Safety is reported within 3M's Safety and Graphics business. The
allocation of purchase consideration related to Scott Safety is considered preliminary with provisional amounts primarily
related to intangible assets and certain tax-related, contingent liability and working capital items. 3M expects to
finalize the allocation of purchase price within the one year measurement-period following the acquisition.
Pro forma information related to acquisitions has not been included because the impact on the Company's consolidated
results of operations was not considered material. The following table shows the impact on the consolidated balance sheet
of the purchase price allocations related to 2017 acquisitions and assigned finite-lived intangible asset weighted-average
lives.
2017 Acquisition Activity
Finite-Lived
Intangible-Asset
(Millions) Scott Weighted-Average
Asset (Liability) Safety Other Total Lives (Years)
Accounts receivable $ 100 $ - $ 100
Inventory 79 - 79
Other current assets 10 - 10
Property, plant, and equipment 74 - 74
Purchased finite-lived intangible assets:
Customer related intangible assets 439 3 442 15
Other technology-based intangible assets 125 2 127 10
Definite-lived tradenames 285 - 285 17
Other amortizable intangible assets - 1 1 5
Purchased goodwill 1,296 6 1,302
Accounts payable and other liabilities (100) - (100)
Deferred tax asset/(liability) (297) - (297)
Net assets acquired $ 2,011 $ 12 $ 2,023
Supplemental information:
Cash paid $ 2,020 $ 12 $ 2,032
Less: Cash acquired 9 - 9
Cash paid, net of cash acquired $ 2,011 $ 12 $ 2,023
Purchased identifiable finite-lived intangible assets related to acquisition activity in 2017 totaled $855 million. The
associated finite-lived intangible assets acquired in 2017 will be amortized on a systematic and rational basis (generally
straight line) over a weighted-average life of 15 years (lives ranging from four to 17 years). Acquired in-process research
and development and identifiable intangible assets for which significant assumed renewals or extensions of underlying
arrangements impacted the determination of their useful lives were not material.
2016 acquisitions:
In September 2016, 3M acquired all of the outstanding shares of Semfinder, headquartered in Kreuzlingen, Switzerland.
Semfinder is a leading developer of precision software that enables efficient coding of medical procedures in multiple
languages. The purchase price paid for these business combinations (net of cash acquired) during 2016 aggregated to $16
million. Semfinder is reported within 3M's Health Care business.
Adjustments in 2016 to the preliminary purchase price allocations of other acquisitions within the allocation period
primarily related to the identification of contingent liabilities and certain tax-related items aggregating to
approximately $35 million along with other balances related to the 2015 acquisition of Capital Safety Group S.A.R.L. The
change to provisional amounts resulted in an immaterial impact to the results of operations in the third quarter of 2016, a
portion of which related to earlier quarters in the measurement period.
Purchased identifiable finite-lived intangible assets related to acquisition activity in 2016 totaled $4 million. The
associated finite-lived intangible assets acquired in 2016 will be amortized on a systematic and rational basis (generally
straight line) over a weighted-average life of 8 years (lives ranging from two to 20 years). Acquired in-process research
and development and identifiable intangible assets for which significant assumed renewals or extensions of underlying
arrangements impacted the determination of their useful lives were not material.
2015 acquisitions:
In March 2015, 3M purchased all of the outstanding shares of Ivera Medical Corp., headquartered in San Diego, California.
Ivera Medical Corp. is a manufacturer of health care products that disinfect and protect devices used for access into a
patient's bloodstream and is reported within 3M's Health Care business. In addition, in the first quarter of 2015, 3M
purchased the remaining interest in a former equity method investment reported within 3M's Industrial business for an
immaterial amount.
In August 2015, 3M acquired all of the outstanding shares of Capital Safety Group S.A.R.L., with operating headquarters in
Bloomington, Minnesota, from KKR & Co. L.P. for $1.7 billion, net of cash acquired. The net assets acquired included the
assumption of $0.8 billion of debt. Capital Safety is a leading global provider of fall protection equipment and is
reported within 3M's Safety and Graphics business.
In August 2015, 3M acquired the assets and liabilities associated with Polypore International, Inc.'s Separations Media
business (hereafter referred to as Membrana), headquartered in Wuppertal, Germany, for $1.0 billion. Membrana is a leading
provider of microporous membranes and modules for filtration in the life sciences, industrial and specialty segments and is
reported within 3M's Industrial business.
