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 September 30, 2018
Commission file number: 1-3285
3M COMPANY
(Exact name of registrant as specified in its charter)
|
DELAWARE |
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41-0417775 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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3M Center, St. Paul, Minnesota |
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55144 |
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(Address of principal executive offices) |
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(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 ☒ |
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Accelerated filer ☐ |
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|
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Non-accelerated filer ☐
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Smaller reporting company ☐ |
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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.
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Class |
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Outstanding at September 30, 2018 |
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Common Stock, $0.01 par value per share |
|
582,287,135 shares |
Form 10-Q for the Quarterly Period Ended September 30, 2018
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TABLE OF CONTENTS |
BEGINNING |
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Index to Financial Statements: |
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3 | ||
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4 | ||
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5 | ||
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6 | ||
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13 | ||
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17 | ||
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18 | ||
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20 | ||
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21 | ||
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Note 7. Supplemental Equity and Comprehensive Income Information |
21 | |
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25 | ||
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27 | ||
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27 | ||
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28 | ||
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29 | ||
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35 | ||
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38 | ||
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48 | ||
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51 | ||
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53 | ||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Index to Management’s Discussion and Analysis: |
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54 | ||
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61 | ||
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66 | ||
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73 | ||
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Cautionary Note Concerning Factors That May Affect Future Results |
78 | |
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2
3M COMPANY
FORM 10-Q
For the Quarterly Period Ended September 30, 2018
3M Company and Subsidiaries
Consolidated Statement of Income
(Unaudited)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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||||||||
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(Millions, except per share amounts) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
||||
|
Net sales |
|
$ |
8,152 |
|
$ |
8,172 |
|
$ |
24,820 |
|
$ |
23,667 |
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost of sales |
|
|
4,159 |
|
|
4,059 |
|
|
12,622 |
|
|
11,961 |
|
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Selling, general and administrative expenses |
|
|
1,547 |
|
|
1,637 |
|
|
5,920 |
|
|
4,871 |
|
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Research, development and related expenses |
|
|
430 |
|
|
468 |
|
|
1,384 |
|
|
1,422 |
|
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Gain on sale of businesses |
|
|
— |
|
|
— |
|
|
(530) |
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|
(490) |
|
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Total operating expenses |
|
|
6,136 |
|
|
6,164 |
|
|
19,396 |
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17,764 |
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Operating income |
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|
2,016 |
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|
2,008 |
|
|
5,424 |
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|
5,903 |
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|
|
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|
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|
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|
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Other expense (income), net |
|
|
51 |
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|
11 |
|
|
144 |
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|
27 |
|
|
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|
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Income before income taxes |
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1,965 |
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|
1,997 |
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|
5,280 |
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|
5,876 |
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Provision for income taxes |
|
|
419 |
|
|
564 |
|
|
1,266 |
|
|
1,532 |
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|
Net income including noncontrolling interest |
|
$ |
1,546 |
|
$ |
1,433 |
|
$ |
4,014 |
|
$ |
4,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interest |
|
|
3 |
|
|
4 |
|
|
12 |
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9 |
|
|
|
|
|
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|
|
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Net income attributable to 3M |
