REG - 3M Company - Half-year Report <Origin Href="QuoteRef">MMM.N</Origin> - Part 2
03/08/2016 07:07
- Part 2: For the preceding part double click ID:nRSC0594Ga
time or at a point in time. The standard
also clarifies certain other aspects relative to licensing. This ASU has the same effective date and transition
requirements as ASU No. 2014-09, as amended by ASU No. 2015-14, which for 3M is effective January 1, 2018. The Company is
currently assessing this standard's impact on 3M's consolidated results of operations and financial condition.
In May 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, which amends ASU No.
2014-09, Revenue from Contracts with Customers, to address implementation issues relative to transition (adding a practical
expedient for contract modifications and clarifying what constitutes a completed contract when employing ASU No. 2014-09's
full or modified retrospective transition methods), collectability, noncash consideration, and the presentation of sales
and other similar-type taxes (allowing entities to exclude sales-type taxes collected from transaction price). This ASU has
the same effective date and transition requirements as ASU No. 2014-09, as amended by ASU No. 2015-14, which for 3M is
effective January 1, 2018. The Company is currently assessing this standard's impact on 3M's consolidated results of
operations and financial condition.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises
guidance for the accounting for credit losses on financial instruments within its scope. The new standard introduces an
approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the
impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the
current expected credit losses model) applies to most financial assets measured at amortized cost and certain other
instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and
off-balance-sheet credit exposures. With respect to available-for-sale (AFS) debt securities, the ASU amends the current
other-than-temporary impairment model. For such securities with unrealized losses, entities will still consider if a
portion of any impairment is related only to credit losses and therefore recognized as a reduction in income. However,
rather than also reflecting that credit loss amount as a permanent reduction in cost (amortized cost) basis of that AFS
debt security, the ASU requires that credit losses be reflected as an allowance. As a result, under certain circumstances,
a recovery in value could result in previous allowances, or portions thereof, reversing back into income. For 3M, this ASU
is effective January 1, 2020, with early adoption permitted. Entities are required to apply the standard's provisions as a
cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance
is adopted. The Company is currently assessing this ASU's impact on 3M's consolidated result of operations and financial
condition.
NOTE 2. Acquisitions and Divestitures
Acquisitions:
3M makes acquisitions of certain businesses from time to time that are aligned with its strategic intent with respect to,
among other factors, growth markets and adjacent product lines or technologies.
There were no material business combinations that closed during the six months ended June 30, 2016. Adjustments in the
first six months of 2016 to the preliminary purchase price allocations of other acquisitions within the allocation period
were not material. The allocation of purchase price related to the acquisition of Capital Safety Group S.A.R.L. in August
2015 is considered preliminary, primarily with respect to contingent liabilities and certain tax-related assets and
liabilities. 3M expects to finalize the allocation of purchase price within the one year measurement-period following this
acquisition.
Divestitures:
3M may divest certain businesses from time to time based upon review of the Company's portfolio considering, among other
items, factors relative to the extent of strategic and technological alignment and optimization of capital deployment, in
addition to considering if selling the businesses results in the greatest value creation for the Company and for
shareholders.
In the first quarter of 2016, 3M (Safety and Graphics Business) completed the sale of the remainder of the assets of 3M's
library systems business to One Equity Partners Capital Advisors L.P. (OEP). 3M had previously sold the North American
business and the majority of the business outside of North America to OEP in the fourth quarter of 2015. The library
systems business delivers circulation management solutions to library customers with on-premise hardware and software,
maintenance and service, and an emerging cloud-based digital lending platform.
In the first quarter of 2016, 3M (Industrial Business) sold to Innovative Chemical Products Group, a portfolio company of
Audax Private Equity, the assets of 3M's pressurized polyurethane foam adhesives business (formerly known as Polyfoam).
This business is a provider of pressurized polyurethane foam adhesive formulations and systems into the residential
roofing, commercial roofing and insulation and industrial foam segments in the United States with annual sales of
approximately $20 million.
The Company recorded a pre-tax gain of $40 million in the first quarter of 2016 as a result of the sales of these
businesses (recorded in selling, general and administrative expenses). The aggregate operating income of these businesses
included in the Company's operating results for the periods presented and the amounts of major assets and liabilities of
any associated disposal groups classified as held-for-sale as of the respective balance sheet dates presented were not
material.