The impact on the consolidated balance sheet of the purchase price allocations related to 2015 acquisitions and assigned
weighted-average intangible asset lives, including adjustments relative to other acquisitions within the measurement
period, follows. Adjustments in 2015 to the preliminary allocations primarily related to the identification and valuation
of certain indefinite-lived intangible assets. The change to provisional amounts resulted in an immaterial impact to
results of operations in the fourth quarter of 2015, a portion of which relates to earlier quarters in the measurement
period.
2015 Acquisition Activity
Finite-Lived
Intangible-Asset
(Millions) Capital Polypore Separations Weighted-Average
Asset (Liability) Safety Media (Membrana) Other Total Lives (Years)
Accounts receivable $ 66 $ 30 $ 7 $ 103
Inventory 63 35 4 102
Other current assets 10 1 1 12
Property, plant, and equipment 36 128 7 171
Purchased finite-lived intangible assets:
Customer related intangible assets 445 270 40 755 16
Patents 44 11 7 62 7
Other technology-based intangible assets 85 42 1 128 7
Definite-lived tradenames 26 6 1 33 16
Other amortizable intangible assets - - 2 2 4
Purchased indefinite-lived intangible assets 520 - - 520
Purchased goodwill 1,764 636 95 2,495
Accounts payable and other liabilities, net of other assets (105) (122) (5) (232)
Interest bearing debt (766) - - (766)
Deferred tax asset/(liability) (464) - (7) (471)
Net assets acquired $ 1,724 $ 1,037 $ 153 $ 2,914
Supplemental information:
Cash paid $ 1,758 $ 1,037 $ 154 $ 2,949
Less: Cash acquired 34 - 1 35
Cash paid, net of cash acquired $ 1,724 $ 1,037 $ 153 $ 2,914
Purchased identifiable finite-lived intangible assets related to acquisition activity in 2015 totaled $1.0 billion. The
associated finite-lived intangible assets acquired in 2015 will be amortized on a systematic and rational basis (generally
straight line) over a weighted-average life of 14 years (lives ranging from two to 20 years). Indefinite-lived intangible
assets of $520 million relate to certain tradenames associated with the Capital Safety acquisition which have been in
existence for over 55 years, have a history of leading market-share positions, have been and are intended to be
continuously renewed, and the associated products of which are expected to generate cash flows for 3M for an indefinite
period of time. Acquired in-process research and development and identifiable intangible assets for which significant
assumed renewals or extensions of underlying arrangements impacted the determination of their useful lives were not
material.
Divestitures:
3M may divest certain businesses from time to time based upon review of the Company's portfolio considering, among other
items, factors relative to the extent of strategic and technological alignment and optimization of capital deployment, in
addition to considering if selling the businesses results in the greatest value creation for the Company and for
shareholders.
In January 2015, 3M completed the sale of its global Static Control business to Desco Industries Inc., based in Chino,
California. 2014 sales of this business were $46 million. This transaction was not considered material and was reported
within 3M's Electronics and Energy business.
In the fourth quarter of 2015, 3M entered into agreements with One Equity Partners Capital Advisors L.P. (OEP) to sell the
assets of 3M's library systems business. The sales of the North American business and the majority of the business outside
of North America closed in October and November 2015, respectively. The sale of the remainder of the library systems
business closed in the first quarter of 2016 (discussed further below). In December 2015, 3M also completed the sale of
Faab Fabricauto, a wholly-owned subsidiary of 3M, to Hills Numberplates Limited. The library systems business, part of the
former Traffic Safety and Security Division, delivers circulation management solutions to library customers with on-premise
hardware and software, maintenance and service, and an emerging cloud-based digital lending platform. Faab Fabricauto, also
part of the former Traffic Safety and Security Division, is a leading French manufacturer of license plates and signage
solutions. The aggregate cash proceeds relative to the 2015 global library systems and Faab Fabricauto divestiture
transactions was $104 million. The Company recorded within 3M's Safety and Graphics business a net pre-tax gain of $40
million in 2015 as a result of the sale and any adjustment of carrying value.
