Picture of 3M Co logo

MMM 3M Co News Story

0.000.00%
us flag iconLast trade - 00:00
IndustrialsBalancedLarge CapSuper Stock

REG - 3M Company - Half-year Report










RNS Number : 0786W
3M Company
27 July 2018
 

 

 

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

 

http://www.rns-pdf.londonstockexchange.com/rns/0786W_1-2018-7-27.pdf

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

Commission file number:  1-3285

 

3M COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

 

DELAWARE

 

41-0417775

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

3M Center, St. Paul, Minnesota

 

55144

(Address of principal executive offices)

 

(Zip Code)

 

(651) 733-1110

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for

complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

 

 

 

Class

 

Outstanding at June 30, 2018

Common Stock, $0.01 par value per share

 

586,613,476 shares

 

 

 

 

 

       3M COMPANY

    Form 10-Q for the Quarterly Period Ended June 30, 2018






TABLE OF CONTENTS

BEGINNING
PAGE

PART I

FINANCIAL INFORMATION





ITEM 1.

Financial Statements



Index to Financial Statements:



Consolidated Statement of Income

3


Consolidated Statement of Comprehensive Income

4


Consolidated Balance Sheet

5


Consolidated Statement of Cash Flows

6


Notes to Consolidated Financial Statements



Note 1. Significant Accounting Policies

7


Note 2. Revenue

13


Note 3. Acquisitions and Divestitures

16


Note 4. Goodwill and Intangible Assets

17


Note 5. Restructuring Actions and Exit Activities

19


Note 6. Supplemental Income Statement Information

20


Note 7. Supplemental Equity and Comprehensive Income Information

20


Note 8. Income Taxes

24


Note 9. Marketable Securities

26


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

26


Note 11. Pension and Postretirement Benefit Plans

27


Note 12. Derivatives

28


Note 13. Fair Value Measurements

34


Note 14. Commitments and Contingencies

37


Note 15. Stock-Based Compensation

46


Note 16. Business Segments

50


Report of Independent Registered Public Accounting Firm

52




ITEM 2.

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



Index to Management's Discussion and Analysis:



Overview

53


Results of Operations

60


Performance by Business Segment

65


Financial Condition and Liquidity

72


Cautionary Note Concerning Factors That May Affect Future Results

78




ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

78




ITEM 4.

Controls and Procedures

79




PART II

OTHER INFORMATION





ITEM 1.

Legal Proceedings

80




ITEM 1A.

Risk Factors

80




ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

82




ITEM 3.

Defaults Upon Senior Securities

83




ITEM 4.

Mine Safety Disclosures

83




ITEM 5.

Other Information

83




ITEM 6.

Exhibits

83

 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended June 30, 2018

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

 
















    

Three months ended 

    

Six months ended 




June 30,


June 30,


(Millions, except per share amounts)

    

2018

    

2017

    

2018


2017


Net sales


$

 8,390


$

 7,810


$

 16,668


$

 15,495


Operating expenses














Cost of sales



 4,227



 4,020



 8,463



 7,902


Selling, general and administrative expenses



 1,800



 1,620



 4,373



 3,234


Research, development and related expenses



 468



 478



 954



 954


Gain on sale of businesses



 (506)



 (461)



 (530)



 (490)


Total operating expenses



 5,989



 5,657



 13,260



 11,600


Operating income



 2,401



 2,153



 3,408



 3,895
















Other expense (income), net



 51



 11



 93



 16
















Income before income taxes



 2,350



 2,142



 3,315



 3,879


Provision for income taxes



 488



 557



 847



 968


Net income including noncontrolling interest


$

 1,862


$

 1,585


$

 2,468


$

 2,911
















Less: Net income attributable to noncontrolling interest



 5



 2



 9



 5
















Net income attributable to 3M


$

 1,857


$

 1,583


$

 2,459


$

 2,906
















Weighted average 3M common shares outstanding - basic



 591.4



 598.1



 593.8



 598.1


Earnings per share attributable to 3M common shareholders - basic


$

 3.14


$

 2.65


$

 4.14


$

 4.86
















Weighted average 3M common shares outstanding - diluted



 604.2



 612.8



 608.5



 612.4


Earnings per share attributable to 3M common shareholders - diluted


$

 3.07


$

 2.58


$

 4.04


$

 4.74
















Cash dividends paid per 3M common share


$

 1.36


$

 1.175


$

 2.72


$

 2.35


 

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

 



 

3M Company and Subsidiaries

Consolidated Statement of Comprehensive Income

(Unaudited)

 
















    

Three months ended 

    

Six months ended 




June 30,


June 30,


(Millions)

    

2018

    

2017

    

2018

    

2017


Net income including noncontrolling interest


$

 1,862


$

 1,585


$

 2,468


$

 2,911


Other comprehensive income (loss), net of tax:














Cumulative translation adjustment



 (496)



 (67)



 (329)



 225


Defined benefit pension and postretirement plans adjustment



 114



 78



 230



 161


Cash flow hedging instruments, unrealized gain (loss)



 162



 (51)



 101



 (127)


Total other comprehensive income (loss), net of tax



 (220)



 (40)



 2



 259


Comprehensive income (loss) including noncontrolling interest



 1,642



 1,545



 2,470



 3,170


Comprehensive (income) loss attributable to noncontrolling interest



 (1)



 (2)



 (4)



 (8)


Comprehensive income (loss) attributable to 3M


$

 1,641


$

 1,543


$

 2,466


$

 3,162


 

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

 



 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 










    

June 30,

    

December 31,


(Dollars in millions, except per share amount)

    

2018

    

2017


Assets








Current assets








Cash and cash equivalents


$

 2,801


$

 3,053


Marketable securities - current



 385



 1,076


Accounts receivable - net



 5,383



 4,911


Inventories








Finished goods



 1,979



 1,915


Work in process



 1,292



 1,218


Raw materials and supplies



 967



 901


Total inventories



 4,238



 4,034


Prepaids



 713



 937


Other current assets



 370



 266


Total current assets



 13,890



 14,277


Property, plant and equipment



 24,758



 24,914


Less: Accumulated depreciation



 (16,113)



 (16,048)


Property, plant and equipment - net



 8,645



 8,866


Goodwill



 10,107



 10,513


Intangible assets - net



 2,787



 2,936


Other assets



 1,349



 1,395


Total assets


$

 36,778


$

 37,987


Liabilities








Current liabilities








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


$

 3,225


$

 1,853


Accounts payable



 1,871



 1,945


Accrued payroll



 646



 870


Accrued income taxes



 293



 310


Other current liabilities



 2,867



 2,709


Total current liabilities



 8,902



 7,687










Long-term debt



 11,294



 12,096


Pension and postretirement benefits



 3,254



 3,620


Other liabilities



 2,900



 2,962


Total liabilities


$

 26,350


$

 26,365


Commitments and contingencies (Note 14)








Equity








3M Company shareholders' equity:








Common stock par value, $.01 par value; 944,033,056 shares issued


$

 9


$

 9


Additional paid-in capital



 5,550



 5,352


Retained earnings



 39,442



 39,115


Treasury stock, at cost: 357,419,580 shares at June 30, 2018;

    349,148,819 shares at December 31, 2017



 (27,617)



 (25,887)


Accumulated other comprehensive income (loss)



 (7,019)



 (7,026)