Refer to Note 2 in 3M's Current Report on Form 8-K dated May 17, 2016 (which updated 3M's 2015 Annual Report on Form 10-K)
for more information on 3M's acquisitions and divestitures.
NOTE 3. Goodwill and Intangible Assets
There were no material acquisitions that closed during the first six months of 2016. The amounts in the "Translation and
other" column in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balances
by business segment as of December 31, 2015 and June 30, 2016, follow:
Goodwill
December 31, 2015 Acquisition Translation June 30, 2016
(Millions) Balance activity and other Balance
Industrial $ 2,573 $ 1 $ 49 $ 2,623
Safety and Graphics 3,342 2 19 3,363
Health Care 1,624 - 14 1,638
Electronics and Energy 1,510 - 13 1,523
Consumer 200 - 9 209
Total Company $ 9,249 $ 3 $ 104 $ 9,356
Accounting standards require that goodwill be tested for impairment annually and between annual tests in certain
circumstances such as a change in reporting units or the testing of recoverability of a significant asset group within a
reporting unit. At 3M, reporting units generally correspond to a division.
As described in Note 14, effective in the first quarter of 2016, the Company changed its business segment reporting in its
continuing effort to improve the alignment of its businesses around markets and customers. For any product changes that
resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill
of the associated reporting units. During the first quarter of 2016, the Company completed its assessment of any potential
goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.
Acquired Intangible Assets
The carrying amount and accumulated amortization of acquired finite-lived intangible assets, in addition to the balance of
non-amortizable intangible assets, as of June 30, 2016, and December 31, 2015, follow:
June 30, December 31,
(Millions) 2016 2015
Customer related intangible assets $ 1,974 $ 1,973
Patents 607 616
Other technology-based intangible assets 525 525
Definite-lived tradenames 424 421
Other amortizable intangible assets 214 216
Total gross carrying amount $ 3,744 $ 3,751
Accumulated amortization - customer related (737) (668)
Accumulated amortization - patents (489) (481)
Accumulated amortization - other technology based (279) (252)
Accumulated amortization - definite-lived tradenames (228) (215)
Accumulated amortization - other (171) (169)
Total accumulated amortization $ (1,904) $ (1,785)
Total finite-lived intangible assets - net $ 1,840 $ 1,966
Non-amortizable intangible assets (primarily tradenames) 637 635
Total intangible assets - net $ 2,477 $ 2,601
Certain tradenames acquired by 3M are not amortized because they have been in existence for over 55 years, have a history
of leading-market share positions, have been and are intended to be continuously renewed, and the associated products of
which are expected to generate cash flows for 3M for an indefinite period of time.
Amortization expense for acquired intangible assets for the three and six months ended June 30, 2016 and 2015 follows:
Three months ended Six months ended
June 30, June 30,
(Millions) 2016 2015 2016 2015
Amortization expense $ 66 $ 50 $ 132 $ 103
Expected amortization expense for acquired amortizable intangible assets recorded as of June 30, 2016:
Remainder
of After
(Millions) 2016 2017 2018 2019 2020 2021 2021
Amortization expense $ 125 $ 226 $ 204 $ 192 $ 182 $ 166 $ 745
The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from
estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment
of intangible assets, accelerated amortization of intangible assets and other events. 3M expenses the costs incurred to
renew or extend the term of intangible assets.
NOTE 4. Restructuring Actions
During the fourth quarter of 2015, management approved and committed to undertake certain restructuring actions primarily
focused on structural overhead, largely in the U.S. and slower-growing markets, with particular emphasis on Europe, Middle
East, and Africa (EMEA) and Latin America. This impacted approximately 1,700 positions worldwide and resulted in a fourth
quarter 2015 pre-tax charge of $114 million.
Components of these restructuring actions, including cash and non-cash impacts, follow:
(Millions) Employee-Related Asset-Related Total
Expense incurred $ 98 $ 16 $ 114
Non-cash changes (8) (16) (24)
Cash payments (27) - (27)
Accrued restructuring action balances as of December 31, 2015 $ 63 $ - $ 63
Cash payments (35) - (35)
Accrued restructuring action balances as of June 30, 2016 $ 28 $ - $ 28
Non-cash changes include certain pension settlements and special termination benefits recorded in accrued pension and
postretirement benefits and accelerated depreciation resulting from the cessation of use of certain long-lived assets.
Remaining activities related to the restructuring are expected to be completed in 2016.