In the first quarter of 2016, 3M completed the sale of the remainder of the assets of 3M's library systems business to One
Equity Partners Capital Advisors L.P. (OEP). 3M had previously sold the North American business and the majority of the
business outside of North America to OEP in the fourth quarter of 2015 which was reported within 3M's Safety and Graphics
business. Also in the first quarter of 2016, 3M sold to Innovative Chemical Products Group, a portfolio company of Audax
Private Equity, the assets of 3M's pressurized polyurethane foam adhesives business (formerly known as Polyfoam). This
business is a provider of pressurized polyurethane foam adhesive formulations and systems into the residential roofing,
commercial roofing and insulation and industrial foam segments in the United States with annual sales of approximately $20
million and was reported within 3M's Industrial business. The Company recorded a pre-tax gain of $40 million in the first
quarter of 2016 as a result of the sales of these businesses.
In October 2016, 3M sold the assets of its temporary protective films business to Pregis LLC. This business, with annual
sales of approximately $50 million, is a provider of adhesive-backed temporary protective films used in a broad range of
industries and was reported within 3M's Industrial business. In December 2016, 3M sold the assets of its cathode battery
technology out-licensing business, with annual sales of approximately $10 million, to UMICORE. This business was reported
within 3M's Electronics and Energy business. The aggregate selling price relative to these two businesses was $86 million.
The Company recorded a pre-tax gain of $71 million in the fourth quarter of 2016 as a result of the sales of these
businesses.
In January 2017, 3M sold the assets of its safety prescription eyewear business, with annual sales of approximately $45
million, to HOYA Vision Care. The Company recorded a pre-tax gain of $29 million in the first quarter of 2017 as a result
of this sale, which was reported within the Company's Safety and Graphics business.
In May 2017, 3M completed the related sale or transfer of control, as applicable, of its identity management business to
Gemalto N.V. This business, with 2016 sales of approximately $205 million, is a leading provider in identity management
solutions, including biometric hardware and software that enable identity verification and authentication, as well as
secure materials and document readers. In June 2017, 3M also completed the sale of its tolling and automated license/number
plate recognition business, with annual sales of approximately $40 million, to Neology, Inc. 3M's tolling and automated
license/number plate recognition business includes RFID readers and tags, automatic vehicle classification systems, lane
controller and host software, and back office software and services. It also provides mobile and fixed cameras, software,
and services in automated license/number plate recognition. 3M received proceeds of $833 million, or $809 million net of
cash sold, and reflected a pre-tax gain of $458 million as a result of these two divestitures, which was reported within
the Company's Safety and Graphics business.
In October 2017, 3M sold its electronic monitoring business to an affiliate of Apax Partners. This business, with annual
sales of approximately $95 million, is a provider of electronic monitoring technologies, serving hundreds of correctional
and law enforcement agencies around the world. 3M received proceeds of $201 million, net of cash sold, and reflected a
pre-tax gain of $98 million in the fourth quarter of 2017 as a result of this divestiture, which was reported within the
Company's Safety and Graphics business.
In the fourth quarter of 2017, 3M sold the assets of an electrical marking/labeling business within its Electronics and
Energy business. The former activity, proceeds and gain were not considered material.
In December 2017, 3M agreed to sell substantially all of its Communication Markets Division to Corning Incorporated, for
$900 million, subject to closing and other adjustments. This business, with annual sales of approximately $400 million
consists of optical fiber and copper passive connectivity solutions for the telecommunications industry including 3M's
xDSL, FTTx, and structured cabling solutions and, in certain countries, telecommunications system integration services.
This sale is expected to close in 2018, subject to consultation or information requirements with relevant works councils
and to customary closing conditions and regulatory approvals. The 3M expects a pre-tax gain of approximately $500 million
as a result of this divestiture that will be reported within the Company's Electronics and Energy business.
In February 2018, 3M closed on the sale of certain personal safety product offerings primarily focused on noise,
environmental, and heat stress monitoring to TSI, Inc. This business has annual sales of approximately $15 million. The
transaction is expected to result in a pre-tax gain of less than $20 million that will be reported within the Company's
Safety and Graphics business.
The aggregate operating income of these businesses was approximately $45 million, $50 million and not significant in 2017,
2016 and 2015, respectively. The approximate amounts of major assets and liabilities associated with disposal groups
classified as held-for-sale as of December 31, 2017 and December 31, 2016, included the following:
December 31, December 31,
(Millions) 2017 2016
Accounts receivable $ 25 $ 25
Property, plant and equipment (net) 20 25
Intangible assets - 35
Deferred revenue (other current liabilities) - 35
In addition, approximately $270 million of goodwill was estimated to be attributable to disposal groups classified as
held-for-sale as of both December 31, 2017 and December 31, 2016, 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 3. Goodwill and Intangible Assets
Purchased goodwill from acquisitions totaled $1.3 billion in 2017, none of which is deductible for tax purposes. Purchased
goodwill from acquisitions totaled $14 million in 2016, none of which is deductible for tax purposes. The acquisition
activity in the following table also includes the net impact of adjustments to the preliminary allocation of purchase price
within the one year measurement-period following prior acquisitions, which increased goodwill by $39 million during 2016.
