3M Company (MMM)

FORM 10-Q | Quarterly Report
Apr. 26, 2019 4:11 PM
|
About: 3M Company (MMM)View as PDF
3M CO (Form: 10-Q, Received: 04/26/2019 16:25:12)

 

 

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 March 31, 2019

 

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 ☒  No ☐

 

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

 

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

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

 

Smaller reporting company ☐

 

 

Emerging growth company ☐

 

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

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

 

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

 

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

 

 

 

 

Class

 

Outstanding at March 31, 2019

Common Stock, $0.01 par value per share

 

576,426,706 shares

 

 

 

 

 


 

3M COMPANY

Form 10-Q for the Quarterly Period Ended March 31, 2019

 

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

11

 

Note 3.   Acquisitions and Divestitures

13

 

Note 4.   Goodwill and Intangible Assets

14

 

Note 5.   Restructuring Actions and Exit Activities

16

 

Note 6.   Supplemental Income Statement Information  

16

 

Note 7.   Supplemental Equity and Comprehensive Income Information

17

 

Note 8.   Income Taxes

19

 

Note 9.   Marketable Securities

20

 

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

20

 

Note 11.   Pension and Postretirement Benefit Plans

21

 

Note 12.   Derivatives

22

 

Note 13.   Fair Value Measurements

28

 

Note 14.   Commitments and Contingencies

31

 

Note 15. Leases

42

 

Note 16.   Stock-Based Compensation

45

 

Note 17.   Business Segments

48

 

 

 

ITEM 2.  

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

 

 

Index to Management’s Discussion and Analysis:

 

 

Overview

51

 

Results of Operations

56

 

Performance by Business Segment

60

 

Financial Condition and Liquidity

65

 

Cautionary Note Concerning Factors That May Affect Future Results

70

 

 

 

ITEM 3.  

Quantitative and Qualitative Disclosures About Market Risk

70

 

 

 

ITEM 4.  

Controls and Procedures

71

 

 

 

PART II  

OTHER INFORMATION

 

 

 

 

ITEM 1.  

Legal Proceedings

72

 

 

 

ITEM 1A.  

Risk Factors

72

 

 

 

ITEM 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

74

 

 

 

ITEM 3.  

Defaults Upon Senior Securities

75

 

 

 

ITEM 4.  

Mine Safety Disclosures

75

 

 

 

ITEM 5.  

Other Information

75

 

 

 

ITEM 6.  

Exhibits

75

 

2


 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended March 31, 2019

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

 

 

March 31,

 

(Millions, except per share amounts)

    

2019

    

2018

 

Net sales

 

$

7,863

 

$

8,278

 

Operating expenses

 

 

 

 

 

 

 

Cost of sales

 

 

4,310

 

 

4,236

 

Selling, general and administrative expenses

 

 

1,948

 

 

2,573

 

Research, development and related expenses

 

 

477

 

 

486

 

Gain on sale of businesses

 

 

(8)

 

 

(24)

 

Total operating expenses

 

 

6,727

 

 

7,271

 

Operating income

 

 

1,136

 

 

1,007

 

 

 

 

 

 

 

 

 

Other expense (income), net

 

 

48

 

 

42

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

1,088

 

 

965

 

Provision for income taxes

 

 

195

 

 

359

 

Net income including noncontrolling interest

 

$

893

 

$

606

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

 

 2

 

 

 4

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

891

 

$

602

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — basic

 

 

577.5

 

 

596.2

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.54

 

$

1.01

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — diluted

 

 

588.5

 

 

612.7

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

1.51

 

$

0.98

 

 

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

 

3


 

3M Company and Subsidiaries

Consolidated Statement of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

 

 

March 31,

 

(Millions)

    

2019

    

2018

 

Net income including noncontrolling interest

 

$

893

 

$

606

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

77

 

 

167

 

Defined benefit pension and postretirement plans adjustment

 

 

84

 

 

116

 

Cash flow hedging instruments

 

 

 6

 

 

(61)

 

Total other comprehensive income (loss), net of tax

 

 

167

 

 

222

 

Comprehensive income (loss) including noncontrolling interest

 

 

1,060

 

 

828

 

Comprehensive (income) loss attributable to noncontrolling interest

 