|
$ |
1,543 |
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$ |
1,429 |
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$ |
4,002 |
|
$ |
4,335 |
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|
|
|
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|
|
|
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Weighted average 3M common shares outstanding — basic |
|
|
585.6 |
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|
597.6 |
|
|
591.1 |
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|
597.9 |
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Earnings per share attributable to 3M common shareholders — basic |
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$ |
2.64 |
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$ |
2.39 |
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$ |
6.77 |
|
$ |
7.25 |
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Weighted average 3M common shares outstanding — diluted |
|
|
598.4 |
|
|
612.7 |
|
|
605.1 |
|
|
612.5 |
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Earnings per share attributable to 3M common shareholders — diluted |
|
$ |
2.58 |
|
$ |
2.33 |
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$ |
6.61 |
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$ |
7.08 |
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|
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Cash dividends paid per 3M common share |
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$ |
1.36 |
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$ |
1.175 |
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$ |
4.08 |
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$ |
3.525 |
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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)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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(Millions) |
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2018 |
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2017 |
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2018 |
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2017 |
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Net income including noncontrolling interest |
|
$ |
1,546 |
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$ |
1,433 |
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$ |
4,014 |
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$ |
4,344 |
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Other comprehensive income (loss), net of tax: |
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Cumulative translation adjustment |
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(112) |
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44 |
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(441) |
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269 |
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Defined benefit pension and postretirement plans adjustment |
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114 |
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80 |
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|
344 |
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|
241 |
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Cash flow hedging instruments, unrealized gain (loss) |
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46 |
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(49) |
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147 |
|
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(176) |
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Total other comprehensive income (loss), net of tax |
|
|
48 |
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|
75 |
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50 |
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334 |
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Comprehensive income (loss) including noncontrolling interest |
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|
1,594 |
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|
1,508 |
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|
4,064 |
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|
4,678 |
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Comprehensive (income) loss attributable to noncontrolling interest |
|
|
— |
|
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(3) |
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(4) |
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(11) |
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Comprehensive income (loss) attributable to 3M |
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$ |
1,594 |
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$ |
1,505 |
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$ |
4,060 |
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$ |
4,667 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
4
3M Company and Subsidiaries
(Unaudited)
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September 30, |
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December 31, |
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||
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(Dollars in millions, except per share amount) |
|
2018 |
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2017 |
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Assets |
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Current assets |
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|
|
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Cash and cash equivalents |
|
$ |
3,185 |
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$ |
3,053 |
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Marketable securities — current |
|
|
338 |
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|
1,076 |
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Accounts receivable — net |
|
|
5,329 |
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|
4,911 |
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Inventories |
|
|
|
|
|
|
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Finished goods |
|
|
2,125 |
