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REG - 3M Company - Annual Financial Report




 



RNS Number : 0867O
3M Company
05 February 2021
 

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Notes to Consolidated Financial Statements

 

NOTE 1. Significant Accounting Policies

 

Consolidation: 3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products. All applicable subsidiaries are consolidated. All intercompany transactions are eliminated. As used herein, the term "3M" or "Company" refers to 3M Company and subsidiaries unless the context indicates otherwise.

 

Basis of presentation: Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year presentation.

 

As described in Note 19, 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). Also, 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. Information provided herein reflects the impact of these changes for all periods presented.

 

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 consolidating 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.

 

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.

 

Cash and cash equivalents: Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less when acquired.

 

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.

 

Investments: All equity securities that do not result in consolidation and are not accounted for under the equity method are measured at fair value with changes therein reflected in net income. 3M utilizes the measurement alternative for equity investments that do not have readily determinable fair values and measures these investments at cost less impairment plus or minus observable price changes in orderly transactions. The balance of these securities is disclosed in Note 7.

 

Other assets: Other assets include deferred income taxes, product and other insurance receivables, the cash surrender value of life insurance policies, medical equipment in rental arrangements utilized primarily by hospitals and other medical clinics, prepaid pension and postretirement and other long-term assets. Investments in life insurance are reported at the amount that could be realized under contract at the balance sheet date, with any changes in cash surrender value or contract value during the period accounted for as an adjustment of premiums paid. Cash outflows and inflows associated with life insurance activity are included in "Purchases of marketable securities and investments" and "Proceeds from maturities and sale of marketable securities and investments," respectively.

 

Inventories: Inventories are stated at the lower of cost or net realizable value (NRV), which is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Cost is determined on a first-in, first-out basis.

 

Property, plant and equipment: Property, plant and equipment, including capitalized interest and internal direct engineering costs, are recorded at cost. Depreciation of property, plant and equipment generally is computed using the straight-line method based on the estimated useful lives of the assets. The estimated useful lives of buildings and improvements primarily range from ten to forty years, with the majority in the range of twenty to forty years. The estimated useful lives of machinery and equipment primarily range from three to fifteen years, with the majority in the range of five to ten years. Fully depreciated assets other than capitalized internally developed software are retained in property, plant and equipment and accumulated depreciation accounts until disposal. Upon disposal, assets and related accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to operations. Property, plant and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss recorded is calculated by the excess of the asset's carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. 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.

 

Conditional asset retirement obligations: A liability is initially recorded at fair value for an asset retirement obligation associated with the retirement of tangible long-lived assets in the period in which it is incurred if a reasonable estimate of fair value can be made. Conditional asset retirement obligations exist for certain long-term assets of the Company. The obligation is initially measured at fair value using expected present value techniques. Over time the liabilities are accreted for the change in their present value and the initial capitalized costs are depreciated over the remaining useful lives of the related assets. The asset retirement obligation liability was $145 million and $137 million at December 31, 2020 and 2019, respectively.

 

Goodwill: Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. Goodwill is tested for impairment annually in the fourth quarter of each year, and is tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level, with all goodwill assigned to a reporting unit. Reporting units are one level below the business segment level, but are required to be combined when reporting units within the same segment have similar economic characteristics. 3M did not combine any of its reporting units for impairment testing. The impairment loss is measured as the amount by which the carrying value of the reporting unit's net assets exceeds its estimated fair value, not to exceed the carrying value of the reporting unit's goodwill. The estimated fair value of a reporting unit is determined using earnings for the reporting unit multiplied by a price/earnings ratio for comparable industry groups or by using a discounted cash flow analysis. Companies have the option to first assess qualitative factors to determine whether the fair value of a reporting unit is not "more likely than not" less than its carrying amount, which is commonly referred to as "Step 0". 3M has chosen not to apply Step 0 for its annual goodwill assessments.

 

Intangible assets: Intangible asset types include customer related, patents, other technology-based, tradenames and other intangible assets acquired from an independent party. Intangible assets with a definite life are amortized over a period ranging from four to twenty years on a systematic and rational basis (generally straight line) that is representative of the asset's use. The estimated useful lives vary by category, with customer-related largely between ten to twenty years, patents largely between seven to twenty years, other technology-based largely between four to twenty years, definite lived tradenames largely between six and twenty years, and other intangibles largely between five to eight years. Intangible assets are removed from their respective gross asset and accumulated amortization accounts when they are no longer in use. Refer to Note 4 for additional details on the gross amount and accumulated amortization of the Company's intangible assets. Costs related to internally developed intangible assets, such as patents, are expensed as incurred, within "Research, development and related expenses."

 

Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss is recognized when the carrying amount exceeds the estimated undiscounted cash flows from the asset's or asset group's ongoing use and eventual disposition. If an impairment is identified, the amount of the impairment loss recorded is calculated by the excess of the asset's carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis.

 

Intangible assets with an indefinite life, namely certain tradenames, are not amortized. Indefinite-lived intangible assets are tested for impairment annually, and are tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. An impairment loss would be recognized when the fair value is less than the carrying value of the indefinite-lived intangible asset.

 

Restructuring actions: Restructuring actions generally include significant actions involving employee-related severance charges, contract termination costs, and impairment or accelerated depreciation/amortization of assets associated with such actions. Employee-related severance charges are largely based upon distributed employment policies and substantive severance plans. These charges are reflected in the quarter when the actions are probable and the amounts are estimable, which typically is when management approves the associated actions. Severance amounts for which affected employees in certain circumstances are required to render service in order to receive benefits at their termination dates were measured at the date such benefits were communicated to the applicable employees and recognized as expense over the employees' remaining service periods. Contract termination and other charges primarily reflect costs to terminate a contract before the end of its term (measured at fair value at the time the Company provided notice to the counterparty) or costs that will continue to be incurred under the contract for its remaining term without economic benefit to the Company. Asset impairment charges related to intangible assets and property, plant and equipment reflect the excess of the assets' carrying values over their fair values.

 

Revenue (sales) recognition: The Company sells a wide range of products to a diversified base of customers around the world and has no material concentration of credit risk or significant payment terms extended to customers. The vast majority of 3M's customer arrangements contain a single performance obligation to transfer manufactured goods as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and, therefore, not distinct. However, to a limited extent 3M also enters into customer arrangements that involve intellectual property out-licensing, multiple performance obligations (such as equipment, installation and service), software with coterminous post-contract support, services and non-standard terms and conditions.

 

The Company recognizes revenue in light of the guidance of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. Revenue is recognized when control of goods has transferred to customers. For the majority of the Company's customer arrangements, control transfers to customers at a point-in-time when goods/services have been delivered as that is generally when legal title, physical possession and risks and rewards of goods/services transfers to the customer. In limited arrangements, control transfers over time as the customer simultaneously receives and consumes the benefits as 3M completes the performance obligation(s).

 

Revenue is recognized at the transaction price which the Company expects to be entitled. When determining the transaction price, 3M estimates variable consideration applying the portfolio approach practical expedient under ASC 606. The main sources of variable consideration for 3M are customer rebates, trade promotion funds, and cash discounts. These sales incentives are recorded as a reduction to revenue at the time of the initial sale using the most-likely amount estimation method. The most-likely amount method is based on the single most likely outcome from a range of possible consideration outcomes. The range of possible consideration outcomes are primarily derived from the following inputs: sales terms, historical experience, trend analysis, and projected market conditions in the various markets served. Because 3M serves numerous markets, the sales incentive programs offered vary across businesses, but the most common incentive relates to amounts paid or credited to customers for achieving defined volume levels or growth objectives. There are no material instances where variable consideration is constrained and not recorded at the initial time of sale. Free goods are accounted for as an expense and recorded in cost of sales. Product returns are recorded as a reduction to revenue based on anticipated sales returns that occur in the normal course of business. 3M primarily has assurance-type warranties that do not result in separate performance obligations. Sales, use, value-added, and other excise taxes are not recognized in revenue. The Company has elected to present revenue net of sales taxes and other similar taxes.

 

For substantially all arrangements recognized over time, the Company applies the "right to invoice" practical expedient. As a result, 3M recognizes revenue at the invoice amount when the entity has a right to invoice a customer at an amount that corresponds directly with the value to the customer of the Company's performance completed to date.

 

For contracts with multiple performance obligations, the Company allocates the contract's transaction price to each performance obligation using 3M's best estimate of the standalone selling price of each distinct good or service in the contract.

 

The Company did not recognize any material revenue in the current reporting period for performance obligations that were fully satisfied in previous periods.

 

The Company does not have material unfulfilled performance obligation balances for contracts with an original length greater than one year in any years presented. Additionally, the Company does not have material costs related to obtaining a contract with amortization periods greater than one year for any year presented.

 

3M applies ASC 606 utilizing the following allowable exemptions or practical expedients:

·      Exemption to not disclose the unfulfilled performance obligation balance for contracts with an original length of one year or less.

·      Practical expedient relative to costs of obtaining a contract by expensing sales commissions when incurred because the amortization period would have been one year or less.