 

(2)

 

 

(3)

 

Comprehensive income (loss) attributable to 3M

 

$

1,058

 

$

825

 

 

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

 

4


 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

(Dollars in millions, except per share amount)

    

2019

    

2018

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,938

 

$

2,853

 

Marketable securities — current

 

 

539

 

 

380

 

Accounts receivable — net

 

 

5,173

 

 

5,020

 

Inventories

 

 

 

 

 

 

 

Finished goods

 

 

2,221

 

 

2,120

 

Work in process

 

 

1,333

 

 

1,292

 

Raw materials and supplies

 

 

984

 

 

954

 

Total inventories

 

 

4,538

 

 

4,366

 

Prepaids

 

 

713

 

 

741

 

Other current assets

 

 

473

 

 

349

 

Total current assets

 

 

14,374

 

 

13,709

 

Property, plant and equipment

 

 

25,124

 

 

24,873

 

Less: Accumulated depreciation

 

 

(16,295)

 

 

(16,135)

 

Property, plant and equipment — net

 

 

8,829

 

 

8,738

 

Operating lease right of use assets

 

 

797

 

 

 —

 

Goodwill

 

 

10,611

 

 

10,051

 

Intangible assets — net

 

 

3,047

 

 

2,657

 

Other assets

 

 

1,482

 

 

1,345

 

Total assets

 

$

39,140

 

$

36,500

 

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

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

 

$

790

 

$

1,211

 

Accounts payable

 

 

2,309

 

 

2,266

 

Accrued payroll

 

 

517

 

 

749

 

Accrued income taxes

 

 

183

 

 

243

 

Operating lease liabilities — current

 

 

255

 

 

 —

 

Other current liabilities

 

 

3,071

 

 

2,775

 

Total current liabilities

 

 

7,125

 

 

7,244

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

15,580

 

 

13,411

 

Pension and postretirement benefits

 

 

2,919

 

 

2,987

 

Operating lease liabilities

 

 

531

 

 

 —

 

Other liabilities

 

 

3,228

 

 

3,010

 

Total liabilities

 

$

29,383

 

$

26,652

 

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

 

 

5,755

 

 

5,643

 

Retained earnings

 

 

41,159

 

 

40,636

 

Treasury stock, at cost: 367,606,350 shares at March 31, 2019;

     367,457,888 shares at December 31, 2018

 

 

(29,668)

 

 

(29,626)

 

Accumulated other comprehensive income (loss)

 

 

(7,552)

 

 

(6,866)

 

Total 3M Company shareholders’ equity

 

 

9,703

 

 

9,796

 

Noncontrolling interest

 

 

54

 

 

52

 

Total equity

 

$

9,757

 

$

9,848

 

Total liabilities and equity

 

$

39,140

 

$

36,500

 

 

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

5


 

3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

 

 

March 31,

 

(Millions)

    

2019

    

2018

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

$

893

 

$

606

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

375

 

 

382

 

Company pension and postretirement contributions

 

 

(47)

 

 

(232)

 

Company pension and postretirement expense

 

 

70

 

 

102

 

Stock-based compensation expense

 

 

130

 

 

159

 

Gain on sale of businesses

 

 

(5)

 

 

(24)

 

Deferred income taxes

 

 

(56)

 

 

(103)

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(78)

 

 

(260)

 

Inventories

 

 

(178)

 

 

(209)

 

Accounts payable

 

 

(3)

 

 

(88)

 

Accrued income taxes (current and long-term)

 

 

 —

 

 

212

 

Other — net

 

 

(53)

 

 

(402)

 

Net cash provided by (used in) operating activities

 

 

1,048

 

 

143

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

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

 

 

(391)

 

 

(304)

 

Proceeds from sale of PP&E and other assets

 

 

 1

 

 

83

 

Acquisitions, net of cash acquired

 

 

(704)

 

 

 —

 

Purchases of marketable securities and investments

 

 

(511)

 

 

(517)

 

Proceeds from maturities and sale of marketable securities and investments

 

 

369

 

 

990

 

Proceeds from sale of businesses, net of cash sold

 

 

 6

 

 

40

 

Other — net

 

 

 5

 

 

(11)

 

Net cash provided by (used in) investing activities

 