Total 3M Company shareholders' equity



 10,365



 11,563


Noncontrolling interest



 63



 59


Total equity


$

 10,428


$

 11,622


Total liabilities and equity


$

 36,778


$

 37,987


 

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



 

3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

 










    

Six months ended 




June 30,


(Millions)

    

2018

    

2017


Cash Flows from Operating Activities








Net income including noncontrolling interest


$

 2,468


$

 2,911


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








Depreciation and amortization



 762



 818


Company pension and postretirement contributions



 (261)



 (279)


Company pension and postretirement expense



 204



 163


Stock-based compensation expense



 208



 206


Gain on sale of businesses



 (530)



 (490)


Deferred income taxes



 (1)



 (120)


Changes in assets and liabilities








Accounts receivable



 (606)



 (412)


Inventories



 (337)



 (347)


Accounts payable



 (12)



 (60)


Accrued income taxes (current and long-term)



 234



 257


Other - net



 (87)



 (17)


Net cash provided by operating activities



 2,042



 2,630










Cash Flows from Investing Activities








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



 (669)



 (589)


Proceeds from sale of PP&E and other assets



 96



 13


Acquisitions, net of cash acquired



 13



 -


Purchases of marketable securities and investments



 (964)



 (407)


Proceeds from maturities and sale of marketable securities and investments



 1,636



 543


Proceeds from sale of businesses, net of cash sold



 806



 862


Other - net



 (11)



 5


Net cash provided by investing activities



 907



 427










Cash Flows from Financing Activities








Change in short-term debt - net



 774



 (113)


Repayment of debt (maturities greater than 90 days)



 (6)



 (650)


Proceeds from debt (maturities greater than 90 days)



 6



 -


Purchases of treasury stock



 (2,537)



 (1,184)


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



 305



 496


Dividends paid to shareholders



 (1,612)



 (1,403)


Other - net



 (26)



 (2)


Net cash used in financing activities



 (3,096)



 (2,856)










Effect of exchange rate changes on cash and cash equivalents



 (105)



 55










Net increase (decrease) in cash and cash equivalents



 (252)



 256


Cash and cash equivalents at beginning of year



 3,053



 2,398


Cash and cash equivalents at end of period


$

 2,801


$

 2,654


 

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



 

3M Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1.  Significant Accounting Policies

 

Basis of Presentation

 

The interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair statement of the Company's consolidated financial position, results of operations and cash flows for the periods presented. These adjustments consist of normal, recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year. The interim consolidated financial statements and notes are presented as permitted by the requirements for Quarterly Reports on Form 10-Q. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's consolidated financial statements and notes included in its Current Report on Form 8-K dated May 8, 2018 (which updated 3M's 2017 Annual Report on Form 10-K).

 

As described in the "New Accounting Pronouncements" section, the Company adopted Accounting Standards Update (ASU) No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, effective January 1, 2018 on a retrospective basis. This ASU changed how 3M presents net periodic benefit cost within its consolidated statement of income, as reflected in the table that follows. The financial information presented herein reflects these impacts for all periods presented.

 












Three months ended June 30, 2017


Previously






(Millions)

    

Reported

    

Revised

    

Change













Net Sales


$

 7,810


$

 7,810


$

 -


Operating expenses











Cost of sales



 4,007



 4,020



 13


Selling, general and administrative expenses



 1,607



 1,620



 13


Research, development and related expenses



 473



 478



 5


Gain on sale of businesses



 (461)



 (461)



 -


Total operating expenses



 5,626



 5,657



 31


Operating income


$

 2,184


$

 2,153


$

 (31)













Other expense (income), net


$

 42


$

 11


$

 (31)













Income before income taxes


$

 2,142


$

 2,142


$

 -


 












Six months ended June 30, 2017


Previously






(Millions)

    

Reported

    

Revised

    

Change













Net Sales


$

 15,495


$

 15,495


$

 -


Operating expenses











Cost of sales



 7,876



 7,902



 26


Selling, general and administrative expenses



 3,207



 3,234



 27


Research, development and related expenses



 944



 954



 10


Gain on sale of businesses



 (490)



 (490)



 -


Total operating expenses



 11,537



 11,600



 63


Operating income


$

 3,958


$

 3,895


$

 (63)













Other expense (income), net


$

 79


$

 16


$

 (63)













Income before income taxes


$

 3,879


$

 3,879


$

 -


 

In addition, as described in Note 16, effective in the first quarter of 2018, the Company changed its business segment reporting in its continuing effort to improve the alignment of businesses around markets and customers. These changes included the consolidation of customer account activity within international countries (expanding dual credit reporting) and the centralization of manufacturing and supply chain technology platforms. Segment information presented herein reflects the impact of these changes for all periods presented.

 

The Company updated its financial information and disclosures in its Current Report on Form 8-K dated May 8, 2018 (which updated 3M's 2017 Annual Report on Form 10-K) to reflect the retrospective application of ASU No. 2017-07 and the preceding business reporting changes.

 

Changes to Significant Accounting Policies

 

The following accounting policies have been updated since the Company's 2017 Annual Report on Form 10-K (which was updated by 3M's Current Report on Form 8-K dated May 8, 2018 in regards to the adoption of ASU 2017-07 and the business segment reporting changes discussed above).

 

Revenue (sales) recognition: As described in the "New Accounting Pronouncements" section, 3M adopted ASU No. 2014-09, Revenue from Contracts with Customers, and other related ASUs on January 1, 2018 using the modified retrospective transition approach. The Company's accounting policy with respect to revenue recognition and additional disclosure relative to this ASU are included in Note 2.

 

Investments: As described in the "New Accounting Pronouncements" section, 3M adopted ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, effective January 1, 2018. As a result, 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. Further, the change in balance of these securities for the three and six months ended June 30, 2018 was not considered material for additional disclosure.

 

Foreign Currency Translation

 

Local currencies generally are considered the functional currencies outside the United States. 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 month-end exchange rates of each applicable month. Cumulative translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in shareholders' equity.

 

3M has a subsidiary in Venezuela, the financial statements of which are 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 is immaterial as a percent of 3M's consolidated operating income for 2017. The Venezuelan government sets official rates of exchange and conditions precedent to purchase foreign currency at these rates with local currency. The government has also operated various expanded secondary currency exchange mechanisms that have been eliminated and replaced from time to time. Such rates and conditions have been and continue to be subject to change. For the periods presented, the financial statements of 3M's Venezuelan subsidiary were remeasured utilizing the rate associated with the secondary auction mechanism, Tipo de Cambio Complementario (DICOM), or its predecessor. During the same periods, the Venezuelan government's official exchange was Tipo de Cambio Protegido (DIPRO), or its predecessor, until its discontinuance in the first quarter of 2018.

 

Note 1 in 3M's Current Report on Form 8-K dated May 8, 2018 (which updated 3M's 2017 Annual Report on Form 10-K) provides additional information the Company considers in determining the exchange rate used relative to its Venezuelan subsidiary as well as factors which could lead to its deconsolidation. The Company continues to monitor these circumstances. Changes in applicable exchange rates or exchange mechanisms may continue in the future. These changes could impact the rate of exchange applicable to remeasure the Company's net monetary assets (liabilities) denominated in Venezuelan Bolivars (VEF). As of June 30, 2018, the Company had a balance of net monetary assets denominated in VEF of less than 860 billion VEF and the DIPRO exchange rate was approximately 96,000 VEF per U.S. dollar. A need to deconsolidate the Company's Venezuelan subsidiary's operations may result from a lack of exchangeability of VEF-denominated cash coupled with an acute degradation in the ability to make key operational decisions due to government regulations in Venezuela. Based upon a review of factors as of June 30, 2018, the Company continues to consolidate its Venezuelan subsidiary. As of June 30, 2018, the balance of accumulated other comprehensive loss associated with this subsidiary was approximately $145 million, and the amount of intercompany receivables due from this subsidiary and its equity balance were not significant.