·      Portfolio approach practical expedient relative to estimation of variable consideration.

·      "Right to invoice" practical expedient based on 3M's right to invoice the customer at an amount that reasonably represents the value to the customer of 3M's performance completed to date.

·      Election to present revenue net of sales taxes and other similar taxes.

·      Sales-based royalty exemption permitting future intellectual property out-licensing royalty payments to be excluded from the otherwise required remaining performance obligations disclosure

 

The Company recognizes revenue from the rental of durable medical devices in accordance with the guidance of ASC 842, Leases. The Company recognizes rental revenue based on the length of time a device is used by the patient/organization, (i) at the contracted rental rate for contracted customers and (ii) generally, retail price for non-contracted customers. The leases are short-term in nature, generally providing for daily or monthly pricing, and are all classified as operating leases.

 

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.

 

Advertising and merchandising: These costs are charged to operations in the period incurred, and totaled $278 million in 2020, $348 million in 2019 and $396 million in 2018.

 

Research, development and related expenses: These costs are charged to operations in the period incurred and are shown on a separate line of the Consolidated Statement of Income. Research, development and related expenses totaled $1.878 billion in 2020, $1.911 billion in 2019 and $1.821 billion in 2018. Research and development expenses, covering basic scientific research and the application of scientific advances in the development of new and improved products and their uses, totaled $1.146 billion in 2020, $1.253 billion in 2019 and $1.253 billion in 2018. Related expenses primarily include technical support; internally developed patent costs, which include costs and fees incurred to prepare, file, secure and maintain patents; amortization of externally acquired patents and externally acquired in-process research and development; and gains/losses associated with certain corporate approved investments in R&D-related ventures.

 

Internal-use software: The Company capitalizes direct costs of services used in the development of, and external software acquired for use as, internal-use software. Amounts capitalized are amortized over a period of three to seven years, generally on a straight-line basis, unless another systematic and rational basis is more representative of the software's use. Amounts are reported as a component of either machinery and equipment or finance leases within property, plant and equipment. Fully depreciated internal-use software assets are removed from property, plant and equipment and accumulated depreciation accounts.

 

Environmental: Environmental expenditures relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed. Reserves for liabilities related to anticipated remediation costs are recorded on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of feasibility studies, the Company's commitment to a plan of action, or approval by regulatory agencies. Environmental expenditures for capital projects that contribute to current or future operations generally are capitalized and depreciated over their estimated useful lives.

 

Income taxes: The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exists. As of December 31, 2020 and 2019, the Company had valuation allowances of $135 million and $158 million on its deferred tax assets, respectively. The Company recognizes and measures its uncertain tax positions based on the rules under ASC 740, Income Taxes.

 

Earnings per share: The difference in the weighted average 3M shares outstanding for calculating basic and diluted earnings per share attributable to 3M common shareholders is the result of the dilution associated with the Company's stock-based compensation plans. Certain options outstanding under these stock-based compensation plans during the years 2020, 2019 and 2018 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 (18.1 million average options for 2020, 8.9 million average options for 2019, and 2.9 million average options for 2018). The computations for basic and diluted earnings per share for the years ended December 31 follow:

 

Earnings Per Share Computations

 













(Amounts in millions, except per share amounts)

    


2020

    

2019

    

2018


Numerator:












Net income attributable to 3M



$

 5,384


$

 4,570


$

 5,349














Denominator:












Denominator for weighted average 3M common shares outstanding - basic




 577.6



 577.0



 588.5


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




 4.6



 8.1



 13.5


Denominator for weighted average 3M common shares outstanding - diluted




 582.2



 585.1



 602.0














Earnings per share attributable to 3M common shareholders - basic



$

 9.32


$

 7.92


$

 9.09


Earnings per share attributable to 3M common shareholders - diluted



$

 9.25


$

 7.81


$

 8.89


 

Stock-based compensation: The Company recognizes compensation expense for its stock-based compensation programs, which include stock options, restricted stock, restricted stock units (RSUs), performance shares, and the General Employees' Stock Purchase Plan (GESPP). Under applicable accounting standards, the fair value of share-based compensation is determined at the grant date and the recognition of the related expense is recorded over the period in which the share-based compensation vests. However, with respect to income taxes, the related deduction from taxes payable is based on the award's intrinsic value at the time of exercise (for an option) or on the fair value upon vesting of the award (for RSUs), which can be either greater (creating an excess tax benefit) or less (creating a tax deficiency) than the deferred tax benefit recognized as compensation cost is recognized in the financial statements. These excess tax benefits/deficiencies are recognized as income tax benefit/expense in the statement of income and, within the statement of cash flows, are classified in operating activities in the same manner as other cash flows related to income taxes. The extent of excess tax benefits/deficiencies is subject to variation in 3M stock price and timing/extent of RSU vestings and employee stock option exercises.

 

Comprehensive income: Total comprehensive income and the components of accumulated other comprehensive income (loss) are presented in the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Changes in Equity. Accumulated other comprehensive income (loss) is composed of foreign currency translation effects (including hedges of net investments in international companies), defined benefit pension and postretirement plan adjustments, unrealized gains and losses on available-for-sale debt securities, and unrealized gains and losses on cash flow hedging instruments. The Company uses the portfolio approach for releasing income tax effects from accumulated other comprehensive income.

 

Derivatives and hedging activities: All derivative instruments within the scope of ASC 815, Derivatives and Hedging, are recorded on the balance sheet at fair value. The Company uses interest rate swaps, currency swaps, and foreign currency forward and option contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity market volatility. All hedging instruments that qualify for hedge accounting are designated and effective as hedges, in accordance with U.S. generally accepted accounting principles. If the underlying hedged transaction ceases to exist, all changes in fair value of the related derivatives that have not been settled are recognized in current earnings. Instruments that do not qualify for hedge accounting are marked to market with changes recognized in current earnings. Cash flows from derivative instruments are classified in the statement of cash flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships. The Company does not hold or issue derivative financial instruments for trading purposes and is not a party to leveraged derivatives.

 

Credit risk: The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps, currency swaps, and forward and option contracts. However, the Company's risk is limited to the fair value of the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counterparties. 3M enters into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow each counterparty to net settle amounts owed between a 3M entity and the counterparty as a result of multiple, separate derivative transactions. The Company does not anticipate nonperformance by any of these counterparties. 3M has elected to present the fair value of derivative assets and liabilities within the Company's consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation.

 

Fair value measurements: 3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under the standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

Acquisitions: The Company accounts for business acquisitions in accordance with ASC 805, Business Combinations. This standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration) and the exclusion of transaction and acquisition-related restructuring costs from acquisition accounting. 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.

 

Leases: 3M determines if an arrangement is a lease upon inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used. 3M determines certain service agreements that contain the right to use an underlying asset are not leases because 3M does not control how and for what purpose the identified asset is used. Examples of such agreements include master supply agreements, product processing agreements, warehouse and distribution services agreements, power purchase agreements, and transportation purchase agreements.

 

After adoption of ASU 2016-02 and related standards in 2019, operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The discount rate used to calculate present value is 3M's incremental borrowing rate or, if available, the rate implicit in the lease. 3M determines the incremental borrowing rate for leases using a portfolio approach based primarily on the lease term and the economic environment of the applicable country or region.

 

As a lessee, the Company leases distribution centers, office space, land, and equipment. Certain 3M lease agreements include rental payments adjusted annually based on changes in an inflation index. 3M's leases do not contain material residual value guarantees or material restrictive covenants. Lease expense is recognized on a straight-line basis over the lease term.

 

Certain leases include one or more options to renew, with terms that can extend the lease term up to five years. 3M includes options to renew the lease as part of the right of use lease asset and liability when it is reasonably certain the Company will exercise the option. In addition, certain leases contain fair value purchase and termination options with an associated penalty. In general, 3M is not reasonably certain to exercise such options.

 

For the measurement and classification of its lease agreements, 3M groups lease and non-lease components into a single lease component for all underlying asset classes. Variable lease payments primarily include payments for non-lease components, such as maintenance costs, payments for leased assets used beyond their noncancelable lease term as adjusted for contractual options to terminate or renew, and payments for non-components such as sales tax. Certain 3M leases contain immaterial variable lease payments based on number of units produced.

 



 

New Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revised guidance for the accounting for credit losses on financial instruments within its scope, and through March 2020 issued ASUs that amended the standard (ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-11, and ASU No. 2020-03). The new standard introduced an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modified the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. With respect to available-for-sale (AFS) debt securities, the ASU amended the current other-than-temporary impairment model. For such securities with unrealized losses, entities still consider if a portion of any impairment is related only to credit losses and therefore recognized as a reduction in income. However, rather than also reflecting that credit loss amount as a permanent reduction in cost (amortized cost) basis of that AFS debt security, the ASU requires that credit losses be reflected as an allowance. As a result, under certain circumstances, a recovery in value could result in previous allowances, or portions thereof, reversing back into income. For 3M, this ASU was effective January 1, 2020. 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.