NOTE 5. Supplemental Equity and Comprehensive Income Information
Consolidated Statement of Changes in Equity
Three months ended June 30, 2016
3M Company Shareholders
Common Accumulated
Stock and Other
Additional Comprehensive Non-
Paid-in Retained Treasury Income controlling
(Millions) Total Capital Earnings Stock (Loss) Interest
Balance at March 31, 2016 $ 11,774 $ 4,925 $ 36,785 $ (23,716) $ (6,261) $ 41
Net income 1,293 1,291 2
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment 37 37 -
Defined benefit pension and post-retirement plans adjustment 67 67 -
Debt and equity securities - unrealized gain (loss) - - -
Cash flow hedging instruments - unrealized gain (loss) (27) (27) -
Total other comprehensive income (loss), net of tax 77
Dividends declared (672) (672)
Stock-based compensation 47 47
Reacquired stock (837) (837)
Issuances pursuant to stock option and benefit plans 255 (210) 465
Balance at June 30, 2016 $ 11,937 $ 4,972 $ 37,194 $ (24,088) $ (6,184) $ 43
Six months ended June 30, 2016
3M Company Shareholders
Common Accumulated
Stock and Other
Additional Comprehensive Non-
Paid-in Retained Treasury Income controlling
(Millions) Total Capital Earnings Stock (Loss) Interest
Balance at December 31, 2015 $ 11,747 $ 4,800 $ 36,575 $ (23,308) $ (6,359) $ 39
Net income 2,571 2,566 5
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment 175 176 (1)
Defined benefit pension and post-retirement plans adjustment 136 136 -
Debt and equity securities - unrealized gain (loss) - - -
Cash flow hedging instruments - unrealized gain (loss) (137) (137) -
Total other comprehensive income (loss), net of tax 174
Dividends declared (1,344) (1,344)
Stock-based compensation 172 172
Reacquired stock (2,000) (2,000)
Issuances pursuant to stock option and benefit plans 617 (603) 1,220
Balance at June 30, 2016 $ 11,937 $ 4,972 $ 37,194 $ (24,088) $ (6,184) $ 43
Three months ended June 30, 2015
3M Company Shareholders
Common Accumulated
Stock and Other
Additional Comprehensive Non-
Paid-in Retained Treasury Income controlling
(Millions) Total Capital Earnings Stock (Loss) Interest
Balance at March 31, 2015 $ 13,952 $ 4,616 $ 35,080 $ (19,458) $ (6,321) $ 35
Net income 1,303 1,300 3
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment 23 24 (1)
Defined benefit pension and post-retirement plans adjustment 96 96 -
Debt and equity securities - unrealized gain (loss) - - -
Cash flow hedging instruments - unrealized gain (loss) (32) (32) -
Total other comprehensive income (loss), net of tax 87
Dividends declared (646) (646)
Stock-based compensation, net of tax impacts 78 78
Reacquired stock (1,787) (1,787)
Issuances pursuant to stock option and benefit plans 143 (119) 262
Balance at June 30, 2015 $ 13,130 $ 4,694 $ 35,615 $ (20,983) $ (6,233) $ 37
Six months ended June 30, 2015
3M Company Shareholders
Common Accumulated
Stock and Other
Additional Comprehensive Non-
Paid-in Retained Treasury Income controlling
(Millions) Total Capital Earnings Stock (Loss) Interest
Balance at December 31, 2014 $ 13,142 $ 4,388 $ 34,317 $ (19,307) $ (6,289) $ 33
Net income 2,504 2,499 5
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment (170) (169) (1)
Defined benefit pension and post-retirement plans adjustment 187 187 -
Debt and equity securities - unrealized gain (loss) - - -
Cash flow hedging instruments - unrealized gain (loss) 38 38 -
Total other comprehensive income (loss), net of tax 55
Dividends declared (649) (649)
Stock-based compensation, net of tax impacts 306 306
Reacquired stock (2,683) (2,683)
Issuances pursuant to stock option and benefit plans 455 (552) 1,007
Balance at June 30, 2015 $ 13,130 $ 4,694 $ 35,615 $ (20,983) $ (6,233) $ 37
In December 2014, 3M's Board of Directors declared a first quarter 2015 dividend of $1.025 per share (paid in March 2015).
This reduced 3M's stockholder equity and increased other current liabilities as of December 31, 2014, by approximately $0.6
billion.