 

(1,225)

 

 

281

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Change in short-term debt — net

 

 

(428)

 

 

1,581

 

Repayment of debt (maturities greater than 90 days)

 

 

(246)

 

 

(6)

 

Proceeds from debt (maturities greater than 90 days)

 

 

2,265

 

 

 6

 

Purchases of treasury stock

 

 

(701)

 

 

(937)

 

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

 

 

215

 

 

219

 

Dividends paid to shareholders

 

 

(830)

 

 

(810)

 

Other — net

 

 

(17)

 

 

(7)

 

Net cash provided by (used in) financing activities

 

 

258

 

 

46

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 4

 

 

(32)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

85

 

 

438

 

Cash and cash equivalents at beginning of year

 

 

2,853

 

 

3,053

 

Cash and cash equivalents at end of period

 

$

2,938

 

$

3,491

 

 

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

6


 

3M Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1.  Significant Accounting Policies

 

Basis of Presentation

 

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

 

As described in Note 17, effective in the first quarter of 2019, 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 realignment of certain customer account activity in various countries (affecting dual credit reporting), creation of the Closure and Masking Systems and Medical Solutions divisions, and certain other actions that impacted segment reporting. Segment information presented herein reflects the impact of these changes for all periods presented.

 

Changes to Significant Accounting Policies

 

The following significant accounting policies have been added or changed since the Company’s 2018 Annual Report on Form 10-K.

 

Leases: As described in the “New Accounting Pronouncements” section, 3M adopted Accounting Standards Update (ASU) No. 2016-02, Leases , and other related ASUs (collectively, Accounting Standards Codification (ASC) 842) on January 1, 2019, using the modified retrospective method of adoption. This ASU replaced previous lease accounting guidance. The Company’s accounting policy with respect to leases and additional disclosure relative to ASC 842 are included in Note 15.

 

Income Taxes : As described in the “New Accounting Pronouncements” section, 3M adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . The Company’s accounting policy for income taxes has been updated to indicate the uses of the portfolio approach for releasing income tax effects from accumulated other comprehensive loss.

 

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 was immaterial as a percent of 3M’s consolidated operating income for 2018. 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 third quarter of 2018, the Venezuelan government effected a conversion of its currency to the Sovereign Bolivar (VES), essentially equating to its previous Venezuelan Bolivar divided by 100,000.

 

Note 1 in 3M’s 2018 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.

7


 

These changes could impact the rate of exchange applicable to remeasure the Company’s net monetary assets (liabilities) denominated in VES. As of March 31, 2019, the Company had a balance of net monetary liabilities denominated in VES of approximately 60 million VES and the DICOM exchange rate was approximately 3,333 VES per U.S. dollar. A need to deconsolidate the Company’s Venezuelan subsidiary’s operations may result from a lack of exchangeability of VES-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 March 31, 2019, the Company continues to consolidate its Venezuelan subsidiary.   3M also continues to monitor the macro-economic and operating business environment of Venezuela and may make certain resulting strategic decisions. As of March 31, 2019, 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 total equity balance were not significant.

 

3M has subsidiaries in Argentina, the operating income of which was less than one half of one percent of 3M’s consolidated operating income for 2018. 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, beginning in the third quarter of 2018, the financial statements of the Argentine subsidiaries were remeasured as if their functional currency were that of their parent. As of March 31, 2019, the Company had a balance of net monetary assets denominated in Argentine pesos (ARS) of approximately 190 million ARS and the exchange rate was approximately 43 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 have had an anti-dilutive effect (5.2 million average options for the three months ended March 31, 2019 and 1.9 million average options for the three months ended March 31, 2018). The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

 

 

March 31,

 

(Amounts in millions, except per share amounts)

    

2019

    

2018

 

Numerator:

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

891

 

$

602

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding basic

 

 

577.5

 

 

596.2

 

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

 

 

11.0

 

 

16.5

 

Denominator for weighted average 3M common shares outstanding diluted

 

 

588.5

 

 

612.7

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders basic

 

$

1.54

 

$

1.01

 

Earnings per share attributable to 3M common shareholders diluted

 

$

1.51

 

$

0.98

 

 

8


 

New Accounting Pronouncements

 

See the Company’s 2018 Annual Report on Form 10-K for a more detailed discussion of the standards in the tables that follow, except for those pronouncements issued subsequent to the most recent Form 10-K filing date for which separate, more detailed discussion is provided below as applicable.