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|
1,915 |
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Work in process |
|
|
1,350 |
|
|
1,218 |
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Raw materials and supplies |
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|
962 |
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|
901 |
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Total inventories |
|
|
4,437 |
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|
4,034 |
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Prepaids |
|
|
745 |
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|
937 |
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Other current assets |
|
|
385 |
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|
266 |
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Total current assets |
|
|
14,419 |
|
|
14,277 |
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Property, plant and equipment |
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|
24,765 |
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|
24,914 |
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Less: Accumulated depreciation |
|
|
(16,135) |
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|
(16,048) |
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|
Property, plant and equipment — net |
|
|
8,630 |
|
|
8,866 |
|
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Goodwill |
|
|
10,123 |
|
|
10,513 |
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Intangible assets — net |
|
|
2,726 |
|
|
2,936 |
|
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Other assets |
|
|
1,377 |
|
|
1,395 |
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Total assets |
|
$ |
37,275 |
|
$ |
37,987 |
|
|
Liabilities |
|
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|
|
|
|
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Current liabilities |
|
|
|
|
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|
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Short-term borrowings and current portion of long-term debt |
|
$ |
1,307 |
|
$ |
1,853 |
|
|
Accounts payable |
|
|
2,029 |
|
|
1,945 |
|
|
Accrued payroll |
|
|
783 |
|
|
870 |
|
|
Accrued income taxes |
|
|
186 |
|
|
310 |
|
|
Other current liabilities |
|
|
3,031 |
|
|
2,709 |
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Total current liabilities |
|
|
7,336 |
|
|
7,687 |
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|
|
|
|
|
|
|
|
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Long-term debt |
|
|
13,539 |
|
|
12,096 |
|
|
Pension and postretirement benefits |
|
|
3,183 |
|
|
3,620 |
|
|
Other liabilities |
|
|
2,906 |
|
|
2,962 |
|
|
Total liabilities |
|
$ |
26,964 |
|
$ |
26,365 |
|
|
Commitments and contingencies (Note 14) |
|
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Equity |
|
|
|
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3M Company shareholders’ equity: |
|
|
|
|
|
|
|
|
Common stock par value, $.01 par value; 944,033,056 shares issued |
|
$ |
9 |
|
$ |
9 |
|
|
Additional paid-in capital |
|
|
5,597 |
|
|
5,352 |
|
|
Retained earnings |
|
|
40,120 |
|
|
39,115 |
|
|
Treasury stock, at cost: 361,745,921 shares at September 30, 2018; 349,148,819 shares at December 31, 2017 |
|
|
(28,510) |
|
|
(25,887) |
|
|
Accumulated other comprehensive income (loss) |
|
|
(6,968) |
|
|
(7,026) |
|
|
Total 3M Company shareholders’ equity |
|
|
10,248 |
|
|
11,563 |
|
|
Noncontrolling interest |
|
|
63 |
|
|
59 |
|
|
Total equity |
|
$ |
10,311 |
|
$ |
11,622 |
|
|
Total liabilities and equity |
|
$ |
37,275 |
|
$ |
37,987 |
|
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)
|
|
|
Nine months ended |
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September 30, |
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(Millions) |
|
2018 |
|
2017 |
|
||
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income including noncontrolling interest |
|
$ |
4,014 |
|
$ |
4,344 |
|
|
Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,117 |
|
|
1,195 |
|
|
Company pension and postretirement contributions |
|
|
(303) |
|
|
(314) |
|
|
Company pension and postretirement expense |
|
|
306 |
|
|
243 |
|
|
Stock-based compensation expense |
|
|
258 |
|
|
266 |
|
|
Gain on sale of businesses |
|
|
(530) |
|
|
(490) |
|
|
Deferred income taxes |
|
|
(73) |
|
|
(105) |
|
|
Changes in assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(596) |
|
|
(595) |
|
|
Inventories |
|
|
(562) |
|
|
(436) |
|
|
Accounts payable |
|
|
148 |
|
|
(25) |
|
|
Accrued income taxes (current and long-term) |
|
|
122 |
|
|
249 |
|
|
Other — net |
|
|
280 |
|
|
48 |
|
|
Net cash provided by operating activities |
|
|
4,181 |
|
|
4,380 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment (PP&E) |
|
|
(1,046) |
|
|
(914) |
|
|
Proceeds from sale of PP&E and other assets |
|
|
143 |
|
|
18 |
|
|
Acquisitions, net of cash acquired |
|
|
13 |
|
|
(12) |
|
|
Purchases of marketable securities and investments |
|
|
(1,352) |
|
|
(1,055) |
|
|
Proceeds from maturities and sale of marketable securities and investments |
|
|
2,066 |
|
|
745 |
|
|
Proceeds from sale of businesses, net of cash sold |
|
|
806 |
|
|
862 |
|
|
Other — net |
|
|
8 |
|
|
2 |
|
|
Net cash provided by (used in) investing activities |
|
|
638 |
|
|
(354) |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Change in short-term debt — net |
|
|
(698) |
|
|
60 |
|
|
Repayment of debt (maturities greater than 90 days) |
|
|
(456) |
|
|
(650) |
|
|
Proceeds from debt (maturities greater than 90 days) |
|
|
2,247 |
|
|
— |
|
|
Purchases of treasury stock |
|
|
(3,601) |
|
|
(1,564) |
|
|
Proceeds from issuance of treasury stock pursuant to stock option and benefit plans |
|
|
401 |
|
|
582 |
|
|
Dividends paid to shareholders |
|
|
(2,406) |
|
|
(2,104) |
|
|
Other — net |
|
|
(36) |
|
|
(23) |
|
|
Net cash used in financing activities |
|
|
(4,549) |
|
|
(3,699) |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(138) |
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
132 |
|
|
433 |
|
|
Cash and cash equivalents at beginning of year |
|
|
3,053 |
|
|
2,398 |
|
|
Cash and cash equivalents at end of period |
|
$ |
3,185 |
|
$ |