 

In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligned 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. The ASU permitted either a prospective or retrospective transition approach. For 3M, the ASU was effective as of January 1, 2020, with the Company adopting on a prospective basis. Relevant capitalizable costs are included in prepaid expenses or other non-current assets, as applicable, prospectively beginning in 2020. Implementation costs incurred as part of 3M's cloud-computing service arrangements were not material in 2020.

 

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by, among other things, eliminating 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. The transition requirements are primarily prospective and the effective date for 3M is January 1, 2021, with early adoption permitted. As 3M does not have material activity associated with items such as franchise taxes or the types of transactions described above, does not typically have entities subject to relevant loss limitations and is not currently addressing enacted tax law changes for which this ASU applies, 3M does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.

 

In January 2020, the FASB issued 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. This ASU clarifies that 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. Further, this ASU notes 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. The transition requirements are prospective and the effective date for 3M is January 1, 2021, with early adoption permitted. As 3M does not currently have a material amount of equity securities and equity method investments or relevant derivatives, 3M 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.

 

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 and in January 2021 issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. These ASUs provides temporary optional expedients and exceptions to existing guidance on contract modifications and hedge accounting to facilitate the market transition from existing reference rates, such as LIBOR which is being phased out beginning at the end of 2021, to alternate reference rates, such as SOFR. These standards were effective upon issuance and allowed application to contract changes as early as January 1, 2020. These provisions may impact the Company as contract modifications and other changes occur during the LIBOR transition period. The Company continues to evaluate the optional relief guidance provided within these ASUs, has reviewed its debt securities, bank facilities, and derivative instruments and continues to evaluate commercial contracts that may 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. Refer to Note 7 for deferred revenue balances at December 31, 2019 and 2020. Approximately $410 million of the December 31, 2019 balance was recognized as revenue during the year ended December 31, 2020, while approximately $600 million of the December 31, 2018 balance was recognized as revenue during the year ended December 31, 2019.

 

Operating Lease Revenue:

Net sales includes rental revenue from durable medical devices as part of operating lease arrangements (reported within the Medical Solutions Division), which was $586 million for the year ended December 31, 2020. Applicable rental revenue for the years ended December 31, 2019 and 2018 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:














Year ended 




December 31,


Net Sales (Millions)

    

2020

    

2019

    

2018


Abrasives


$

 1,180


$

 1,387


$

 1,512


Automotive Aftermarket



 1,102



 1,229



 1,356


Closure and Masking Systems



 993



 1,111



 1,224


Communication Markets



 -



 -



 175


Electrical Markets



 1,121



 1,200



 1,244


Industrial Adhesives and Tapes



 2,562



 2,689



 2,841


Personal Safety



 4,433



 3,504



 3,601


Roofing Granules



 390



 366



 353


Other Safety and Industrial



 (14)



 28



 108


  Total Safety and Industrial Business Segment


$

 11,767


$

 11,514


$

 12,414













Advanced Materials


$

 1,036


$

 1,245


$

 1,236


Automotive and Aerospace



 1,612



 1,913



 2,074


Commercial Solutions



 1,529



 1,785



 1,863


Electronics



 3,767



 3,711



 3,971


Transportation Safety



 890



 943



 951


Other Transportation and Electronics



 (7)



 (6)



 9


   Total Transportation and Electronics Business Segment


$

 8,827


$

 9,591


$

 10,104













Drug Delivery


$

 146


$

 372


$

 407


Food Safety



 342



 341



 328


Health Information Systems



 1,140



 1,177



 837


Medical Solutions



 4,787



 3,439



 3,073


Oral Care



 1,076



 1,321



 1,353


Separation and Purification Sciences



 853



 791



 817


Other Health Care



 1



 (10)



 6


Total Health Care Business Group


$

 8,345


$

 7,431


$

 6,821













Consumer Health Care


$

 366


$

 379


$

 389


Home Care



 1,066



 991



 1,013


Home Improvement



 2,527



 2,297



 2,216


Stationery and Office



 1,223



 1,378



 1,399


Other Consumer



 154



 106



 110


Total Consumer Business Group


$

 5,336


$

 5,151


$

 5,127













Corporate and Unallocated


$

 (1)


$

 110


$

 50


Elimination of Dual Credit



 (2,090)



 (1,661)



 (1,751)


Total Company


$

 32,184


$

 32,136


$

 32,765


 




















Year ended December 31, 2020


 Net Sales (Millions)

    

Americas


Asia Pacific

    

Europe, Middle East and Africa

    

Other Unallocated

    

Worldwide


Safety and Industrial


$

 6,177


$

 2,805


$

 2,791


$

 (6)


$

 11,767


Transportation and Electronics



 2,455



 5,097



 1,282



 (7)



 8,827


Health Care



 5,062



 1,478



 1,809



 (4)



 8,345


Consumer



 3,832



 939



 567



 (2)



 5,336


Corporate and Unallocated



 (1)



 -



 -



 -



 (1)


Elimination of Dual Credit



 (1,000)



 (750)



 (340)



 -



 (2,090)


Total Company


$

 16,525


$

 9,569


$

 6,109


$

 (19)


$

 32,184


 




















Year ended December 31, 2019


 Net Sales (Millions)

    

Americas


Asia Pacific

    

Europe, Middle East and Africa

    

Other Unallocated

    

Worldwide


Safety and Industrial


$

 6,008


$

 2,844


$

 2,666


$

 (4)


$

 11,514


Transportation and Electronics



 2,901



 5,221



 1,472



 (3)



 9,591


Health Care



 4,200



 1,490



 1,743



 (2)



 7,431


Consumer



 3,641



 952



 559



 (1)



 5,151


Corporate and Unallocated



 109



 -



 1



 -



 110


Elimination of Dual Credit



 (735)



 (711)



 (215)



 -



 (1,661)


Total Company


$

 16,124


$

 9,796


$

 6,226


$

 (10)


$

 32,136


 




















Year ended December 31, 2018


 Net Sales (Millions)

    

Americas


Asia Pacific

    

Europe, Middle East and Africa

    

Other Unallocated

    

Worldwide


Safety and Industrial


$

 6,345


$

 3,076


$

 2,996


$

 (3)


$

 12,414


Transportation and Electronics



 3,015



 5,513



 1,577



 (1)



 10,104


Health Care



 3,636



 1,453



 1,733



 (1)



 6,821


Consumer



 3,562



 980



 586



 (1)



 5,127


Corporate and Unallocated



 51



 -



 -



 (1)



 50


Elimination of Dual Credit



 (745)



 (768)



 (238)



 -



 (1,751)


Total Company


$

 15,864


$

 10,254


$

 6,654


$

 (7)


$

 32,765


 

Americas included United States net sales to customers of $13.9 billion, $13.2 billion and $12.8 billion in 2020, 2019 and 2018, respectively. Asia Pacific included China/Hong Kong net sales to customers of $3.5 billion, $3.3 billion and $3.6 billion in 2020, 2019, and 2018, respectively.

 

 

NOTE 3. 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 year ended December 31, 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. Based in Pittsburgh, Pennsylvania, M*Modal is a leading healthcare technology provider of cloud-based, conversational artificial intelligence-powered systems that help physicians efficiently capture and improve the patient narrative. 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 in 2019 were approximately $300 million and $25 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. Acelity is a leading global medical technology company focused on advanced wound care and specialty surgical applications marketed under the KCI brand. In the first quarter of 2020, the Company paid certain considerations 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.

 

Proforma information related to these acquisitions has not been included as 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 the 2019 acquisitions and assigned finite-lived asset weighted average lives.

 
















2019 Acquisition Activity













Finite-Lived













Intangible-Asset


(Millions)

    


    

    


    

    


    

Weighted-Average


Asset (Liability)


M*Modal


Acelity


Total


Lives (Years)


Accounts receivable


$

 75


$

 295


$

 370




Inventory



 -



 186



 186




Other current assets



 2



 65



 67




Property, plant, and equipment



 8



 147



 155




Purchased finite-lived intangible assets:













Customer related intangible assets



 275



 1,760



 2,035


 18


Other technology-based intangible assets



 160



 1,390



 1,550


 10


Definite-lived tradenames



 11



 485



 496


 16


Purchased goodwill



 517



 2,952



 3,469




Other assets



 58



 73



 131




Accounts payable and other liabilities



 (127)



 (438)



 (565)




Interest bearing debt



 (251)



 (2,322)



 (2,573)




Deferred tax asset/(liability) and accrued income taxes



 (24)



 (288)



 (312)

















Net assets acquired


$

 704


$

 4,305


$

 5,009

















Supplemental information:













Cash paid


$

 708


$

 4,486


$

 5,194




Less: Cash acquired



 4



 206



 210




Cash paid, net of cash acquired


$

 704


$

 4,280


$

 4,984




Consideration payable



 -



 25



 25






$

 704


$

 4,305


$

 5,009




 

Purchased identifiable finite-lived intangible assets related to acquisitions which closed in 2019 totaled $4.081 billion. The associated finite-lived intangible assets acquired will be amortized on a systematic and rational basis (generally straight line) over a weighted-average life of 14 years (lives ranging from 6 to 19 years).