 

 

 

 

 

Standards Adopted During the Current Fiscal Year

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

ASU No. 2016-02, Leases (as amended by ASU Nos. 2018-10, 2018-11, 2018-20, and 2019-01)

Provides 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 previous accounting. This ASU does not make fundamental changes to previous lessor accounting.

January 1, 2019

See Note 15 for detailed discussion and disclosures. 

 

Adopted using the modified retrospective approach.

 

Impact on January 1, 2019 includes a $14 million increase in the balance of retained earnings and recording of additional lease assets and liabilities of $0.8 billion each.

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.

 

The adoption of this ASU did not have a material impact.

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.

 

The adoption of this ASU did not have a material impact.

ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities , and related ASU No. 2018-16

Amends previous 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

See Note 12 for additional details.

 

The adoption of this ASU did not have a material impact .

ASU No. 2018-02 , Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

Permits entities to reclassify, to retained earnings, the one-time income tax effects stranded in accumulated other comprehensive income arising from the change in the U.S. federal corporate tax rate as a result of the Tax Cuts and Jobs Act of 2017.

January 1, 2019

See Note 8 for additional discussion.

 

Impact on January 1, 2019 includes increases of  $0.9 billion in each of retained earnings and accumulated other comprehensive loss.

 

See also the preceding “Changes to Significant Accounting Policies” section.

ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting

Aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees.

 

Clarifies that any share-based payment issued to a customer should be evaluated under ASC 606, Revenue from Contracts with Customers .

January 1, 2019

The adoption of this ASU did not have a material impact as 3M does not issue share-based payments to nonemployees or customers .

9


 

 

 

 

 

 

Standards Adopted During the Current Fiscal Year (continued)

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

ASU No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made

Clarifies 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.

 

Recognition of contribution expense is deferred for conditional arrangements and is immediate for unconditional arrangements.

January 1, 2019

Adopted prospectively with no immediate impact.

ASU No. 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities

Changes how entities evaluate decision-making fees under the variable interest guidance.

 

Indirect interests held through related parties under common control will be considered on a proportionate basis rather than in their entirety.

January 1, 2019

Adoption of this ASU did not have a material impact as 3M does not have significant involvement with entities subject to consolidation considerations impacted by variable interest entity model factors.

ASU No. 2018-18, Clarifying the Interaction between Topic 808 and Topic 606

Clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606, Revenue from Contracts with Customers , when the counterparty is a customer.

 

Precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction.

January 1, 2019

Adoption of this ASU did not have a material impact as 3M has limited collaborative arrangements.

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. 2016-13, Measurement of Credit Losses on Financial Instruments (in conjunction with ASU No. 2018-19)

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. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement

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

January 1, 2020

As this ASU relates to disclosures only, there will be no impact to 3M’s consolidated results of operations and financial condition.

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

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

January 1, 2020

ASU permits either prospective or retrospective transition.

 

As 3M utilizes limited cloud-computing services where significant implementation costs are incurred, the Company does not expect this ASU to have a material impact.

 

Relevant New Standards Issued Subsequent to Most Recent Annual Report

 

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 – Financial Instruments. The new ASU provides narrow-scope amendments to help apply these recent standards. The transition requirements and effective date of this ASU for 3M is January 1, 2020 with early adoption permitted for certain amendments. The Company is currently assessing this standard’s impact on 3M’s consolidated result of operations and financial condition.

 

 

 

 

 

 

10


 

NOTE 2.  Revenue

 

Contract Balances:

Deferred revenue (current portion) as of March 31, 2019 and December 31, 2018 was $619 million and $617 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 for goods that are in-transit at period end for which control transfers to the customer upon delivery. Approximately $370 million of the December 31, 2018 balance was recognized as revenue during the three months ended March 31, 2019, while approximately $280 million of the December 31, 2017 balance was recognized as revenue during the three months ended March 31, 2018. The amount of noncurrent deferred revenue is not significant.