The amounts in the "Translation and other" column in the following table primarily relate to changes in foreign currency
exchange rates. The goodwill balance by business segment follows:
Goodwill
Dec. 31, 2016 2016 Dec. 31, 2017 2017 2017 Dec. 31,
2015 acquisition translation 2016 acquisition divestiture translation 2017
(Millions) Balance activity and other Balance activity activity and other Balance
Industrial $ 2,573 $ - $ (37) $ 2,536 $ - $ - $ 142 $ 2,678
Safety and Graphics 3,342 41 (59) 3,324 1,296 (323) 122 4,419
Health Care 1,624 12 (27) 1,609 6 - 67 1,682
Electronics and Energy 1,510 - (21) 1,489 - - 35 1,524
Consumer 200 - 8 208 - - 2 210
Total Company $ 9,249 $ 53 $ (136) $ 9,166 $ 1,302 $ (323) $ 368 $ 10,513
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 17, effective in the first quarter of 2017, the Company changed its business segment reporting in its
continuing effort to improve the alignment of its businesses around markets and customers. For any product changes that
resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill
of the associated reporting units. During the first quarter of 2017, the Company completed its assessment of any potential
goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed. The
Company also completed its annual goodwill impairment test in the fourth quarter of 2017 for all reporting units and
determined that no impairment existed. In addition, the Company had no impairments of goodwill in prior years.
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 December 31, follow:
December 31, December 31,
(Millions) 2017 2016
Customer related intangible assets $ 2,332 $ 1,939
Patents 561 602
Other technology-based intangible assets 583 524
Definite-lived tradenames 678 420
Other amortizable intangible assets 207 211
Total gross carrying amount $ 4,361 $ 3,696
Accumulated amortization - customer related (874) (797)
Accumulated amortization - patents (489) (497)
Accumulated amortization - other technology based (292) (302)
Accumulated amortization - definite-lived tradenames (256) (236)
Accumulated amortization - other (162) (173)
Total accumulated amortization $ (2,073) $ (2,005)
Total finite-lived intangible assets - net $ 2,288 $ 1,691
Non-amortizable intangible assets (primarily tradenames) 648 629
Total intangible assets - net $ 2,936 $ 2,320
Certain tradenames acquired by 3M are not amortized because they have been in existence for over 55 years, have a history
of leading-market share positions, have been and are intended to be continuously renewed, and the associated products of
which are expected to generate cash flows for 3M for an indefinite period of time.
Amortization expense for the years ended December 31 follows:
(Millions) 2017 2016 2015
Amortization expense $ 238 $ 262 $ 229
Expected amortization expense for acquired amortizable intangible assets recorded as of December 31, 2017 follows:
After
(Millions) 2018 2019 2020 2021 2022 2022
Amortization expense $ 252 $ 242 $ 231 $ 221 $ 208 $ 1,134
The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from
estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment
of intangible assets, accelerated amortization of intangible assets and other events. 3M expenses the costs incurred to
renew or extend the term of intangible assets.
NOTE 4. Restructuring Actions and Exit Activities
2017 Restructuring Actions:
During the second quarter of 2017, management approved and committed to undertake certain restructuring actions primarily
focused on portfolio and footprint optimization. These actions affected approximately 1,300 positions worldwide and
resulted in a second quarter 2017 pre-tax charge of $99 million. Remaining activities related to restructuring are expected
to be completed by the end of 2018.