 

2018 acquisition:

 

There were no acquisitions that closed during 2018.

 

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 19 (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 the first quarter of 2019, the Company sold certain oral care technology comprising a business and reflected an earnout on a previous divestiture resulting in an aggregate immaterial gain.

 

In August 2019, 3M closed on the sale of its gas and flame detection business, a leader in fixed and portable gas and flame detection, to Teledyne Technologies Incorporated. 3M's gas and flame business was part of the overall October 2017 acquisition of underlying legal entities and associated assets of Scott Safety. This business has annual sales of approximately $120 million. The transaction resulted in a pre-tax gain of $112 million that was reported within the Company's Safety and Industrial business.

 

2018 divestitures:

 

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 resulted in a pre-tax gain of less than $20 million. In addition, during the first quarter of 2018, 3M divested a polymer additives compounding business, formerly part of the Company's Health Care business, and reflected a gain on final closing adjustments from a prior divestiture which, in aggregate, were not material. In May 2018, 3M divested an abrasives glass products business, formerly part of the Company's Safety and Industrial business, with annual sales of approximately $10 million. The transaction resulted in a pre-tax gain of less than $15 million.


In June 2018, 3M completed the sale of substantially all of its Communication Markets Division to Corning Incorporated. 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. 3M received cash proceeds of $772 million and reflected a pre-tax gain of $494 million as a result of this divestiture. In December 2018, the Company completed the sale of the remaining telecommunications system integration services portion of the business based in Germany, resulting in a pre-tax gain of $15 million.

 

Operating income and held for sale amounts

The aggregate operating income of these businesses was approximately $40 million, $40 million, and $85 million in 2020, 2019, and 2018, 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

 

Goodwill

 

There was no goodwill recorded from acquisitions during 2020. Goodwill from acquisitions total $3.5 billion in 2019, none of which was 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 decreased goodwill by $34 million during 2020. 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:

 


















(Millions)


Safety and Industrial


Transportation and Electronics


Health Care


Consumer


Total Company


Balance as of December 31, 2018


$

 4,716


$

 1,857


$

 3,248


$

 230


$

 10,051


Acquisition activity



 -



 -



 3,469



 -



 3,469


Divestiture activity



 (49)



 -



 -



 -



 (49)


Translation and other



 (46)



 (27)



 22



 24



 (27)


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



 66



 38



 306



 11



 421


Balance as of December 31, 2020


$

 4,687


$

 1,858


$

 6,992


$

 265


$

 13,802


 

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 19, 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. Goodwill balances reported above reflect these business segment reporting changes in the earliest period presented. The Company also completed its annual goodwill impairment test in the fourth quarter of 2020 for all reporting units and determined that no impairment existed. In addition, the Company had no impairments of goodwill in 2019 or 2018.

 

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)

    

2020

    

2019


Customer related intangible assets


$

 4,280


$

 4,316


Patents



 537



 538


Other technology-based intangible assets



 2,114



 2,124


Definite-lived tradenames



 1,178



 1,158


Other amortizable intangible assets



 104



 125


Total gross carrying amount


$

 8,213


$

 8,261










Accumulated amortization - customer related



 (1,422)



 (1,180)


Accumulated amortization - patents



 (512)



 (499)


Accumulated amortization - other technology-based



 (638)



 (435)


Accumulated amortization - definite-lived tradenames



 (385)



 (316)


Accumulated amortization - other



 (79)



 (90)


Total accumulated amortization


$

 (3,036)


$

 (2,520)










Total finite-lived intangible assets - net


$

 5,177


$

 5,741










Non-amortizable intangible assets (primarily tradenames)



 658



 638


Total intangible assets - net


$

 5,835


$

 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 15, 3M reflected an immaterial charge related to impairment of certain indefinite-lived assets in the first quarter of 2020.

 

Amortization expense for the years ended December 31 follows:












(Millions)

    

2020

    

2019

    

2018


Amortization expense


$

537


$

 341


$

 249


 

Expected amortization expense for acquired amortizable intangible assets recorded as of December 31, 2020 follows:

 






































After


(Millions)


2021


2022


2023


2024


2025


2025


Amortization expense


$

 528


$

 515


$

 488


$

 459


$

 428


$

 2,759


 

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:

 

Operational/Marketing Capability Restructuring:

 

In late 2020, 3M announced it would undertake certain actions to further enhance its operations and marketing capabilities to take advantage of certain global market trends while de-prioritizing investments in slower-growth end markets. During the fourth quarter of 2020, management approved and committed to undertake associated restructuring actions impacting approximately 2,100 positions resulting in a pre-tax charge of $137 million. 3M is planning further actions under this initiative primarily in the second half of 2021. This aggregate initiative, spanning 2020 and 2021, is expected to impact approximately 2,900 positions worldwide with an expected pre-tax charge of $250 to $300 million. The related 2020 restructuring charges were recorded in the income statement as follows:

 





(Millions)

    

Fourth Quarter 2020

Cost of sales


$

 51

Selling, general and administrative expenses



 79

Research, development and related expenses



 7

Total operating income impact


$

 137

 

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

 













Fourth Quarter 2020

(Millions)

    

Employee-Related

    

Asset-Related and Other

    

Total

Safety and Industrial


$

 36


$

 7


$

 43

Transportation and Electronics



 16



 12



 28

Health Care



 23



 3



 26

Consumer



 10



 1



 11

Corporate and Unallocated



 16



 13



 29

Total Operating Expense


$

 101


$

 36


$

 137

 

 

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











(Millions)

    

Employee-Related

    

Asset-Related and Other

    

Total

Expense incurred in the fourth quarter of 2020


$

 101


$

 36


$

 137

Non-cash changes



 -



 (36)



 (36)

  Accrued restructuring action balances as of December 31, 2020


$

 101


$

 -


$

 101

 

Remaining activities related to this restructuring actions approved and committed under this initiative in the 2020 are expected to be largely completed through 2021.

 

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



 (14)



 -



 (14)


Adjustments



 (3)



 -



 (3)


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


$

 15


$

 9


$

 24


 

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 is summarized as follows:

 














Second Quarter 2020


(Millions)

    

Employee-Related

    

Asset-Related and Other

    

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)


Cash payments



 (2)



 -



 (2)


Adjustments



 (9)



 -



 (9)


Accrued restructuring action balances as of December 31, 2020


$

 24


$

 -


$

 24


 

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

 

2019 Restructuring Actions:

 

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. Additionally, during the fourth quarter of 2019, to realign 3M's organizational structure and operating model to improve growth and operational efficiency, management approved and committed to undertake certain restructuring actions. These actions impacted approximately 1,500 positions worldwide. The Company recorded fourth quarter 2019 pre-tax charges of $134 million. These restructuring charges were recorded in the income statement as follows:

 






(Millions)

    

Second and Fourth Quarter 2019


Cost of sales


$

 72


Selling, general and administrative expenses



 137


Research, development and related expenses



 37


Total operating income impact



 246


Other expense (income), net



 36


Total income before income taxes impact


$

 282


 

The second quarter 2019 actions included a voluntary early retirement incentive initial charge (further discussed in Note 13), the charge for which is included in other expense (income), net above.

 

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

 














Second and Fourth Quarter 2019


(Millions)

    

Employee-Related

    

Asset-Related

    

Total


Safety and Industrial


$

 50


$

 -


$

 50


Transportation and Electronics



 31



 -



 31


Health Care



 17



 -



 17


Consumer



 8



 -



 8


Corporate and Unallocated



 100



 40



 140


Total Operating Expense


$

 206


$

 40


$

 246


 

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

 












(Millions)

    

Employee-Related

    

Asset-Related

    

Total


Expense incurred in the second quarter and fourth quarter of 2019


$

 242


$

 40


$

 282


Non-cash changes



 (36)



 (40)



 (76)


Cash payments



 (52)



 -



 (52)


Adjustments



 (14)



 -



 (14)


  Accrued restructuring action balances as of December 31, 2019


$

 140


$

 -


$

 140


Cash Payments



 (51)



 -



 (51)


Adjustments



 (59)



 -



 (59)


  Accrued restructuring action balances as of December 31, 2020


$

 30


$

 -


$

 30


 

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.

 



 

2018 Restructuring Actions:

 

Divestiture-Related Restructuring

 

During the second quarter and fourth quarter of 2018, management approved and committed to undertake certain restructuring actions related to addressing corporate functional costs following the Communication Markets Division divestiture. These actions affected approximately 1,200 positions worldwide and resulted in a second quarter 2018 pre-tax charge of $105 million and a fourth quarter pre-tax charge of $22 million, net of adjustments for reductions in cost estimates of $10 million, essentially all within Corporate and Unallocated. The restructuring charges were recorded in the income statement as follows:

 






(Millions)


Second and Fourth Quarter 2018


Cost of sales


$

 27


Selling, general and administrative expenses



 105


Research, development and related expenses



 5


Total


$

 137


 

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

 












(Millions)

    

Employee-Related

    

Asset-Related

    

Total


Expense incurred in the second quarter and fourth quarter of 2018


$

 125


$

 12


$

 137


Non-cash changes



 -



 (12)



 (12)


Cash payments



 (24)



 -



 (24)


Adjustments



 (17)



 -



 (17)


Accrued restructuring action balances as of December 31, 2018


$

 84


$

 -


$

 84


Cash payments



 (76)



 -



 (76)


Adjustments



 (5)



 -



 (5)


Accrued restructuring action balances as of December 31, 2019


$

 3


$

 -


$

 3


 

Remaining activities related to this restructuring were substantially completed in 2019.