 

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 

 

 

 

March 31,

 

Net Sales (Millions)

 

2019

    

2018

 

Abrasives

 

$

433

 

$

473

 

Adhesives and Tapes

 

 

807

 

 

842

 

Advanced Materials

 

 

312

 

 

304

 

Automotive and Aerospace

 

 

500

 

 

556

 

Automotive Aftermarket

 

 

390

 

 

419

 

Closure and Masking Systems

 

 

278

 

 

307

 

Separation and Purification

 

 

214

 

 

235

 

Other Industrial

 

 

(5)

 

 

(1)

 

Total Industrial Business Group

 

$

2,929

 

$

3,135

 

 

 

 

 

 

 

 

 

Commercial Solutions

 

$

458

 

$

485

 

Personal Safety

 

 

939

 

 

957

 

Roofing Granules

 

 

92

 

 

101

 

Transportation Safety

 

 

217

 

 

237

 

Other Safety and Graphics

 

 

(2)

 

 

(1)

 

Total Safety and Graphics Business Group

 

$

1,704

 

$

1,779

 

 

 

 

 

 

 

 

 

Drug Delivery

 

$

92

 

$

119

 

Food Safety

 

 

83

 

 

81

 

Health Information Systems

 

 

260

 

 

205

 

Medical Solutions

 

 

764

 

 

777

 

Oral Care

 

 

341

 

 

354

 

Other Health Care

 

 

 —

 

 

(1)

 

Total Health Care Business Group

 

$

1,540

 

$

1,535

 

 

 

 

 

 

 

 

 

Electronics

 

$

863

 

$

930

 

Energy

 

 

330

 

 

420

 

Other Electronics and Energy

 

 

(3)

 

 

 —

 

Total Electronics and Energy Business Group

 

$

1,190

 

$

1,350

 

 

 

 

 

 

 

 

 

Consumer Health Care

 

$

98

 

$

102

 

Home Care

 

 

258

 

 

269

 

Home Improvement

 

 

462

 

 

458

 

Stationery and Office

 

 

294

 

 

303

 

Other Consumer

 

 

11

 

 

13

 

Total Consumer Business Group

 

$

1,123

 

$

1,145

 

 

 

 

 

 

 

 

 

Corporate and Unallocated

 

$

21

 

$

 —

 

Elimination of Dual Credit

 

 

(644)

 

 

(666)

 

Total Company

 

$

7,863

 

$

8,278

 

 

11


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

 

Net Sales (Millions)

    

United States

 

Asia Pacific

    

Europe, Middle East and Africa

    

Latin America and Canada

    

Other Unallocated

    

Worldwide

 

Industrial

 

$

1,082

 

$

823

 

$

727

 

$

297

 

$

 —

 

$

2,929

 

Safety and Graphics

 

 

635

 

 

469

 

 

408

 

 

191

 

 

 1

 

 

1,704

 

Health Care

 

 

725

 

 

305

 

 

378

 

 

132

 

 

 —

 

 

1,540

 

Electronics and Energy

 

 

203

 

 

840

 

 

94

 

 

53

 

 

 —

 

 

1,190

 

Consumer

 

 

631

 

 

266

 

 

130

 

 

96

 

 

 —

 

 

1,123

 

Corporate and Unallocated

 

 

19

 

 

 2

 

 

 —

 

 

 3

 

 

(3)

 

 

21

 

Elimination of Dual Credit

 

 

(249)

 

 

(227)

 

 

(113)

 

 

(55)

 

 

 —

 

 

(644)

 

Total Company

 

$

3,046

 

$

2,478

 

$

1,624

 

$

717

 

$

(2)

 

$

7,863

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2018

 

Net Sales (Millions)

    

United States

 

Asia Pacific

    

Europe, Middle East and Africa

    

Latin America and Canada

    

Other Unallocated

    

Worldwide

 

Industrial

 

$

1,100

 

$

937

 

$

787

 

$

312

 

$

(1)

 

$

3,135

 

Safety and Graphics

 

 

652

 

 

493

 

 

436

 

 

198

 

 

 —

 

 

1,779

 

Health Care

 

 

702

 

 

298

 

 

394

 

 

141

 

 

 —

 

 

1,535

 

Electronics and Energy

 

 

229

 

 

910

 

 

145

 

 

67

 

 

(1)

 

 

1,350

 

Consumer

 

 

610

 

 

286

 

 

143

 

 

106

 

 

 —

 

 

1,145

 

Corporate and Unallocated

 

 

(1)

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

Elimination of Dual Credit

 

 

(248)

 

 

(248)

 

 

(113)

 

 

(57)

 

 

 —

 

 

(666)

 

Total Company

 

$

3,044

 

$

2,676

 

$

1,792

 

$

767

 

$

(1)

 

$

8,278

 

 

12


 

 

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.