Changes in Accumulated Other Comprehensive Income (Loss) Attributable to 3M by Component
Three months ended June 30, 2016
Total
Defined Benefit Debt and Cash Flow Accumulated
Pension and Equity Hedging Other
Cumulative Postretirement Securities, Instruments, Comprehensive
Translation Plans Unrealized Unrealized Income
(Millions) Adjustment Adjustment Gain (Loss) Gain (Loss) (Loss)
Balance at March 31, 2016, net of tax: $ (1,540) $ (4,735) $ - $ 14 $ (6,261)
Other comprehensive income (loss), before tax:
Amounts before reclassifications 59 - - (15) 44
Amounts reclassified out - 101 - (28) 73
Total other comprehensive income (loss), before tax 59 101 - (43) 117
Tax effect (22) (34) - 16 (40)
Total other comprehensive income (loss), net of tax 37 67 - (27) 77
Balance at June 30, 2016, net of tax: $ (1,503) $ (4,668) $ - $ (13) $ (6,184)
Six months ended June 30, 2016
Total
Defined Benefit Debt and Cash Flow Accumulated
Pension and Equity Hedging Other
Cumulative Postretirement Securities, Instruments, Comprehensive
Translation Plans Unrealized Unrealized Income
(Millions) Adjustment Adjustment Gain (Loss) Gain (Loss) (Loss)
Balance at December 31, 2015, net of tax: $ (1,679) $ (4,804) $ - $ 124 $ (6,359)
Other comprehensive income (loss), before tax:
Amounts before reclassifications 119 - - (136) (17)
Amounts reclassified out - 204 - (80) 124
Total other comprehensive income (loss), before tax 119 204 - (216) 107
Tax effect 57 (68) - 79 68
Total other comprehensive income (loss), net of tax 176 136 - (137) 175
Balance at June 30, 2016, net of tax: $ (1,503) $ (4,668) $ - $ (13) $ (6,184)
Three months ended June 30, 2015
Total
Defined Benefit Debt and Cash Flow Accumulated
Pension and Equity Hedging Other
Cumulative Postretirement Securities, Instruments, Comprehensive
Translation Plans Unrealized Unrealized Income
(Millions) Adjustment Adjustment Gain (Loss) Gain (Loss) (Loss)
Balance at March 31, 2015, net of tax: $ (1,288) $ (5,202) $ - $ 169 $ (6,321)
Other comprehensive income (loss), before tax:
Amounts before reclassifications (12) - - (16) (28)
Amounts reclassified out - 141 - (34) 107
Total other comprehensive income (loss), before tax (12) 141 - (50) 79
Tax effect 36 (45) - 18 9
Total other comprehensive income (loss), net of tax 24 96 - (32) 88
Balance at June 30, 2015, net of tax: $ (1,264) $ (5,106) $ - $ 137 $ (6,233)
Six months ended June 30, 2015
Total
Defined Benefit Debt and Cash Flow Accumulated
Pension and Equity Hedging Other
Cumulative Postretirement Securities, Instruments, Comprehensive
Translation Plans Unrealized Unrealized Income
(Millions) Adjustment Adjustment Gain (Loss) Gain (Loss) (Loss)
Balance at December 31, 2014, net of tax: $ (1,095) $ (5,293) $ - $ 99 $ (6,289)
Other comprehensive income (loss), before tax:
Amounts before reclassifications (56) 24 - 120 88
Amounts reclassified out - 265 - (61) 204
Total other comprehensive income (loss), before tax (56) 289 - 59 292
Tax effect (113) (102) - (21) (236)
Total other comprehensive income (loss), net of tax (169) 187 - 38 56
Balance at June 30, 2015, net of tax $ (1,264) $ (5,106) $ - $ 137 $ (6,233)
Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but
tax effects within cumulative translation does include impacts from items such as net investment hedge transactions.
Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part
of net income.