 

NOTE 6. Supplemental Income Statement Information

 

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

 













(Millions)



2020


2019


2018


Interest expense



$

 529


$

 448


$

 350


Interest income




 (29)



 (80)



 (70)


Pension and postretirement net periodic benefit cost (benefit)




 (50)



 (68)



 (73)


Loss on deconsolidation of Venezuelan subsidiary




 -



 162



 -


Total



$

 450


$

 462


$

 207


 

Interest expense includes an early debt extinguishment pre-tax charge of approximately $10 million in the fourth quarter of 2020.

 

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 for 2019 included a second quarter charge related to the voluntary early retirement incentive program announced in May 2019 in addition to U.S. non-qualified pension plan settlement charges of $32 million recognized in the fourth quarter of 2019. Refer to Note 13 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 Balance Sheet Information

 

Additional supplemental balance sheet information is provided in the table that follows.

 









(Millions)

    

2020

    

2019


Other current assets








Derivative assets-current


$

 34


$

 75


Held-to-maturity debt security held in trust



 -



 470


Insurance related (receivables, prepaid expenses and other)



 125



 172


Other



 166



 174


Total other current assets


$

 325


$

 891










Property, plant and equipment - at cost








Land


$

 338


$

 351


Buildings and leasehold improvements



 8,021



 7,877


Machinery and equipment



 16,866



 16,586


Construction in progress



 1,425



 1,310


Gross property, plant and equipment



 26,650



 26,124


Accumulated depreciation



 (17,229)



 (16,791)


Property, plant and equipment - net


$

 9,421


$

 9,333










Other assets








Deferred income taxes


$

 871


$

 521


Prepaid pension and post retirement



 630



 230


Insurance related receivables and other



 49



 67


Cash surrender value of life insurance policies



 258



 254


Equity method investments



 134



 70


Equity and other investments



 80



 126


Other



 418



 406


Total other assets


$

 2,440


$

 1,674










Other current liabilities








Accrued rebates


$

 639


$

 594


Deferred revenue



 498



 430


Derivative liabilities



 81



 17


Employee benefits and withholdings



 192



 229


Contingent liability claims and other



 556



 566


Property, sales-related and other taxes



 308



 247


Pension and postretirement benefits



 71



 67


Other



 933



 906


Total other current liabilities


$

 3,278


$

 3,056










Other liabilities








Long term income taxes payable


$

 1,511


$

 1,507


Employee benefits



 410



 312


Contingent liability claims and other



 815



 787


Finance lease obligations



 93



 111


Deferred income taxes



 333



 301


Other



 300



 257


Total other liabilities


$

 3,462


$

 3,275


 



 

NOTE 8. 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 as of December 31, 2020, 2019 and 2018. Preferred stock, without par value, of 10 million shares is authorized but unissued.

 

Cash dividends declared and paid totaled $1.47, $1.44, and $1.36 per share for each quarter in 2020, 2019 and 2018, respectively, which resulted in total year declared and paid dividends of $5.88, $5.76, and $5.44 per share, respectively.

 

In connection with 3M's January 1, 2019 adoption of ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, and ASU No. 2016-02, Leases, the Company recorded an increase in retained earnings of approximately $0.9 billion (with offsetting increase to accumulated other comprehensive loss for the same amount) and $14 million, respectively.

 

Transfer of Ownership Interest Involving Non-Wholly Owned Subsidiaries

 

During 2018, a wholly owned subsidiary in India was sold to 3M India Limited, which is 75 percent owned by the Company. Because the Company retained its controlling interest in the subsidiary involved, the sale resulted in a deemed dividend to 3M, resulting in an increase in 3M Company shareholders' equity and a decrease in noncontrolling interest. Refer to the Consolidated Statement of Changes in Equity for further details.

 

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, 2017, net of tax:


$

 (1,638)


$

 (5,276)


$

 (112)


$

 (7,026)


Other comprehensive income (loss), before tax:














Amounts before reclassifications



 (414)



 55



 133



 (226)


Amounts reclassified out



 -



 606



 96



 702


Total other comprehensive income (loss), before tax



 (414)



 661



 229



 476


Tax effect



 (47)



 (217)



 (53)



 (317)


Total other comprehensive income (loss), net of tax



 (461)



 444



 176



 159


Impact from purchase of subsidiary shares



 1



 -



 -



 1


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



 102



 (1,227)



 (26)



 (1,151)


Amounts reclassified out



 142



 459



 (70)



 531


Total other comprehensive income (loss), before tax



 244



 (768)



 (96)



 (620)


Tax effect



 (32)



 208



 24



 200


Total other comprehensive income (loss), net of tax



 212



 (560)



 (72)



 (420)


Balance at December 31, 2019, net of tax:


$

 (1,899)


$

 (6,209)


$

 (31)


$

 (8,139)


Other comprehensive income (loss), before tax:














Amounts before reclassifications



 387



 (555)



 (113)



 (281)


Amounts reclassified out



 -



 676



 (71)



 605


Total other comprehensive income (loss), before tax



 387



 121



 (184)



 324


Tax effect



 62



 50



 42



 154


Total other comprehensive income (loss), net of tax



 449



 171



 (142)



 478


Balance at December 31, 2020, net of tax:


$

 (1,450)


$

 (6,038)


$

 (173)


$

 (7,661)


 

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

 


















Amounts Reclassified from




Details about Accumulated Other



Accumulated Other Comprehensive Income




Comprehensive Income Components



Year ended December 31,


Location on Income


(Millions)



2020


2019


2018


Statement


Cumulative translation adjustment














Deconsolidation of Venezuelan subsidiary



$

 -


$

 (142)


$

 -


Other (expense) income, 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



$

 (2)


$

 -


$

 -


See Note 13


Prior service benefit




 62



 69



 76


See Note 13


Net actuarial loss




 (716)



 (478)



 (678)


See Note 13


Curtailments/Settlements




 (20)



 (48)



 (4)


See Note 13


Deconsolidation of Venezuelan subsidiary




 -



 (2)



 -


Other (expense) income, net


Total before tax




 (676)



 (459)



 (606)




Tax effect




 161



 110



 145


Provision for income taxes


Net of tax



$

 (515)


$

 (349)


$

 (461)


















Cash flow hedging instruments gains (losses)














Foreign currency forward/option contracts



$

 80


$

 74


$

 (95)


Cost of sales


Interest rate contracts




 (9)



 (4)



 (1)


Interest expense


Total before tax




 71



 70



 (96)




Tax effect




 (17)



 (17)



 19


Provision for income taxes


Net of tax



$

 54


$

 53


$

 (77)




Total reclassifications for the period, net of tax



$

 (461)


$

 (438)


$

 (538)




 

 

 

NOTE 9. Supplemental Cash Flow Information

 












(Millions)

    

2020

    

2019

    

2018


Cash income tax payments, net of refunds


$

1,351


$

 1,198


$

 1,560


Cash interest payments



 524



 370



 314


 

Cash interest payments include interest paid on debt and finance lease balances. Cash interest payments exclude the cash paid for early debt extinguishment costs. Additional details are described in Note 12.

 

Individual amounts in the Consolidated Statement of Cash Flows exclude the impacts of acquisitions, divestitures and exchange rate impacts, which are presented separately.

 

NOTE 10. Income Taxes

 

Income Before Income Taxes

 












(Millions)

    

2020

    

2019

    

2018


United States


$

 3,720


$

 3,008


$

 3,487


International



 2,991



 2,704



 3,513


Total


$

 6,711


$

 5,712


$

 7,000


 

Provision for Income Taxes

 












(Millions)

    

2020

    

2019

    

2018


Currently payable











Federal


$

 720


$

 534


$

 698


State



 123



 59



 109


International



 633



 673



 763


Tax Cuts and Jobs Act (TCJA) non-current transition tax provision



 -



 -



 176


Deferred











Federal



 (59)



 (32)



 (38)


State



 (20)



 (26)



 (17)


International



 (79)



 (78)



 (54)


Total


$

 1,318


$

 1,130


$

 1,637


 

Components of Deferred Tax Assets and Liabilities

 









(Millions)

    

2020

    

2019


Deferred tax assets:








Accruals not currently deductible








Employee benefit costs


$

 232


$

 169


Product and other claims



 338



 280


Miscellaneous accruals



 153



 119


Pension costs



 849



 824


Stock-based compensation



 231



 218


Net operating/capital loss/tax credit carryforwards



 148



 150


Foreign tax credits



 100



 66


Currency translation



 90



 -


Inventory



 54



 70


Other



 112



 113


Gross deferred tax assets



 2,307



 2,009


Valuation allowance



 (135)



 (158)


Total deferred tax assets


$

 2,172


$

 1,851










Deferred tax liabilities:








Product and other insurance receivables


$

 (4)


$

 -


Accelerated depreciation



 (607)



 (580)


Intangible amortization



 (1,023)



 (1,021)


Currency translation



 -



 (30)


Other



 -



 -


Total deferred tax liabilities


$

 (1,634)


$

 (1,631)










Net deferred tax assets


$

 538


$

 220


 

The net deferred tax assets are included as components of Other Assets and Other Liabilities within the Consolidated Balance Sheet. See Note 7 "Supplemental Balance Sheet Information" for further details.