 

3M has subsidiaries in Argentina, the operating income of which is less than one half of one percent of 3M's consolidated operating income for 2017. Based on various indices, Argentina's cumulative three-year inflation rate exceeded 100 percent in the second quarter of 2018, thus being considered highly inflationary. As a result, the financial statements of the Argentine subsidiaries will be remeasured as if its functional currency were that of its parent, starting in the third quarter of 2018. As of June 30, 2018, the Company had a balance of net monetary assets denominated in Argentine pesos (ARS) of less than 230 million ARS and the exchange rate was approximately 28 ARS per U.S. dollar.

 

Earnings Per Share

 

The difference in the weighted average 3M shares outstanding for calculating basic and diluted earnings per share attributable to 3M common shareholders is a result of the dilution associated with the Company's stock-based compensation plans. Certain options outstanding under these stock-based compensation plans were not included in the computation of diluted earnings per share attributable to 3M common shareholders because they would not have had a dilutive effect (3.5 million average options for the three months ended June 30, 2018; 2.7 million average options for the six months ended June 30, 2018; insignificant for the three months ended June 30, 2017; 1.6 million average options for the six months ended June 30, 2017). The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 
















    

Three months ended 

    

Six months ended 




June 30,


June 30,


(Amounts in millions, except per share amounts)

    

2018

    

2017

    

2018

    

2017


Numerator:














Net income attributable to 3M


$

 1,857


$

 1,583


$

 2,459


$

 2,906
















Denominator:














Denominator for weighted average 3M common shares outstanding - basic



 591.4



 598.1



 593.8



 598.1


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



 12.8



 14.7



 14.7



 14.3


Denominator for weighted average 3M common shares outstanding - diluted



 604.2



 612.8



 608.5



 612.4
















Earnings per share attributable to 3M common shareholders - basic


$

 3.14


$

 2.65


$

 4.14


$

 4.86


Earnings per share attributable to 3M common shareholders - diluted


$

 3.07


$

 2.58


$

 4.04


$

 4.74


 



 

New Accounting Pronouncements

 

See the Company's Current Report on Form 8-K dated May 8, 2018 (which updated 3M's 2017 Annual Report on Form 10-K) for a more detailed discussion of the standards in the tables that follow, except for those pronouncements issued subsequent to the most recent Form 10-K filing date for which separate, more detailed discussion is provided below.

 





Standards Adopted During the Current Fiscal Year

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

ASU No. 2014-09, Revenue from Contracts with Customers (as amended by ASU Nos. 2015-14, 2016-08, 2016-10, 2016-12, and 2016-20) and related ASU No. 2017-10, Determining the Customer of the Operation Services

·   Provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes most previous revenue recognition guidance, including industry-specific guidance.

·   Core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

·   Requires disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

·   Specifies the accounting for some costs to obtain or fulfill a contract with a customer.

January 1, 2018

·   See Note 2 for detailed discussion and disclosures.

·   Adopted using a modified retrospective approach. January 1, 2018 balance of retained earnings was increased by less than $2 million.

ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities

·   Requires investments in equity securities in an entity that do not result in consolidation and are not accounted for under the equity method to be measured at fair value with changes therein reflected in net income.

·   Simplifies the impairment assessment and allows for a fair value measurement alternative for equity investments without a readily determinable fair value.

·   Eliminates the previous cost method of accounting for certain equity securities that did not have readily determinable fair values.

January 1, 2018

·   Measurement alternative adopted prospectively.

·   See the preceding "Changes to Significant Accounting Policies" section for impact.

 

ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory

·   Exempts income tax accounting that requires companies to defer the income tax effects of certain intercompany transactions only for intercompany inventory transactions.

·   The exception no longer applies to intercompany sales and transfers of other assets (e.g., intangible assets).

January 1, 2018

·   Adopted using a modified retrospective approach. January 1, 2018 balance of retained earnings was decreased by less than $2 million.

ASU No. 2017-01, Clarifying the Definition of a Business

·   Narrows the previous definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business.

January 1, 2018

·   Adopted prospectively with no immediate impact.

·   Fewer sets of transferred assets and activities are expected to be considered businesses.

ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

·   Largely impacts the sale of nonfinancial assets (such as real estate and intellectual property) that do not constitute a business, when the purchaser is not a customer.

·   Seller applies certain recognition and measurement principles of ASU No. 2014-09, Revenue from Contracts with Customers, even though the purchaser is not a customer.

January 1, 2018

·   Adopted coincident with the adoption of ASU No. 2014-09 with no material impact.



 

Standards Adopted During the Current Fiscal Year (continued)

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

·   Changes previous classification of net periodic defined benefit pension and postretirement benefit costs within operating expenses.

·   Requires that only the service cost component of net periodic benefit cost be included in operating expenses and that only the service cost component is eligible for capitalization into assets such as inventory.

·   Specifies that other net periodic benefit costs components (such as interest, expected return on plan assets, prior service cost amortization and actuarial gain/loss amortization) would be reported outside of operating income.

January 1, 2018

·   Adopted on a retrospective basis.

·   No impact on previously reported income before income taxes and net income attributable to 3M. However, non-service cost components of net periodic benefit costs in prior periods have been reclassified from operating expenses and are now reported outside of operating income within other expense (income), net.

·   See the "Basis of Presentation" section above for impact of this ASU's adoption on prior period income statement amounts.

·   Prospective impact on costs capitalized into assets was not material.

ASU No. 2017-09, Scope of Modification Accounting

·   Provides that fewer changes to the terms of share-based payment awards will require accounting under the modification model (which generally would have required additional compensation cost).

January 1, 2018

·   Adopted prospectively with no immediate impact.

·   3M does not typically make changes to the terms or conditions of its issued share-based payments.

ASU No. 2017-09, Scope of Modification Accounting

·   Provides that fewer changes to the terms of share-based payment awards will require accounting under the modification model (which generally would have required additional compensation cost).

January 1, 2018

·   Adopted prospectively with no immediate impact.

·   3M does not typically make changes to the terms or conditions of its issued share-based payments.













 





Standards Issued and Not Yet Adopted

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

ASU No. 2016-02, Leases (as amended by ASU No. 2018-10)

·   Introduces a lessee model that requires entities to recognize assets and liabilities for most leases, but recognize expenses on their income statements in a manner similar to current accounting. This ASU does not make fundamental changes to existing lessor accounting.

January 1, 2019

·   Requires modified retrospective transition applied to earliest period presented.

·   3M is currently assessing this ASU's impact.

·   See the "Relevant New Standards Issued Subsequent to Most Recent Annual Report" below for further discussion on ASU No. 2018-10 issued in July 2018.

ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments

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

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

January 1, 2020

·   Required to make a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

·   3M is currently assessing this ASU's impact.

ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities

·   Shortens the amortization period to the earliest call date for the premium related to certain callable debt securities that have explicit, noncontingent call features and are callable at a fixed price and preset date.

January 1, 2019

·   3M's marketable security portfolio includes limited instances of callable debt securities held at a premium.

·   3M does not expect this ASU to have a material impact.

 



 





Standards Issued and Not Yet Adopted (continued)

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

ASU No. 2017-11, (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception

 

·   Amends (1) the classification of financial instruments with down-round features as liabilities or equity by revising certain guidance relative to evaluating if they must be accounted for as derivative instruments and (2) the guidance on recognition and measurement of freestanding equity-classified instruments.

January 1, 2019

·   No financial instruments with down-round features have been issued.

·   3M does not expect this ASU to have a material impact.

ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities

·   Amends existing guidance to simplify application of hedge accounting in certain situations and allow companies to better align their hedge accounting with risk management activities.

·   Simplifies related accounting by eliminating requirement to separately measure and report hedge ineffectiveness.

·   Expands an entity's ability to hedge nonfinancial and financial risk components.

January 1, 2019

·   Required to make a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

·   3M is currently assessing this ASU's impact.

 

Relevant New Standards Issued Subsequent to Most Recent Annual Report

 

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify, to retained earnings, the one-time income tax effects stranded in accumulated other comprehensive income (AOCI) arising from the change in the U.S. federal corporate tax rate as a result of the Tax Cuts and Jobs Act of 2017. An entity that elects to make this reclassification must consider all items in AOCI that have tax effects stranded as a result of the tax rate change, and must disclose the reclassification of these tax effects as well as the entity's policy for releasing income tax effects from AOCI. The ASU may be applied either retrospectively or as of the beginning of the period of adoption. For 3M, the ASU is effective January 1, 2019. While this ASU will have no impact on 3M's results of operations, the Company is currently assessing this standard's impact on its consolidated financial condition.

 

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which largely aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees. The ASU also clarifies that any share-based payment issued to a customer should be evaluated under ASC 606, Revenue from Contracts with Customers. The ASU requires a modified retrospective transition approach. For 3M, the ASU is effective as of January 1, 2019. Because the Company does not grant share-based payments to nonemployees or customers, this ASU will not have a material impact on its consolidated results of operations and financial condition.

 

In June 2018, the FASB issued ASU No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The ASU applies to entities that receive or make contributions, which primarily are not-for-profit entities but also affects business entities that make contributions. In the context of business entities that make contributions, the FASB clarified that a contribution is conditional if the arrangement includes both a barrier for the recipient to be entitled to the assets transferred and a right of return for the assets transferred (or a right of release of the business entity's obligation to transfer assets). The recognition of contribution expense is deferred for conditional arrangements and is immediate for unconditional arrangements. The ASU requires modified prospective transition to arrangements that have not been completed as of the effective date or that are entered into after the effective date, but full retrospective application to each period presented is permitted. For 3M, the ASU is effective as of January 1, 2019. The Company does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.  

 

In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amends ASU No. 2016-02, Leases. The new ASU includes certain clarifications to address potential narrow-scope implementation issues which the Company is incorporating into its assessment and adoption of ASU No. 2016-02. This ASU has the same transition requirements and effective date as ASU No. 2016-02, which for 3M is January 1, 2019.

 

NOTE 2.  Revenue

 

The Company adopted ASU No. 2014-09 and related standards (collectively, Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers), as described in Note 1, on January 1, 2018 using the modified retrospective method of adoption. Prior periods have not been restated. Due to the cumulative net impact of adopting ASC 606, the January 1, 2018 balance of retained earnings was increased by less than $2 million, primarily relating to the accelerated recognition for software installation service and training revenue. This cumulative impact reflects retrospective application of ASC 606 only to contracts that were not completed as of January 1, 2018. Further, the Company applied the practical expedient permitting the effect of all contract modifications that occurred before January 1, 2018 to be aggregated in the transition accounting. The impact of applying ASC 606 as compared with previous guidance applied to revenues and costs was not material for the three and six months ended June 30, 2018.

 

Performance Obligations:

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.

 

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.

 

Contract Balances:

Deferred income (current portion) as of June 30, 2018 and December 31, 2017 was $512 million and $513 million, respectively, and primarily relates to revenue that is recognized over time for one-year software license contracts, the changes in balance of which are related to the satisfaction or partial satisfaction of these contracts. The balance also contains a deferral of income for goods that are in-transit at period end for which control transfers to the customer upon delivery. Approximately $110 million and $390 million of the December 31, 2017 balance was recognized as revenue during the three and six months ended June 30, 2018, respectively. The amount of noncurrent deferred income is not considered significant.

 

Exemptions and Practical Expedients Applied or Elected:

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.

 

Disaggregated revenue information:

The Company views the following disaggregated disclosures as useful to understanding the composition of revenue recognized during the respective reporting periods:

 

















Three months ended 


Six months ended 




June 30,


June 30,


Net Sales (Millions)


2018

    

2017

    

2018

    

2017


Abrasives


$

 473


$

 437


$

 948


$

 867


Adhesives and Tapes



 1,165



 1,096



 2,318



 2,171


Advanced Materials



 317



 287



 621



 574


Automotive and Aerospace



 519



 489



 1,078



 997


Automotive Aftermarket



 438



 418



 856



 835


Separation and Purification



 238



 219



 474



 439


Other Industrial



 (2)



 -



 (3)



 (1)


Total Industrial Business Group


$

 3,148


$

 2,946


$

 6,292


$

 5,882
















Commercial Solutions


$

 502


$

 457


$

 987


$

 900


Personal Safety



 957



 721



 1,919



 1,428


Roofing Granules



 99



 96



 200



 193


Transportation Safety



 257



 295



 493



 598


Other Safety and Graphics



 -



 -



 (1)



 -


Total Safety and Graphics Business Group


$

 1,815


$

 1,569


$

 3,598


$

 3,119
















Drug Delivery


$

 119


$

 120


$

 238


$

 241


Food Safety



 84



 76



 166



 149


Health Information Systems



 205



 195



 410



 386


Medical Solutions



 772



 729



 1,548



 1,443


Oral Care



 342



 330



 696



 666


Other Health Care



 (2)



 (1)



 (2)



 (1)


Total Health Care Business Group


$

 1,520


$

 1,449


$

 3,056


$

 2,884
















Electronics


$

 925


$

 883


$

 1,856


$

 1,761


Energy



 411



 404



 831



 817


Other Electronics and Energy



 1



 3



 -



 3


Total Electronics and Energy Business Group


$

 1,337


$

 1,290


$

 2,687


$

 2,581
















Consumer Health Care


$

 100


$

 104


$

 202


$

 206


Home Care



 255



 253



 524



 514


Home Improvement



 507



 460



 954



 868


Stationery and Office



 351



 340



 650



 632


Other Consumer



 10



 12



 20



 22


Total Consumer Business Group


$

 1,223


$

 1,169


$

 2,350


$

 2,242
















Corporate and Unallocated


$

 12


$

 2


$

 12


$

 3


Elimination of Dual Credit



 (665)



 (615)



 (1,327)



 (1,216)


Total Company


$

 8,390


$

 7,810


$

 16,668


$

 15,495


 

 






















Three months ended June 30, 2018


 Net Sales (Millions)

    

United States


Asia Pacific

    

Europe, Middle East and Africa

    