Reclassifications out of Accumulated Other Comprehensive Income Attributable to 3M
Amount Reclassified from
Details about Accumulated Other Accumulated Other Comprehensive Income
Comprehensive Income Components Three months ended June 30, Six months ended June 30, Location on Income
(Millions) 2016 2015 2016 2015 Statement
Gains (losses) associated with, defined benefit pension and postretirement plans amortization
Transition asset $ 1 $ 1 $ 1 $ 1 See Note 9
Prior service benefit 24 17 47 35 See Note 9
Net actuarial loss (126) (159) (252) (318) See Note 9
Curtailments/Settlements - - - 17 See Note 9
Total before tax (101) (141) (204) (265)
Tax effect 34 45 68 91 Provision for income taxes
Net of tax $ (67) $ (96) $ (136) $ (174)
Debt and equity security gains (losses)
Sales or impairments of securities $ - $ - $ - $ - Selling, general and administrative expenses
Total before tax - - - -
Tax effect - - - - Provision for income taxes
Net of tax $ - $ - $ - $ -
Cash flow hedging instruments gains (losses)
Foreign currency forward/option contracts $ 28 $ 35 $ 81 $ 65 Cost of sales
Commodity price swap contracts - - - (2) Cost of sales
Interest rate swap contracts - (1) (1) (2) Interest expense
Total before tax 28 34 80 61
Tax effect (11) (12) (29) (22) Provision for income taxes
Net of tax $ 17 $ 22 $ 51 $ 39
Total reclassifications for the period, net of tax $ (50) $ (74) $ (85) $ (135)
NOTE 6. Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With
few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by
tax authorities for years before 2005.
The IRS has completed its field examination of the Company's U.S. federal income tax returns for the years 2005 through
2014. The Company protested certain IRS positions within these tax years and entered into the administrative appeals
process with the IRS. In December 2012, the Company received a statutory notice of deficiency for the 2006 year. The
Company filed a petition in Tax Court in the first quarter of 2013 relating to the 2006 tax year.
Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2015 and 2016.
It is anticipated that the IRS will complete its examination of the Company for 2015 by the end of the first quarter of
2017 and for 2016 by the end of the first quarter of 2018. As of June 30, 2016, the IRS has not proposed any significant
adjustments to the Company's tax positions for which the Company is not adequately reserved.
Payments relating to other proposed assessments arising from the 2005 through 2016 examinations may not be made until a
final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from
the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also audit
activity in several U.S. state and foreign jurisdictions.
3M anticipates changes to the Company's uncertain tax positions due to the closing and resolution of audit issues for
various audit years mentioned above and closure of statutes. The Company is not currently able to reasonably estimate the
amount by which the liability for unrecognized tax benefits will increase or decrease during the next 12 months as a result
of the ongoing income tax authority examinations. The total amounts of unrecognized tax benefits that, if recognized, would
affect the effective tax rate as of June 30, 2016 and December 31, 2015 are $383 million and $369 million, respectively.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company
recognized in the consolidated statement of income on a gross basis approximately $1 million of expense and $4 million of
benefit for the three months ended June 30, 2016 and June 30, 2015, respectively, and approximately $3 million of benefit
and $2 million of benefit for the six months ended June 30, 2016 and June 30, 2015, respectively. At June 30, 2016 and
December 31, 2015, accrued interest and penalties in the consolidated balance sheet on a gross basis were $39 million and
$45 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax
positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of
such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance
of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash
to the taxing authority to an earlier period.
The effective tax rate for the second quarter of 2016 was 29.6 percent, compared to 28.1 percent in the second quarter of
2015, an increase of 1.5 percentage points. Primary factors that increased the Company's effective tax rate on a combined
basis by 5.3 percentage points year-on-year included international taxes that were impacted by changes to both the
geographic mix of income before taxes and additional tax expense related to global cash optimization actions, plus
remeasurements of 3M's uncertain tax positions. This increase was partially offset by a 3.8 percentage points year-on-year
decrease to the Company's effective tax rate. Primary factors that decreased the effective tax rate included the
recognition of excess tax benefits beginning in 2016 related to employee share-based payments (resulting from the adoption
of ASU No. 2016-09, as discussed in Note 1), the reinstatement of the R&D tax credit, and other items.
The effective tax rate for the first six months of 2016 was 28.2 percent, compared to 28.8 percent in the first six months
of 2015, a decrease of 0.6 percentage points. Primary factors that decreased the Company's effective tax rate on a combined
basis by 4.5 percentage points for the first six months of 2016 when compared to the same period for 2015 included the
recognition of excess tax benefits beginning in 2016 related to employee share-based payments (resulting from the adoption
of ASU No. 2016-09, as discussed in Note 1), the reinstatement of the R&D tax credit, and other items. This decrease was
partially offset by a 3.9 percentage point year-on-year increase, which included international taxes that were impacted by
changes to both the geographic mix of income before taxes and additional tax expense related to global cash optimization
actions, plus remeasurements of 3M's uncertain tax positions.
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 exits. As of June
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