 

As of December 31, 2020, the Company had tax effected operating losses, capital losses, and tax credit carryovers for federal (approximately $108 million), state (approximately $84 million), and international (approximately $58 million), with all amounts before limitation impacts and valuation allowances. Federal tax attribute carryovers will expire after one to 10 years, the state after one to 11 years, and the international after one year to an indefinite carryover period. As of December 31, 2020, the Company has provided $135 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

 










    

2020

    

2019

    

2018


Statutory U.S. tax rate


 21.0

%  

 21.0

%  

 21.0

%

State income taxes - net of federal benefit


 1.2


 0.5


 1.0


International income taxes - net


 (1.2)


 0.2


 0.2


Global Intangible Low Taxed Income (GILTI)


 0.8


 1.8


 1.1


Foreign Derived Intangible Income (FDII)


 (1.8)


 (2.9)


 (1.3)


U.S. TCJA enactment - net impacts


 -


 -


 2.5


U.S. research and development credit


 (1.0)


 (1.7)


 (1.5)


Reserves for tax contingencies


 0.5


 2.3


 1.2


Employee share-based payments


 (0.5)


 (1.3)


 (1.4)


All other - net


 0.6


 (0.1)


 0.6


Effective worldwide tax rate


 19.6

%  

 19.8

%  

 23.4

%

 

The effective tax rate for 2020 was 19.6 percent, compared to 19.8 percent in 2019, a decrease of 0.2 percentage points, impacted by several factors. Primary factors that decreased the effective tax rate for 2020 included geographical income mix and adjustments to uncertain tax positions. These decreases were partially offset by decreased benefit from stock options.

 

The effective tax rate for 2019 was 19.8 percent, compared to 23.4 percent in 2018, a decrease of 3.6 percentage points, impacted by several factors. Primary factors that decreased the effective tax rate for 2020 included prior year measurement period adjustments related to 2017 Tax Cuts and Jobs Act (TCJA), prior year resolution of the NRD lawsuit (as described in Note 16), and geographical income mix. These decreases were partially offset by the deconsolidation of the Venezuelan subsidiary, adjustments to uncertain tax positions, and significant litigation-related charges.

 

The TCJA was enacted in December 2017, after which the SEC staff issued Staff Accounting Bulletin (SAB) 118, which provided a measurement period of up to one year from the TCJA's enactment date for companies to complete their accounting under ASC 740. In connection with the enactment of the TCJA, the Company recorded net charges of $176 million as measurement period adjustments in 2018, which are comprised of both a transition tax in addition to a remeasurement of deferred tax assets/liabilities and other impacts.

 

The TCJA's transition tax is payable over eight years beginning in 2018. As of December 31, 2020 and December 31, 2019, 3M reflected $584 million and $653 million, respectively, in long term income taxes payable. As of December 31, 2020 and December 31, 2019, 3M reflected $69 million and $33 million, respectively, payable within one year associated with the transition tax.

 

The IRS has completed its field examination of the Company's U.S. federal income tax returns for 2005 through 2016, but the years have not closed as the Company is in the process of resolving issues identified during those examinations. The Company is under examination or in appeals for 2017 through 2018. 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 December 31, 2020, no taxing authority proposed significant adjustments to the Company's tax positions for which the Company is not adequately reserved.

 

It is reasonably possible that the amount of unrecognized tax benefits could significantly change within the next 12 months. The Company has ongoing federal, state and international income tax audits in various jurisdictions and evaluates uncertain tax positions that may be challenged by local tax authorities and not fully sustained. These uncertain tax positions are reviewed on an ongoing basis and adjusted in light of facts and circumstances including progression of tax audits, developments in case law and closing of statutes of limitation. At this time, the Company is not able to estimate the range by which these potential events could impact 3M's unrecognized tax benefits within the next 12 months.

 

The Company recognizes the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (UTB) is as follows:

 

Federal, State and Foreign Tax

 












(Millions)

    

2020

    

2019

    

2018


Gross UTB Balance at January 1


$

 1,167


$

 647


$

 530













Additions based on tax positions related to the current year



 74



 76



 129


Additions for tax positions of prior years



 106



 132



 146


Additions related to recent acquisitions



 -



 396



 -


Reductions for tax positions of prior years



 (173)



 (56)



 (123)


Settlements



 (8)



 (4)



 (17)


Reductions due to lapse of applicable statute of limitations



 (53)



 (24)



 (18)













Gross UTB Balance at December 31


$

 1,113


$

 1,167


$

 647













Net UTB that would impact the effective tax rate at December 31


$

 1,145


$

 1,178


$

 655


 

The total amount of UTB, if recognized, would affect the effective tax rate by $1,145 million as of December 31, 2020, $1,178 million as of December 31, 2019, and $655 million as of December 31, 2018. The ending net UTB results from adjusting the gross balance for 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 $21 million of expense, $33 million of expense, and $12 million of expense in 2020, 2019, and 2018, 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, 2020, and December 31, 2019, accrued interest and penalties in the consolidated balance sheet on a gross basis were $126 million and $102 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.

 

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: China (2022), Switzerland (2023), Singapore (2025), and Brazil (2029). The income tax benefits attributable to the tax status of these subsidiaries are estimated to be $163 million (28 cents per diluted share) in 2020, $127 million (22 cents per diluted share) in 2019, and $227 million (38 cents per diluted share) in 2018.

 

As of December 31, 2020, the Company has approximately $15 billion of undistributed earnings in its foreign subsidiaries. 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 $10 billion of undistributed earnings from non-U.S. subsidiaries as of December 31, 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. In December 2020, Congress passed a second relief package, Consolidated Appropriations Act, 2021. The enactment period impacts to 3M were immaterial to income tax expense.

 

NOTE 11. Marketable Securities and Held-to-Maturity Debt Securities

 

Marketable Securities

 

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

 









(Millions)


December 31, 2020


December 31, 2019


Corporate debt securities


$

 7


$

 -


Commercial paper



 237



 85


Certificates of deposit/time deposits



 31



 10


U.S. treasury securities



 125



 -


U.S. municipal securities



 4



 3


Current marketable securities


$

 404


$

 98










U.S. municipal securities


$

 30


$

 43


Non-current marketable securities


$

 30


$

 43










Total marketable securities


$

 434


$

 141


 

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

 

The balance at December 31, 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)

    

December 31, 2020


Due in one year or less


$

 404


Due after one year through five years



 15


Due after five years through ten years



 15


Total marketable securities


$

 434


 

Held-to-Maturity Debt Securities

 

In connection with the in-substance debt defeasance of the Third Lien Notes described in Note 12, 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. At December 31, 2019, 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. At December 31, 2019, the difference between the amortized cost of the U.S. Treasury security and its fair value was not material. Upon the maturity of the debt security in May 2020, the Company has no held-to-maturity debt securities.

 

NOTE 12. 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, 2020. 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. For notes subject to in-substance defeasance, the final maturity reflected below is that associated with the redemption date included in the irrevocable instructions given to the trust. Long-term debt and short-term borrowings as of December 31 consisted of the following:

 

Long-Term Debt

 















(Millions)


Currency/


Effective


Final


Carrying Value


Description / 2020 Principal Amount


Fixed vs. Floating


Interest Rate


Maturity Date


2020


2019


Third lien senior secured notes subject to in-substance

  defeasance (repaid in 2020)


USD Fixed


 -

%  

2020


$

 -


$

 463


Medium-term note (repaid in 2020)


EUR Floating


 -

%  

2020



 -



 726


Medium-term note (repaid in 2020)


USD Floating


 -

%  

2020



 -



 299


Medium-term note (repaid in 2020)


USD Floating


 -

%  

2020



 -



 200


Medium-term note (repaid in 2020)


USD Fixed


 -

%  

2020



 -



 599


Medium-term note (repaid in 2020)


USD Fixed


 -

%  

2020



 -



 199


Medium-term note (repaid in 2020)


USD Floating


 -

%  

2020



 -



 204


Eurobond (300 million euros)


EUR Floating


 (0.28)

%  

2021



 374



 346


Eurobond (300 million euros)


EUR Fixed


 1.97

%  

2021



 367



 334


Medium-term note (500 million euros)