2,831 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
6
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 September 30, 2017 |
|
Previously |
|
|
|
|
|
|||
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(Millions) |
|
Reported |
|
Revised |
|
Change |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
8,172 |
|
$ |
8,172 |
|
$ |
— |
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
4,045 |
|
|
4,059 |
|
|
14 |
|
|
Selling, general and administrative expenses |
|
|
1,623 |
|
|
1,637 |
|
|
14 |
|
|
Research, development and related expenses |
|
|
463 |
|
|
468 |
|
|
5 |
|
|
Gain on sale of businesses |
|
|
— |
|
|
— |
|
|
— |
|
|
Total operating expenses |
|
|
6,131 |
|
|
6,164 |
|
|
33 |
|
|
Operating income |
|
$ |
2,041 |
|
$ |
2,008 |
|
$ |
(33) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income), net |
|
$ |
44 |
|
$ |
11 |
|
$ |
(33) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
1,997 |
|
$ |
1,997 |
|
$ |
— |
|
|
Nine months ended September 30, 2017 |
|
Previously |
|
|
|
|
|
|||
|
(Millions) |
|
Reported |
|
Revised |
|
Change |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
23,667 |
|
$ |
23,667 |
|
$ |
— |
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
11,921 |
|
|
11,961 |
|
|
40 |
|
|
Selling, general and administrative expenses |
|
|
4,830 |
|
|
4,871 |
|
|
41 |
|
|
Research, development and related expenses |
|
|
1,407 |
|
|
1,422 |
|
|
15 |
|
|
Gain on sale of businesses |
|
|
(490) |
|
|
(490) |
|
|
— |
|
|
Total operating expenses |
|
|
17,668 |
|
|
17,764 |
|
|
96 |
|
|
Operating income |
|
$ |
5,999 |
|
$ |
5,903 |
|
$ |
(96) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income), net |
|
$ |
123 |
|
$ |
27 |
|
$ |
(96) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
5,876 |
|
$ |
5,876 |
|
$ |
— |
|
7
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 nine months ended September 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 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 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 VES. As of September 30, 2018, the Company had a balance of net monetary assets denominated in VES of less than 2 million VES and the DICOM exchange rate was approximately 62 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
8
government regulations in Venezuela. Based upon a review of factors as of September 30, 2018, the Company continues to consolidate its Venezuelan subsidiary. As of September 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, 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 September 30, 2018, the Company had a balance of net monetary assets denominated in Argentine pesos (ARS) of approximately 300 million ARS and the exchange rate was approximately 41 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 (3.2 million average options for the three months ended September 30, 2018; 2.8 million average options for the nine months ended September 30, 2018; insignificant for the three months ended September 30, 2017, 1.1 million average options for the nine months ended September 30, 2017). The computations for basic and diluted earnings per share follow:
Earnings Per Share Computations
|
|
|
Three months ended |
|
Nine months ended |
|
||||||||
|
|
|
September 30, |
|
September 30, |
|
||||||||
|
(Amounts in millions, except per share amounts) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to 3M |
|
$ |
1,543 |
|
$ |
1,429 |
|
$ |
4,002 |
|
$ |
4,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for weighted average 3M common shares outstanding – basic |
|
|
585.6 |
|
|
597.6 |
|
|
591.1 |
|
|
597.9 |
|
|
Dilution associated with the Company’s stock-based compensation plans |
|
|
12.8 |
|
|
15.1 |
|
|
14.0 |
|
|
14.6 |
|
|
Denominator for weighted average 3M common shares outstanding – diluted |
|
|
598.4 |
|
|
612.7 |
|
|
605.1 |
|
|
612.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to 3M common shareholders – basic |
|
$ |
2.64 |
|
$ |
2.39 |
|
$ |
6.77 |
|
$ |
7.25 |
|
|
Earnings per share attributable to 3M common shareholders – diluted |
|
$ |
2.58 |
|
$ |
2.33 |
|
$ |
6.61 |
|
$ |
7.08 |
|
9
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. |
10
|
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. |
|
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 Nos. 2018-10 and 2018-11) |
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 |
As amended, provides for retrospective transition applied to earliest period presented or an adoption method by which entities would not need to recast the comparative periods presented. 3M does not plan on recasting prior periods as it adopts this ASU. 3M continues to evaluate the ASU’s impact on its consolidated results of operations and financial condition, has conducted initial analysis, executed project management relative to the process of adopting this ASU including implementing a new lease accounting system, conducted detailed contract reviews, and is finalizing its assessment of adoption impacts. Note 15 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 information regarding rent expense for operating leases and minimum lease payments for capital and operating leases under existing lease guidance. See the “Relevant New Standards Issued Subsequent to Most Recent Annual Report” below for further discussion on ASU Nos. 2018-10 and 2018-11 issued in July 2018. |
11
|
Standards Issued and Not Yet Adopted (continued) |
|||
|
Standard |
Relevant Description |
Effective Date for 3M |
Impact and Other Matters |
|
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. |
|
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 does not expect this ASU to have a material 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
12
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.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASU No. 2016-02, Leases. The new ASU offers an additional transition method by which entities may elect not to recast the comparative periods presented in financial statements in the period of adoption and allows lessors to elect a practical expedient to not separate lease and nonlease components when certain conditions are met. This ASU has the same transition requirements and effective date as ASU No. 2016-02, which for 3M is January 1, 2019.