Latin America and Canada

    

Other Unallocated

    

Worldwide


Industrial


$

 1,182


$

 870


$

 777


$

 318


$

 1


$

 3,148


Safety and Graphics



 747



 419



 443



 206



 -



 1,815


Health Care



 703



 292



 381



 145



 (1)



 1,520


Electronics and Energy



 244



 899



 131



 63



 -



 1,337


Consumer



 742



 236



 138



 105



 2



 1,223


Corporate and Unallocated



 8



 1



 1



 4



 (2)



 12


Elimination of Dual Credit



 (278)



 (213)



 (113)



 (60)



 (1)



 (665)


Total Company


$

 3,348


$

 2,504


$

 1,758


$

 781


$

 (1)


$

 8,390


 






















Six months ended June 30, 2018


 Net Sales (Millions)

    

United States


Asia Pacific

    

Europe, Middle East and Africa

    

Latin America and Canada

    

Other Unallocated

    

Worldwide


Industrial


$

 2,282


$

 1,814


$

 1,562


$

 634


$

 -


$

 6,292


Safety and Graphics



 1,399



 916



 879



 404



 -



 3,598


Health Care



 1,405



 591



 775



 286



 (1)



 3,056


Electronics and Energy



 473



 1,810



 276



 129



 (1)



 2,687


Consumer



 1,352



 508



 279



 211



 -



 2,350


Corporate and Unallocated



 8



 -



 1



 3



 -



 12


Elimination of Dual Credit



 (527)



 (459)



 (222)



 (119)



 -



 (1,327)


Total Company


$

 6,392


$

 5,180


$

 3,550


$

 1,548


$

 (2)


$

 16,668


 






















Three months ended June 30, 2017


 Net Sales (Millions)

    

United States


Asia Pacific

    

Europe, Middle East and Africa

    

Latin America and Canada

    

Other Unallocated

    

Worldwide


Industrial


$

 1,114


$

 810


$

 709


$

 314


$

 (1)


$

 2,946


Safety and Graphics



 639



 370



 364



 195



 1



 1,569


Health Care



 697



 261



 353



 137



 1



 1,449


Electronics and Energy



 233



 855



 136



 67



 (1)



 1,290


Consumer



 694



 231



 139



 105



 -



 1,169


Corporate and Unallocated



 2



 2



 -



 (1)



 (1)



 2


Elimination of Dual Credit



 (252)



 (207)



 (96)



 (60)



 -



 (615)


Total Company


$

 3,127


$

 2,322


$

 1,605


$

 757


$

 (1)


$

 7,810


 






















Six months ended June 30, 2017


 Net Sales (Millions)

    

United States


Asia Pacific

    

Europe, Middle East and Africa

    

Latin America and Canada

    

Other Unallocated

    

Worldwide


Industrial


$

 2,196


$

 1,663


$

 1,405


$

 619


$

 (1)


$

 5,882


Safety and Graphics



 1,220



 801



 715



 383



 -



 3,119


Health Care



 1,387



 521



 706



 270



 -



 2,884


Electronics and Energy



 464



 1,706



 279



 132



 -



 2,581


Consumer



 1,281



 490



 265



 207



 (1)



 2,242


Corporate and Unallocated



 3



 1



 -



 -



 (1)



 3


Elimination of Dual Credit



 (483)



 (427)



 (188)



 (118)



 -



 (1,216)


Total Company


$

 6,068


$

 4,755


$

 3,182


$

 1,493


$

 (3)


$

 15,495


 

 

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.

 

There were no business combinations that closed during the six months ended June 30, 2018 and 2017.

 

As discussed in 3M's Current Report on Form 8-K dated May 8, 2018 (which updated 3M's 2017 Annual Report on Form 10-K), in October 2017, 3M completed the acquisition of Scott Safety for $2.0 billion of cash, net of cash acquired. Adjustments in 2018 to the purchase price allocation were approximately $16 million and related to identification of certain immaterial acquired assets and resolution of certain acquired working capital and other purchase price adjustments with the seller. The change to provisional amounts did not result in material impacts to results of operations in 2018 or any portion related to earlier quarters in the measurement period. The allocation of purchase consideration related to Scott Safety is considered preliminary with provisional amounts primarily related to intangible assets and certain tax-related and contingent liability items. 3M expects to finalize the allocation of purchase price within the one year measurement-period following the acquisition.

 

Divestitures:

 

3M may divest certain businesses from time to time based upon reviews 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 its shareholders.

 

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 that was reported within the Company's Safety and Graphics business.

 

In addition, during the first quarter of 2018, 3M divested a polymer additives compounding business, formerly part of the Company's Industrial 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 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, which was reported within the Company's Electronics and Energy business. The sale of the telecommunications system integration services portion of the business based in Germany for approximately $30 million remains pending and is expected to be completed by the end of 2018.

 

2017 divestitures:

During 2017, as described in Note 2 in 3M's Current Report on Form 8-K dated May 8, 2018 (which updated 3M's 2017 Annual Report on Form 10-K), the Company divested of a number of business including its: safety prescription eyewear; identity management; tolling and automated license/number plate recognition; electronic monitoring; and electrical marking/labeling businesses.

 

The aggregate operating income of these businesses was approximately $25 million and $10 million in the first six months of 2018 and 2017, respectively. The approximate amounts of major assets and liabilities associated with disposal groups classified as held-for-sale as of June 30, 2018 were not material and as of December 31, 2017 included the following:

 







    

December 31,


(Millions)

    

2017


Accounts receivable


$

 25


Property, plant and equipment (net)



 20


 

In addition, an immaterial amount and approximately $275 million of goodwill was estimated to be attributable to disposal groups classified as held-for-sale as of June 30, 2018 and December 31, 2017, respectively, 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.

 

Refer to Note 2 in 3M's Current Report on Form 8-K dated May 8, 2018 (which updated 3M's 2017 Annual Report on Form 10-K) for more information on 3M's acquisitions and divestitures.

 

NOTE 4.  Goodwill and Intangible Assets

 

There were no acquisitions that closed during the first six months of 2018. The acquisition activity in the following table relates to the net impact of adjustments to the preliminary allocation of purchase price within the one year measurement period following prior acquisitions, which decreased goodwill by $16 million during the six months ended June 30, 2018. Divestiture activity within the Electronics and Energy business segment relates to the sale of substantially all of the Communication Markets Division. 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, 2017 and June 30, 2018, follow:

 

Goodwill

 




















December 31, 2017


Acquisition


Divestiture


Translation


June 30, 2018


(Millions)

    

Balance

    

activity

    

activity

    

and other

    

Balance


Industrial


$

 2,678


$

 -


$

 (4)


$

 (44)


$

 2,630


Safety and Graphics



 4,419



 (16)



 (8)



 (57)



 4,338


Health Care



 1,682



 -



 -



 (19)



 1,663


Electronics and Energy



 1,524



 -



 (247)



 (10)



 1,267


Consumer



 210



 -



 -



 (1)



 209


Total Company


$

 10,513


$

 (16)


$

 (259)


$

 (131)


$

 10,107


 

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 16, effective in the first quarter of 2018, the Company changed its business segment reporting in its continuing effort to improve the alignment of its businesses around markets and customers. In addition, certain shared film manufacturing and supply technology platform resources formerly reflected within the Electronics and Energy business segment were combined with other shared and centrally managed material resource centers of expertise within Corporate and Unallocated. 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 2018, 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, 2018, and December 31, 2017, follow:

 










    

June 30,

    

December 31,


(Millions)

    

2018

    

2017


Customer related intangible assets


$

 2,302


$

 2,332


Patents



 554



 561


Other technology-based intangible assets



 578



 583


Definite-lived tradenames



 676



 678


Other amortizable intangible assets



 204



 207


Total gross carrying amount


$

 4,314


$

 4,361










Accumulated amortization - customer related



 (931)



 (874)


Accumulated amortization - patents



 (491)



 (489)


Accumulated amortization - other technology based



 (312)



 (292)


Accumulated amortization - definite-lived tradenames



 (272)



 (256)


Accumulated amortization - other



 (164)



 (162)


Total accumulated amortization


$

 (2,170)


$

 (2,073)










Total finite-lived intangible assets - net


$

 2,144


$

 2,288










Non-amortizable intangible assets (primarily tradenames)



 643



 648


Total intangible assets - net


$

 2,787


$

 2,936


 

3M does not amortize certain acquired tradenames because they have been in existence for over 55 years, have a history of leading-market share positions, are intended to be continuously renewed, and the associated products 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, 2018 and 2017 follows:

 
















    

Three months ended 

    

Six months ended 




June 30,


June 30,


(Millions)

    

2018

    

2017

    

2018


2017


Amortization expense


$

 63


$

 47


$

 127


$

 111


 

Expected amortization expense for acquired amortizable intangible assets recorded as of June 30, 2018:

 


























Remainder of

















After


(Millions)


2018


2019


2020


2021


2022


2023


2023


Amortization expense


$

 123


$

 241


$

 229


$

 220


$

 206


$

 175


$

 950


 

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 and Exit Activities

2018 Restructuring Actions:

 

During the second 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 900 positions worldwide and resulted in a second quarter 2018 pre-tax charge of $105 million, essentially all within Corporate and Unallocated.

 

 

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

 






(Millions)

    

Second Quarter 2018


Cost of sales


$

 12


Selling, general and administrative expenses



 89


Research, development and related expenses



 4


Total


$

 105


 

Components of these restructuring actions, follow:

 






(Millions)

    

Employee-Related


Expense incurred in the second quarter of 2018


$

 105


Cash payments



 (6)


Accrued restructuring action balances as of June 30, 2018


$

 99


 

Remaining activities related to this restructuring are expected to be largely completed through the first half of 2019.

 

2017 Restructuring Actions:

 

During the second quarter of 2017, management approved and committed to undertake certain restructuring actions primarily focused on portfolio and footprint optimization. These actions affected approximately 1,300 positions worldwide and resulted in a second quarter 2017 pre-tax charge of $99 million.

 

Components of these restructuring actions, including cash and non-cash impacts, follow:

 






(Millions)

    

Employee-Related


Expense incurred in the second quarter of 2017


$

 99


Cash payments



 (8)


Adjustments



 (3)


Accrued restructuring action balances as of December 31, 2017


$

 88


Cash payments



 (13)


Adjustments



 (27)


Accrued restructuring action balances as of June 30, 2018


$

 48


 

Remaining activities related to this restructuring are expected to be completed by the end of 2018. A portion of the adjustments detailed above include certain severance accruals taken in 2017, the obligation for which was relieved and reflected as part of the gain on divestiture when that business was sold in 2018.

 

2017 Exit Activities: 

 

During the first quarter of 2017, the Company recorded net pre-tax charges of $24 million related to exit activities. These charges related to employee reductions, primarily in Western Europe.



 

NOTE 6.  Supplemental Income Statement Information

 

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
















    

Three months ended 

    

Six months ended 




June 30,


June 30,


(Millions)


2018

    

2017

    

2018


2017


Interest expense


$

 88


$

 54


$

 170


$

 99


Interest income



 (16)



 (12)



 (37)



 (20)


Pension and postretirement net periodic benefit cost (benefit)



 (21)



 (31)



 (40)



 (63)


Total


$

 51


$

 11


$

 93


$

 16


 

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. Refer to Note 11 for additional details on the components of pension and postretirement net periodic benefit costs.

 

 

NOTE 7.  Supplemental Equity and Comprehensive Income Information

 

Consolidated Statement of Changes in Equity

 

Three months ended June 30, 2018

 


























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, 2018


$

 11,039


$

 5,505


$

 38,453


$

 (26,178)


$

 (6,803)


$

 62






















Net income



 1,862






 1,857









 5


Other comprehensive income (loss), net of tax:




















Cumulative translation adjustment



 (496)












 (492)



 (4)


Defined benefit pension and post-retirement plans adjustment



 114












 114



 -


Cash flow hedging instruments - unrealized gain (loss)



 162












 162



 -


Total other comprehensive income (loss), net of tax



 (220)

















Dividends declared



 (802)






 (802)











Stock-based compensation



 54



 54














Reacquired stock



 (1,591)









 (1,591)








Issuances pursuant to stock option and benefit plans



 86






 (66)



 152








Balance at June 30, 2018


$

 10,428


$

 5,559


$

 39,442


$

 (27,617)


$

 (7,019)


$

 63


 



 

Six months ended June 30, 2018

 


























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, 2017


$

 11,622


$

 5,361


$

 39,115


$

 (25,887)


$

 (7,026)


$

 59






















Net income



 2,468






 2,459









 9


Other comprehensive income (loss), net of tax:




















Cumulative translation adjustment



 (329)












 (324)



 (5)


Defined benefit pension and post-retirement plans adjustment



 230












 230



 -


Cash flow hedging instruments - unrealized gain (loss)



 101












 101



 -


Total other comprehensive income (loss), net of tax



 2

















Dividends declared



 (1,612)






 (1,612)











Stock-based compensation



 198



 198














Reacquired stock



 (2,563)









 (2,563)








Issuances pursuant to stock option and benefit plans



 313






 (520)



 833








Balance at June 30, 2018


$

 10,428


$

 5,559


$

 39,442


$

 (27,617)


$

 (7,019)


$

 63


 

Three months ended June 30, 2017

 


























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, 2017


$

 11,040


$

 5,198


$

 38,094


$

 (25,354)


$

 (6,949)


$

 51






















Net income



 1,585






 1,583









 2


Other comprehensive income (loss), net of tax:




















Cumulative translation adjustment



 (67)












 (67)



 -


Defined benefit pension and post-retirement plans adjustment



 78












 78



 -


Cash flow hedging instruments - unrealized gain (loss)



 (51)












 (51)



 -


Total other comprehensive income (loss), net of tax



 (40)

















Dividends declared



 (701)






 (701)











Stock-based compensation



 55



 55














Reacquired stock



 (475)









 (475)








Issuances pursuant to stock option and benefit plans



 180






 (183)



 363








Balance at June 30, 2017


$

 11,644


$

 5,253


$

 38,793


$

 (25,466)


$

 (6,989)


$

 53


 



 

Six months ended June 30, 2017

 


























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, 2016


$

 10,343


$

 5,070


$

 37,907


$

 (25,434)


$

 (7,245)


$

 45






















Net income



 2,911






 2,906









 5


Other comprehensive income (loss), net of tax:




















Cumulative translation adjustment



 225












 222



 3


Defined benefit pension and post-retirement plans adjustment



 161












 161



 -


Cash flow hedging instruments - unrealized gain (loss)