EUR Fixed


 0.45

%  

2022



 612



 557


Medium-term note ($600 million)


USD Fixed


 2.17

%  

2022



 598



 597


Medium-term note ($450 million)


USD Fixed


 2.76

%  

2022



 449



 449


Medium-term note (600 million euros)


EUR Fixed


 1.14

%  

2023



 731



 665


Medium-term note ($650 million)


USD Fixed


 2.26

%  

2023



 649



 648


Registered note ($500 million)


USD Fixed


 1.86

%  

2023



 498



 497


Medium-term note ($300 million)


USD Floating


 0.52

%  

2024



 299



 299


Medium-term note ($300 million)


USD Fixed


 3.30

%  

2024



 299



 299


Medium-term note ($500 million)


USD Fixed


 2.98

%  

2024



 502



 503


Medium-term note ($550 million)


USD Fixed


 3.04

%  

2025



 548



 547


Registered note ($750 million)


USD Fixed


 2.12

%  

2025



 744



 743


Registered note ($500 million)


USD Fixed


 2.67

%  

2025



 498



 -


Medium-term note (750 million euros)


EUR Fixed


 1.66

%  

2026



 908



 826


Medium-term note ($650 million)


USD Fixed


 2.37

%  

2026



 644



 643


Medium-term note ($850 million)


USD Fixed


 2.95

%  

2027



 843



 842


30-year debenture ($220 million)


USD Fixed


 6.44

%  

2028



 225



 226


Medium-term note ($600 million)


USD Fixed


 3.62

%  

2028



 598



 597


Medium-term note ($800 million)


USD Fixed


 3.38

%  

2029



 796



 796


Registered note ($1 billion)


USD Fixed


 2.50

%  

2029



 986



 984


Medium-term note (500 million euros)


EUR Fixed


 1.90

%  

2030



 604



 549


Registered note ($600 million)


USD Fixed


 3.09

%  

2030



 595



 -


Medium-term note (500 million euros)


EUR Fixed


 1.54

%  

2031



 608



 554


30-year bond ($555 million)


USD Fixed


 5.73

%  

2037



 551



 551


Floating rate note ($96 million)


USD Floating


 -

%  

2041



 96



 96


Medium-term note ($325 million)


USD Fixed


 4.05

%  

2044



 315



 314


Floating rate note ($55 million)


USD Floating


 -

%  

2044



 53



 53


Medium-term note ($500 million)


USD Fixed


 3.37

%  

2046



 476



 475


Medium-term note ($500 million)


USD Fixed


 3.68

%  

2047



 492



 492


Medium-term note ($650 million)


USD Fixed


 4.07

%  

2048



 637



 637


Medium-term note ($500 million)


USD Fixed


 3.78

%  

2048



 505



 506


Registered note ($1 billion)


USD Fixed


 3.37

%  

2049



 969



 968


Registered note ($650 million)


USD Fixed


 3.72

%  

2050



 642



 -


Other borrowings


Various


 0.01

%  

2021-2040



 72



 76


Total long-term debt








$

 18,783


$

 19,359


Less: current portion of long-term debt









 794



 1,841


Long-term debt (excluding current portion)








$

 17,989


$

 17,518


Post-Swap Borrowing (Long-Term Debt, Including Current Portion)

 















2020


2019



    

Carrying

    

Effective

    

Carrying

    

Effective


(Millions)


Value


Interest Rate


Value


Interest Rate


Fixed-rate debt


$

 17,889


 2.80

%  

$

 17,061


 3.01

%

Floating-rate debt



 894


 0.06

%  


 2,298


 1.06

%

Total long-term debt, including current portion


$

 18,783




$

 19,359




 

Short-Term Borrowings and Current Portion of Long-Term Debt

 













Effective


Carrying Value


(Millions)

    

Interest Rate

    

2020

    

2019


Current portion of long-term debt


 0.78

%  

$

 794


$

 1,841


U.S. dollar commercial paper


 -

%  


 -



 150


Japan subsidiary credit facility


 -

%  


 -



 632


German subsidiary credit facility


 -

%  


 -



 168


Other borrowings


 4.83

%  


 12



 4


Total short-term borrowings and current portion of long-term debt




$

 806


$

 2,795


 

Other short-term borrowings primarily consisted of bank borrowings by international subsidiaries.

 

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 December 31, 2020. The maturities of long-term debt for the periods subsequent to December 31, 2020 are as follows (in millions):

 
























    



    



    



    



    

After

    




2021


2022


2023


2024


2025


2025


Total


$

 794


$

 1,659


$

 1,878


$

 1,100


$

 1,790


$

 11,562


$

 18,783


 

As a result of put provisions associated with certain debt instruments, long-term debt payments due in 2021 include floating rate notes totaling $53 million (classified as current portion of long-term debt).

 

Credit Facilities

 

In November 2019, 3M amended and restated its existing $3.75 billion five-year revolving credit facility expiring in March 2021 to a $3.0 billion five-year revolving credit facility expiring in November 2024. The revolving credit agreement includes a provision under which 3M may request an increase of up to $1.0 billion (at lender's discretion), bringing the total facility up to $4.0 billion. In addition, 3M entered into a $1.25 billion 364-day credit facility, which was renewed in November 2020 with an expiration date of November 2021. The 364-day credit agreement includes a provision under which 3M may convert any advances outstanding on the maturity date into term loans having a maturity date one year later. These credit facilities were undrawn at December 31, 2020. Under both the $3.0 billion and $1.25 billion credit agreements, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the same period. At December 31, 2020, this ratio was approximately 17 to 1. Debt covenants do not restrict the payment of dividends.

 

Other Credit Facilities

 

Apart from the committed credit facilities described above, in September 2019, 3M entered into a credit facility initially expiring in July 2020 that was further extended 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.

 

The Company also had an additional $273 million in stand-alone letters of credit and bank guarantees issued and outstanding at December 31, 2020. These instruments are utilized in connection with normal business activities.

 

Long-Term Debt Issuances

 

The principal amounts, interest rates and maturity dates of individual long-term debt issuances can be found in the long-term debt table found at the beginning of this note.

 

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%.

 

In February 2019, 3M issued $2.25 billion aggregate principal amount of fixed rate medium-term notes. These were comprised of $450 million of 3-year notes due 2022 with a coupon rate of 2.75%, $500 million of remaining 5-year notes due 2024 with a coupon rate of 3.25%, $800 million of 10-year notes due 2029 with a coupon rate of 3.375%, and $500 million of remaining 29.5-year notes due 2048 with a coupon rate of 4.00%. Issuances of the 5-year and 29.5-year notes were pursuant to a reopening of existing securities issued in September 2018.

 

In August 2019, 3M issued $3.25 billion aggregate principal amount of fixed rate registered notes. These were comprised of $500 million of 3.5-year notes due 2023 with a coupon rate of 1.75%, $750 million of 5.5-year notes due 2025 with a coupon rate of 2.00%, $1.0 billion of 10-year notes due 2029 with a coupon rate of 2.375%, and $1.0 billion of 30-year notes due 2049 with a coupon rate of 3.25%.

 

In September 2018, 3M issued $2.25 billion aggregate principal amount of medium-term notes. These were comprised of $400 million of 3-year fixed rate notes due 2021 with a coupon rate of 3.00%, $300 million of 5.5-year fixed rate notes due 2024 with a coupon rate of 3.25%, $300 million of 5.5-year floating rate notes due 2024 with a rate based on a floating three-month LIBOR index, $600 million aggregate principal amount of 10-year fixed rate medium-term notes due 2028 with a coupon rate of 3.625%, and $650 million of 30-year fixed rate notes due 2048 with a coupon rate of 4.00%. Upon debt issuance, the Company entered into a fixed-to-floating interest rate swap on $200 million aggregate principal amount of the 3-year fixed rate notes issued with an interest rate based on a three-month LIBOR index.

 

Long-Term Debt Maturities and Extinguishments

 

In December 2020, 3M, via make-whole-call offers, repaid $1 billion aggregate principal amount of its outstanding notes. This included $400 million aggregate principal amount of 3.00% notes and $600 million aggregate principal amount of 1.625% notes, both of which were due to mature in 2021. The Company recorded an early debt extinguishment pre-tax charge of approximately $10 million within interest expense. This charge reflected the differential between the carrying value and the amount paid to reacquire the notes and related expenses.

 

In May 2020, 3M repaid the aggregate $445 million principal amount of Third Lien notes subject to the in-substance defeasance noted below 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.

 

In June 2019, 3M repaid $625 million aggregate principal amount of fixed-rate medium-term notes that matured.

 

In 2019, 3M also assumed approximately $2.6 billion of debt in connection with the acquisitions of Acelity and M*Modal (See Note 3) of which $2.1 billion was immediately redeemed or paid at close.

 

In November and August 2018, respectively, 3M repaid 500 million euros and $450 million aggregate principal amount of floating rate medium-term notes that matured.

In-Substance Defeasance

 

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.