 

 

 

 

 

 

 

 

 

 

2019 Acquisition Activity

 

 

 

 

 

 

Finite-Lived

 

 

 

 

 

 

Intangible-Asset

 

(Millions)

    

 

    

Weighted-Average

 

Asset (Liability)

 

M*Modal

 

Lives (Years)

 

Accounts receivable

 

$

77

 

 

 

Other current assets

 

 

16

 

 

 

Property, plant, and equipment

 

 

 9

 

 

 

Purchased finite-lived intangible assets:

 

 

 

 

 

 

Customer related intangible assets

 

 

290

 

15

 

Other technology-based intangible assets

 

 

160

 

 6

 

Definite-lived tradenames

 

 

11

 

 6

 

Purchased goodwill

 

 

580

 

 

 

Other assets

 

 

55

 

 

 

Accounts payable and other liabilities

 

 

(113)

 

 

 

Interest bearing debt

 

 

(251)

 

 

 

Deferred tax asset/(liability)

 

 

(130)

 

 

 

 

 

 

 

 

 

 

Net assets acquired

 

$

704

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

Cash paid

 

$

708

 

 

 

Less: Cash acquired

 

 

 4

 

 

 

Cash paid, net of cash acquired

 

$

704

 

 

 

 

Purchased identifiable finite-lived intangible assets related to acquisitions which closed in the three months ended March 31, 2019 totaled $461 million. The associated finite-lived intangible assets acquired will be amortized on a systematic and rational basis (generally straight line) over a weighted-average life of 12 years (lives ranging from 6 to 15 years).

 

In February 2019, 3M completed the acquisition of the technology business of M*Modal for $0.7 billion of cash, net of cash acquired, and assumption of $0.3 billion of M*Modal’s debt. Based in Pittsburgh, Pennsylvania, M*Modal is a leading healthcare technology provider of cloud-based, conversational artificial intelligence-powered systems that help physicians efficiently capture and improve the patient narrative. The allocation of purchase consideration related to M*Modal is considered preliminary with provisional amounts primarily related to intangible assets, working capital, certain tax-related and contingent liability amounts. 3M expects to finalize the allocation of purchase price within the one-year measurement-period following the acquisition. Net sales and operating loss (inclusive of transaction and integration costs) of this business included in 3M’s consolidated results of operations for the first quarter of 2019 were approximately $50 million and $20 million, respectively. Proforma information related to the acquisition has not been included as the impact on the Company’s consolidated results of operations was not considered material.

 

There were no acquisitions that closed during the three months ended March 31, 2018.

13


 

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.

 

2019 divestitures:

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

 

2018 divestitures:

During 2018, as described in Note 3 in 3M’s 2018 Annual Report on Form 10-K, the Company divested a number of businesses including: certain personal safety product offerings primarily focused on noise, environmental and heat stress monitoring; a polymer additives compounding business; an abrasives glass products business; and substantially all of its Communication Markets Division.

 

Operating income and held for sale amounts:

The aggregate operating income of these businesses was approximately $10 million and not material in the first three months of 2018 and 2019, respectively. The approximate amounts of major assets and liabilities associated with disposal groups classified as held-for-sale as of March 31, 2019 and as of December 31, 2018 were not material.

 

Refer to Note 3 in 3M’s 2018 Annual Report on Form 10-K for more information on 3M’s acquisitions and divestitures.

 

NOTE 4.  Goodwill and Intangible Assets

 

Goodwill from acquisitions totaled $580 million during the first three months of 2019, none of which was deductible for tax purposes. The amounts in the “Translation and other” row in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balance by business segment as of December 31, 2018 and March 31, 2019, follow:

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

 

Industrial

 

</