 (127)












 (127)



 -


Total other comprehensive income (loss), net of tax



 259

















Dividends declared



 (1,403)






 (1,403)











Stock-based compensation



 183



 183














Reacquired stock



 (1,153)









 (1,153)








Issuances pursuant to stock option and benefit plans



 504






 (617)



 1,121








Balance at June 30, 2017


$

 11,644


$

 5,253


$

 38,793


$

 (25,466)


$

 (6,989)


$

 53


 

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

 

Three months ended June 30, 2018
















    



    



    



    

Total







Defined Benefit


Cash Flow


Accumulated







Pension and


Hedging


Other




Cumulative


Postretirement


Instruments,


Comprehensive




Translation


Plans


Unrealized


Income


(Millions)


Adjustment


Adjustment


Gain (Loss)


(Loss)


Balance at March 31, 2018, net of tax:


$

 (1,470)


$

 (5,160)


$

 (173)


$

 (6,803)


Other comprehensive income (loss), before tax:














Amounts before reclassifications



 (411)



 -



 182



 (229)


Amounts reclassified out



 -



 151



 28



 179


Total other comprehensive income (loss), before tax



 (411)



 151



 210



 (50)


Tax effect



 (81)



 (37)



 (48)



 (166)


Total other comprehensive income (loss), net of tax



 (492)



 114



 162



 (216)


Balance at June 30, 2018, net of tax:


$

 (1,962)


$

 (5,046)


$

 (11)


$

 (7,019)


 

Six months ended June 30, 2018

 
















    



    



    



    

Total







Defined Benefit


Cash Flow


Accumulated







Pension and


Hedging


Other




Cumulative


Postretirement


Instruments,


Comprehensive




Translation


Plans


Unrealized


Income


(Millions)


Adjustment


Adjustment


Gain (Loss)


(Loss)


Balance at December 31, 2017, net of tax:


$

 (1,638)


$

 (5,276)


$

 (112)


$

 (7,026)


Other comprehensive income (loss), before tax:














Amounts before reclassifications



 (282)



 -



 100



 (182)


Amounts reclassified out



 -



 302



 62



 364


Total other comprehensive income (loss), before tax



 (282)



 302



 162



 182


Tax effect



 (42)



 (72)



 (61)



 (175)


Total other comprehensive income (loss), net of tax



 (324)



 230



 101



 7


Balance at June 30, 2018, net of tax:


$

 (1,962)


$

 (5,046)


$

 (11)


$

 (7,019)


 

Three months ended June 30, 2017
















    



    



    



    

Total







Defined Benefit


Cash Flow


Accumulated







Pension and


Hedging


Other




Cumulative


Postretirement


Instruments,


Comprehensive




Translation


Plans


Unrealized


Income


(Millions)


Adjustment


Adjustment


Gain (Loss)


(Loss)


Balance at March 31, 2017, net of tax:


$

 (1,719)


$

 (5,245)


$

 15


$

 (6,949)


Other comprehensive income (loss), before tax:














Amounts before reclassifications



 (167)



 -



 (74)



 (241)


Amounts reclassified out



 -



 119



 (5)



 114


Total other comprehensive income (loss), before tax



 (167)



 119



 (79)



 (127)


Tax effect



 100



 (41)



 28



 87


Total other comprehensive income (loss), net of tax



 (67)



 78



 (51)



 (40)


Balance at June 30, 2017, net of tax:


$

 (1,786)


$

 (5,167)


$

 (36)


$

 (6,989)


 

Six months ended June 30, 2017

 
















    



    



    



    

Total







Defined Benefit


Cash Flow


Accumulated







Pension and


Hedging


Other




Cumulative


Postretirement


Instruments,


Comprehensive




Translation


Plans


Unrealized


Income


(Millions)


Adjustment


Adjustment


Gain (Loss)


(Loss)


Balance at December 31, 2016, net of tax:


$

 (2,008)


$

 (5,328)


$

 91


$

 (7,245)


Other comprehensive income (loss), before tax:














Amounts before reclassifications



 59



 -



 (175)



 (116)


Amounts reclassified out



 -



 238



 (23)



 215


Total other comprehensive income (loss), before tax



 59



 238



 (198)



 99


Tax effect



 163



 (77)



 71



 157


Total other comprehensive income (loss), net of tax



 222



 161



 (127)



 256


Balance at June 30, 2017, net of tax


$

 (1,786)


$

 (5,167)


$

 (36)


$

 (6,989)


 

Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation do 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)


2018

    

2017

    

2018

    

2017


Statement


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
















Prior service benefit


$

 19


$

 22


$

 38


$

 44


See Note 11


Net actuarial loss



 (170)



 (141)



 (340)



 (282)


See Note 11


Total before tax



 (151)



 (119)



 (302)



 (238)




Tax effect



 37



 41



 72



 77


Provision for income taxes


Net of tax


$

 (114)


$

 (78)


$

 (230)


$

 (161)




















Cash flow hedging instruments gains (losses)
















Foreign currency forward/option contracts


$

 (27)


$

 5


$

 (61)


$

 23


Cost of sales


Interest rate swap contracts



 (1)



 -



 (1)



 -


Interest expense


Total before tax



 (28)



 5



 (62)



 23




Tax effect



 7



 (2)



 15



 (8)


Provision for income taxes


Net of tax


$

 (21)


$

 3


$

 (47)


$

 15




Total reclassifications for the period, net of tax


$

 (135)


$

 (75)


$

 (277)


$

 (146)




 

 

 

 

NOTE 8.  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, and 2016. The Company protested certain IRS positions within these tax years and entered into the administrative appeals process with the IRS. Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2015 and 2017. As of June 30, 2018, the IRS has not proposed any significant adjustments to the Company's tax positions for which the Company is not adequately reserved.

 

Payments relating to other proposed assessments arising from the 2005 through 2017 examinations may not be made until a final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also audit activity in several U.S. state and foreign jurisdictions.

 

3M anticipates changes to the Company's uncertain tax positions due to the closing and resolution of audit issues for various audit years mentioned above and closure of statutes. Currently, the Company is estimating a decrease in unrecognized tax benefits during the next 12 months as a result of anticipated resolutions of audit issues. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of June 30, 2018 and December 31, 2017 are $493 million and $526 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 $6 million of benefit and $5 million of expense for the three months ended June 30, 2018 and June 30, 2017, respectively, and approximately $3 million and $8 million of expense for the six months ended June 30, 2018 and June 30, 2017, respectively. At June 30, 2018 and December 31, 2017, accrued interest and penalties in the consolidated balance sheet on a gross basis were $60 million and $68 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.

 

The provision for income taxes is determined using the asset and liability approach. Under this approach, a valuation allowance is recorded to reduce its deferred tax assets when uncertainty regarding their realizability exists. As of June 30, 2018 and December 31, 2017, the Company had valuation allowances of $83 million and $81 million on its deferred tax assets, respectively.

 

The effective tax rate for the second quarter of 2018 was 20.8 percent, compared to 26.0 percent in the second quarter of 2017, a decrease of 5.2 percentage points. Primary factors that decreased the Company's effective tax rate included favorable aspects of the 2017 Tax Cuts and Jobs Act (TCJA) such as the decrease in the U.S. income tax rate and provisions incentivizing foreign-derived intangible income (FDII), in addition to impacts associated with composition of geographic mix of income before taxes. These decreases were partially offset by multiple factors that increased the Company's effective tax rate. These increases were primarily driven by lower excess tax benefits related to employee share-based payments and impacts of the TCJA such as the global intangible low-taxed income (GILTI) provision and the elimination of the domestic manufacturing deduction.