 

Floating Rate Notes

 

At various times, 3M has issued floating rate notes containing put provisions. 3M would be required to repurchase these securities at various prices ranging from 99 percent to 100 percent of par value according to the reduction schedules for each security. In December 2004, 3M issued a forty-year $60 million floating rate note, with a rate based on a floating LIBOR index. Under the terms of this floating rate note due in 2044, holders have an annual put feature at 100 percent of par value from 2014 and every anniversary thereafter until final maturity. Under the terms of the floating rate notes due in 2027, 2040 and 2041, holders have put options that commence ten years from the date of issuance and each third anniversary thereafter until final maturity at prices ranging from 99 percent to 100 percent of par value. For the periods presented, 3M was required to repurchase an immaterial amount of principal on the aforementioned floating rate notes.

 

NOTE 13. Pension and Postretirement Benefit Plans

 

3M has company-sponsored retirement plans covering substantially all U.S. employees and many employees outside the United States. In total, 3M has over 75 defined benefit plans in 28 countries. Pension benefits associated with these plans generally are based on each participant's years of service, compensation, and age at retirement or termination. The primary U.S. defined-benefit pension plan was closed to new participants effective January 1, 2009. The Company also provides certain postretirement health care and life insurance benefits for its U.S. employees who reach retirement age while employed by the Company and were employed by the Company prior to January 1, 2016. Most international employees and retirees are covered by government health care programs. The cost of company-provided postretirement health care plans for international employees is not material and is combined with U.S. amounts in the tables that follow.

 

The Company has made deposits for its defined benefit plans with independent trustees. Trust funds and deposits with insurance companies are maintained to provide pension benefits to plan participants and their beneficiaries. There are no plan assets in the non-qualified plan due to its nature. For its U.S. postretirement health care and life insurance benefit plans, the Company has set aside amounts at least equal to annual benefit payments with an independent trustee.

 

The Company also sponsors employee savings plans under Section 401(k) of the Internal Revenue Code. These plans are offered to substantially all regular U.S. employees. For eligible employees hired prior to January 1, 2009, employee 401(k) contributions of up to 5% of eligible compensation matched in cash at rates of 45% or 60%, depending on the plan in which the employee participates. Employees hired on or after January 1, 2009, receive a cash match of 100% for employee 401(k) contributions of up to 5% of eligible compensation and receive an employer retirement income account cash contribution of 3% of the participant's total eligible compensation. All contributions are invested in a number of investment funds pursuant to the employees' elections. Employer contributions to the U.S. defined contribution plans were $201 million, $186 million and $173 million for 2020, 2019 and 2018, respectively. 3M subsidiaries in various international countries also participate in defined contribution plans. Employer contributions to the international defined contribution plans were $103 million, $96 million and $99 million for 2020, 2019 and 2018, respectively.

 

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 the fourth quarter of 2019, the Company recognized a non-operating $32 million settlement expense in its U.S. non-qualified pension plan. The charge is related to lump sum payments made to employees at retirement. The settlement expense is an accelerated recognition of past actuarial losses.

 

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.

 

The following tables include a reconciliation of the beginning and ending balances of the benefit obligation and the fair value of plan assets as well as a summary of the related amounts recognized in the Company's consolidated balance sheet as of December 31 of the respective years. 3M also has certain non-qualified unfunded pension and postretirement benefit plans, inclusive of plans related to supplement/excess benefits for employees impacted by particular relocations and other matters, that individually and in the aggregate are not significant and which are not included in the tables that follow. The obligations for these plans are included within other liabilities in the Company's consolidated balance sheet and aggregated less than $40 million as of December 31, 2020 and 2019.

 























Qualified and Non-qualified










Pension Benefits


Postretirement




United States


International


Benefits


(Millions)

    

2020

    

2019

    

2020

    

2019

    

2020

    

2019


Change in benefit obligation




















Benefit obligation at beginning of year


$

 17,935


$

 15,948


$

 7,931


$

 6,965


$

 2,242


$

 2,175


Acquisitions/Transfers



 -



 -



 1



 9



 -



 -


Service cost



 261



 251



 152



 131



 43



 43


Interest cost



 499



 620



 117



 156



 62



 82


Participant contributions



 -



 -



 9



 7



 -



 -


Foreign exchange rate changes



 -



 -



 427



 55



 (14)



 -


Plan amendments



 -



 -



 -



 3



 -



 (171)


Actuarial (gain) loss



 1,785



 2,209



 464



 906



 176



 225


Benefit payments



 (1,104)



 (1,128)



 (274)



 (302)



 (107)



 (112)


Settlements, curtailments, special termination benefits and other



 -



 35



 (57)



 1



 (5)



 -


Benefit obligation at end of year


$

 19,376


$

 17,935


$

 8,770


$

 7,931


$

 2,397


$

 2,242


Change in plan assets




















Fair value of plan assets at beginning of year


$

 16,099


$

 14,803


$

 6,923


$

 6,170


$

 1,338


$

 1,260


Acquisitions/Transfers



 -



 -



 -



 4



 -



 -


Actual return on plan assets



 2,071



 2,323



 1,102



 858



 147



 187


Company contributions



 61



 101



 92



 106



 3



 3


Participant contributions



 -



 -



 9



 7



 -



 -


Foreign exchange rate changes



 -



 -



 376



 80



 -



 -


Benefit payments



 (1,104)



 (1,128)



 (274)



 (302)



 (107)



 (112)


Settlements, curtailments, special termination benefits and other



 -



 -



 (34)



 -



 (5)



 -


Fair value of plan assets at end of year


$

 17,127


$

 16,099


$

 8,194


$

 6,923


$

 1,376


$

 1,338


Funded status at end of year


$

 (2,249)


$

 (1,836)


$

 (576)


$

 (1,008)


$

 (1,021)


$

 (904)


 

 

 























Qualified and Non-qualified










Pension Benefits


Postretirement




United States


International


Benefits


(Millions)

    

2020

    

2019

    

2020

    

2019

    

2020

    

2019


Amounts recognized in the Consolidated Balance Sheet as of Dec. 31,




















Non-current assets


$

 -


$

 -


$

 630


$

 230


$

 -


$

 -


Accrued benefit cost




















Current liabilities



 (52)



 (48)



 (15)



 (15)



 (4)



 (4)


Non-current liabilities



 (2,197)



 (1,788)



 (1,191)



 (1,223)



 (1,017)



 (900)


Ending balance


$

 (2,249)


$

 (1,836)


$

 (576)


$

 (1,008)


$

 (1,021)


$

 (904)


 

 























Qualified and Non-qualified










Pension Benefits


Postretirement




United States


International


Benefits


(Millions)

    

2020

    

2019

    

2020

    

2019

    

2020

    

2019


Amounts recognized in accumulated other comprehensive income as of Dec. 31,




















Net transition obligation (asset)


$

 -


$

 -


$

 9


$

 10


$

 -


$

 -


Net actuarial loss (gain)



 6,080



 5,899



 1,557



 1,967



 713



 663


Prior service cost (credit)



 (104)



 (128)



 (2)



 (5)



 (230)



 (262)


Ending balance


$

 5,976


$

 5,771


$

 1,564


$

 1,972


$

 483


$

 401


 

 

The balance of amounts recognized for international plans in accumulated other comprehensive income as of December 31 in the preceding table are presented based on the foreign currency exchange rate on that date.

 

The pension accumulated benefit obligation represents the actuarial present value of benefits based on employee service and compensation as of the measurement date and does not include an assumption about future compensation levels. The accumulated benefit obligation of the U.S. pension plans was $18.441 billion and $17.125 billion at December 31, 2020 and 2019, respectively. The accumulated benefit obligation of the international pension plans was $8.181 billion and $7.355 billion at December 31, 2020 and 2018, respectively.

 

The following amounts relate to pension plans with accumulated benefit obligations in excess of plan assets as of December 31:

 

















Qualified and Non-qualified Pension Plans




United States


International


(Millions)

   

2020

   

2019

   

2020

   

2019


Projected benefit obligation


$

 19,376


$

 17,935


$

 3,385


$

 2,986


Accumulated benefit obligation



 18,441



 17,125



 3,119



 2,752


Fair value of plan assets



 17,127



 16,099



 2,199



 1,778


 



 

Components of net periodic cost and other amounts recognized in other comprehensive income

 

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. As discussed in Note 6, 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 years ended December 31 follow:
































































Qualified and Non-qualified














Pension Benefits


Postretirement





United States


International


Benefits


(Millions)

    


2020

    

2019

    

2018

    

2020

    

2019

    

2018

    

2020

    

2019

    

2018


Net periodic benefit cost (benefit)






























Operating expense






























Service cost



$

 261


$

 251


$

 288


$

 152


$

 131


$

 143


$

 43


$

 43


$

 52


Non-operating expense






























Interest cost




 499



 620



 563



 117



 156



 157



 62



 82



 79


Expected return on plan assets




 (1,019)



 (1,040)



 (1,087)



 (306)



 (299)



 (307)



 (79)



 (81)



 (84)


Amortization of transition asset




 -



 -

<