In August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, amends, and adds disclosure requirements for fair value measurements. The amended and new disclosure requirements primarily relate to Level 3 fair value measurements. For 3M, the ASU is effective as of January 1, 2020. The removal and amendment of certain disclosures may be early adopted with retrospective application while the new disclosure requirements are to be applied prospectively. As this ASU relates only to disclosures, there will be no impact to the Company’s consolidated results of operations and financial condition.
In August 2018, the FASB issued ASU No. 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans, which makes minor changes to the disclosure requirements related to defined benefit pension and other postretirement plans. The ASU requires a retrospective transition approach. For 3M, the ASU is effective as of January 1, 2021. As this ASU relates only to disclosures, there will be no impact to the Company’s consolidated results of operations and financial condition.
In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which 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. The ASU permits either a prospective or retrospective transition approach. For 3M, the ASU is effective as of January 1, 2020. The Company is currently assessing this standard’s impact on its consolidated results of operations and financial condition.
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 nine months ended September 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
13
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 revenue (current portion) as of September 30, 2018 and December 31, 2017 was $614 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 for goods that are in-transit at period end for which control transfers to the customer upon delivery. Approximately $70 million and $460 million of the December 31, 2017 balance was recognized as revenue during the three and nine months ended September 30, 2018, respectively. The amount of noncurrent deferred revenue 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. |
14
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 |
|
Nine months ended |
|
||||||||
|
|
|
September 30, |
|
September 30, |
|
||||||||
|
Net Sales (Millions) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
||||
|
Abrasives |
|
$ |
427 |
|
$ |
441 |
|
$ |
1,375 |
|
$ |
1,308 |
|
|
Adhesives and Tapes |
|
|
1,164 |
|
|
1,170 |
|
|
3,482 |
|
|
3,341 |
|
|
Advanced Materials |
|
|
314 |
|
|
281 |
|
|
935 |
|
|
855 |
|
|
Automotive and Aerospace |
|
|
499 |
|
|
490 |
|
|
1,577 |
|
|
1,487 |
|
|
Automotive Aftermarket |
|
|
397 |
|
|
414 |
|
|
1,253 |
|
|
1,249 |
|
|
Separation and Purification |
|
|
224 |
|
|
228 |
|
|
698 |
|
|
667 |
|
|
Other Industrial |
|
|
(2) |
|
|
(1) |
|
|
(5) |
|
|
(2) |
|
|
Total Industrial Business Group |
|
$ |
3,023 |
|
$ |
3,023 |
|
$ |
9,315 |
|
$ |
8,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Solutions |
|
$ |
439 |
|
$ |
444 |
|
$ |
1,426 |
|
$ |
1,344 |
|
|
Personal Safety |
|
|
881 |
|
|
732 |
|
|
2,800 |
|
|
2,160 |
|
|
Roofing Granules |
|
|
83 |
|
|
98 |
|
|
283 |
|
|
291 |
|
|
Transportation Safety |
|
|
259 |
|
|
279 |
|
|
752 |
|
|
877 |
|
|
Other Safety and Graphics |
|
|
(2) |
|
|
(2) |
|
|
(3) |
|
|
(2) |
|
|
Total Safety and Graphics Business Group |
|
$ |
1,660 |
|
$ |
1,551 |
|
||||||