 

The effective tax rate for the first six months of 2018 was 25.6 percent, compared to 25.0 percent in the first six months of 2017, an increase of 0.6 percentage points. Factors that increased the Company's effective tax rate primarily related to impacts of the TCJA such as the first quarter 2018 measurement period adjustment to the provisional accounting of the TCJA's enactment (discussed further below) as well as the TCJA's GILTI provision and the elimination of the domestic manufacturing deduction. Lower excess tax benefits year-over-year related to employee share-based payments also increased the Company's effective tax rate. These increases were partially offset by multiple factors that decreased the Company's effective tax rate, including favorable aspects of the TCJA such as the decrease in the U.S. income tax rate and FDII, in addition to impacts associated with composition of income before taxes from both a geographic and a discrete item (such as the resolution of the NRD Lawsuit, as defined and described in Note 14) perspective.

 

The TCJA was enacted in December 2017. Among other things, the TCJA reduces the U.S. federal corporate tax rate from 35 percent to 21 percent beginning in 2018, requires companies to pay a one-time transition tax on previously unremitted earnings of non-U.S. subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting Bulletin (SAB) 118, which provides guidance on accounting for enactment effects of the TCJA. SAB 118 provides a measurement period of up to one year from the TCJA's enactment date for companies to complete their accounting under ASC 740. In accordance with SAB 118, to the extent that a company's accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA. In connection with 3M's initial analysis of the impact of the enactment of the TCJA, the Company recorded a net tax expense of $762 million in the fourth quarter of 2017. As further discussed below, during the first quarter of 2018, 3M recognized a measurement period adjustment resulting in an additional tax expense of $217 million to this provisional accounting. The Company made no additional adjustments in the second quarter of 2018.

 

Transition tax: 3M was able to make a reasonable estimate of the transition tax and recorded a provisional obligation and related income tax expense of $745 million in the fourth quarter of 2017, with an additional $132 million in the first quarter of 2018 as a result of subsequent U.S. Internal Revenue Service guidance. The Company made no additional adjustments in the second quarter of 2018. The Company continues to gather additional information and will consider further guidance to more precisely compute the transition tax. The provisional amount may change when 3M finalizes the calculation of post-1986 foreign earnings and profit previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. The TCJA's transition tax is payable over eight years beginning in 2018. As of June 30, 2018, 3M reflected $74 million and $733 million in current accrued income taxes and long-term income taxes payable, respectively, associated with the transition tax.

 

Remeasurement of deferred tax assets/liabilities and other impacts: 3M remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent under the TCJA. In the fourth quarter of 2017, 3M recorded a net additional income tax expense of $17 million related to remeasurement of deferred tax assets/liabilities and other impacts. In the first quarter of 2018, 3M recorded an additional tax expense of $85 million as a measurement period adjustment as a result of subsequent U.S. Internal Revenue Service guidance and other impacts related to TCJA. The Company made no additional adjustments in the second quarter of 2018. 3M is still analyzing certain aspects of the TCJA, considering additional technical guidance, and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. This includes the potential impacts of the GILTI provision within the TCJA on deferred tax assets/liabilities. 3M also is considering other impacts of the 2017 enactment of the TCJA including, but not limited to, effects on the Company's indefinite reinvestment assertion. 3M previously has not provided deferred taxes on unremitted earnings attributable to international companies that have been considered to be reinvested indefinitely. The full effects of underlying tax rates of the TCJA causes some reassessment of previous indefinite reinvestment assertions with respect to certain jurisdictions. While 3M was able to make a reasonable estimate of these impacts, it may be affected by other analyses related to the TCJA, including, but not limited to, the calculation of the transition tax on deferred foreign income.

 

3M has not completed its full analysis with respect to the GILTI provision within the TCJA. While 3M has recorded current tax on GILTI relative to 2018 operations, the Company has not yet elected a policy as to whether it will recognize deferred taxes for basis differences expected to reverse as GILTI or whether 3M will account for GILTI as period costs if and when incurred.

 

NOTE 9.  Marketable Securities

 

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

 









(Millions)


June 30, 2018


December 31, 2017


Corporate debt securities


$

 -


$

 14


Commercial paper



 347



 899


Certificates of deposit/time deposits



 31



 76


U.S. municipal securities



 4



 3


Asset-backed securities:








Automobile loan related



 3



 16


Credit card related



 -



 68


Asset-backed securities total



 3



 84


Current marketable securities


$

 385


$

 1,076










U.S. municipal securities


$

 26


$

 27


Non-current marketable securities


$

 26


$

 27










Total marketable securities


$

 411


$

 1,103


 

At June 30, 2018 and December 31, 2017, gross unrealized, gross realized, and net realized gains and/or losses (pre-tax) were not material.

 

The balances at June 30, 2018 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)

    

June 30, 2018


Due in one year or less


$

 382


Due after one year through five years



 15


Due after five years through ten years



 14


Total marketable securities


$

 411


 

3M does not currently expect risk related to its holding in asset-backed securities to materially impact its financial condition or liquidity.

 

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

 

As of June 30, 2018 and December 31, 2017, the Company had approximately $1.5 billion and $745 million, respectively, in commercial paper outstanding.



 

NOTE 11.  Pension and Postretirement Benefit Plans

 

The service cost component of defined benefit net periodic benefit cost is recorded in cost of sales, selling, general and administrative expenses, and research, development and related expenses. The other components of net periodic benefit cost are reflected in other expense (income), net. Components of net periodic benefit cost and other supplemental information for the three and six months ended June 30, 2018 and 2017 follow:

 

Benefit Plan Information

 





















Three months ended June 30,



Qualified and Non-qualified









Pension Benefits


Postretirement



United States

International


Benefits


(Millions)

2018

    

2017

    

2018

    

2017

    

2018

    

2017


Net periodic benefit cost (benefit)



















Operating expense



















Service cost

$

 72


$

 67


$

 37


$

 34


$

 13


$

 12


Non-operating expense



















Interest cost

$

 141


$

 142


$

 40


$

 37


$

 20


$

 20


Expected return on plan assets


 (272)



 (259)



 (79)



 (69)



 (21)



 (21)


Amortization of prior service benefit


 (6)



 (6)



 (3)



 (3)



 (10)



 (13)


Amortization of net actuarial loss


 126



 97



 29



 30



 15



 14


Total non-operating expense (benefit)


 (11)



 (26)



 (13)



 (5)



 4



 -


Total net periodic benefit cost (benefit)

$

 61


$

 41


$

 24


$

 29


$

 17


$

 12


 

 





















Six months ended June 30,



Qualified and Non-qualified









Pension Benefits


Postretirement



United States

International


Benefits


(Millions)

2018

    

2017

    

2018

    

2017

    

2018

    

2017


Net periodic benefit cost (benefit)



















Operating expense



















Service cost

$

 144


$

 134


$

 73


$

 67


$

 26


$

 25


Non-operating expense



















Interest cost

$

 282


$

 284


$

 80


$

 74


$

 40


$

 39


Expected return on plan assets


 (544)