Restructuring charges are summarized by business segment as follows:
Second Quarter 2017
(Millions) Employee-Related
Industrial $ 39
Safety and Graphics 9
Health Care 2
Electronics and Energy 7
Consumer 36
Corporate and Unallocated 6
Total Expense $ 99
The preceding restructuring charges were recorded in the income statement as follows:
(Millions) Second Quarter 2017
Cost of sales $ 86
Selling, general and administrative expenses 5
Research, development and related expenses 8
Total $ 99
Restructuring actions, including cash and non-cash impacts, follow:
(Millions) Employee-Related
Expense incurred in the second quarter of 2017 $ 99
Cash payments (8)
Adjustments (3)
Accrued restructuring action balances as of December 31, 2017 $ 88
2017 Exit Activities:
During the first quarter of 2017, the Company recorded net pre-tax charges of $24 million related to exit activities. These
charges related to employee reductions, primarily in Western Europe. During the fourth quarter of 2017, the Company
recorded net pre-tax charges of $23 million related to exit activities. These charges related to employee reductions,
primarily in the United States and Western Europe.
2015 Restructuring Actions:
During the fourth quarter of 2015, management approved and committed to undertake certain restructuring actions primarily
focused on structural overhead, largely in the U.S. and slower-growing markets, with particular emphasis on Europe, Middle
East, and Africa (EMEA) and Latin America. This impacted approximately 1,700 positions worldwide and resulted in a
fourth-quarter 2015 pre-tax charge of $114 million.
Components of these restructuring charges are summarized by business segment as follows:
2015
(Millions) Employee-Related Asset-Related Total
Industrial $ 30 $ 12 $ 42
Safety and Graphics 11 - 11
Health Care 9 - 9
Electronics and Energy 8 4 12
Consumer 3 - 3
Corporate and Unallocated 37 - 37
Total Expense $ 98 $ 16 $ 114
The preceding restructuring charges were recorded in the income statement as follows:
(Millions) 2015
Cost of sales 40
Selling, general and administrative expenses 62
Research, development and related expenses 12
Total $ 114
Components of these restructuring actions, including cash and non-cash impacts, follow:
(Millions) Employee-Related Asset-Related Total
Expense incurred $ 98 $ 16 $ 114
Non-cash changes (8) (16) (24)
Cash payments (27) - (27)
Accrued restructuring action balances as of December 31, 2015 $ 63 $ - $ 63
Cash payments (57) - (57)
Accrued restructuring action balances as of December 31, 2016 $ 6 $ - $ 6
Cash payments (6) - (6)
Accrued restructuring action balances as of December 31, 2017 $ - $ - $ -
Non-cash changes include certain pension settlements and special termination benefits recorded in accrued defined benefit
pension and postretirement benefits and accelerated deprecation resulting from the cessation of use of certain long-lived
assets.
NOTE 5. Supplemental Income Statement Information
Other expense (income), net consists of the following:
(Millions) 2017 2016 2015
Interest expense $ 322 $ 199 $ 149
Interest income (50) (29) (26)
Total $ 272 $ 170 $ 123
The Company recorded an early debt extinguishment charge of approximately $96 million which was included within interest
expense in the fourth quarter of 2017.
NOTE 6. Supplemental Balance Sheet Information
Accounts payable (included as a separate line item in the Consolidated Balance Sheet) includes drafts payable on demand of
$74 million at December 31, 2017, and $88 million at December 31, 2016. Accumulated depreciation for capital leases totaled
$48 million and $89 million as of December 31, 2017, and 2016, respectively. Additional supplemental balance sheet
information is provided in the table that follows.
(Millions) 2017 2016
Other current assets
Derivative assets-current $ 37 $ 148
Insurance related (receivables, prepaid expenses and other) 71 109
Other 158 193
Total other current assets $ 266 $ 450
Property, plant and equipment - at cost
Land $ 348 $ 341
Buildings and leasehold improvements 7,681 7,252
Machinery and equipment 15,907 14,935
Construction in progress 843 809
Capital leases 135 162
Gross property, plant and equipment 24,914 23,499
Accumulated depreciation (16,048) (14,983)
Property, plant and equipment - net $ 8,866 $ 8,516
Other assets
Deferred income taxes $ 511 $ 422
Prepaid pension and post retirement 237 52
Insurance related receivables and other 63 68
Cash surrender value of life insurance policies 241 236
Equity method investments 70 60
Cost method and other investments 80 68
Other 193 272
Total other assets $ 1,395 $ 1,178
Other current liabilities
Accrued rebates $ 516 $ 458
Deferred income 513 551
Derivative liabilities 135 92
Employee benefits and withholdings 208 155
Contingent liability claims and other 179 201
Property, sales-related and other taxes 277 248
Pension and postretirement benefits 69 66
Other 812 701
Total other current liabilities $ 2,709 $ 2,472
Other liabilities
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