3M CO, 10-K filed on 2/7/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
shares in Millions, $ in Billions
12 Months Ended
Dec. 31, 2018
Jan. 31, 2019
Jun. 30, 2018
Document and Entity Information      
Entity Registrant Name 3M Company    
Trading Symbol mmm    
Entity Central Index Key 0000066740    
Document Type 10-K    
Document Period End Date Dec. 31, 2018    
Amendment Flag false    
Current Fiscal Year End Date --12-31    
Entity Well Known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Public Float   $ 115.3 $ 115.4
Entity Common Stock, Shares Outstanding   575.8  
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
v3.10.0.1
Consolidated Statement of Income - USD ($)
shares in Millions, $ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Consolidated Statement of Income      
Net sales $ 32,765 $ 31,657 $ 30,109
Operating expenses      
Cost of sales 16,682 16,055 15,118
Selling, general and administrative expenses 7,602 6,626 6,311
Research, development and related expenses 1,821 1,870 1,764
Gain on sale of businesses (547) (586) (111)
Total operating expenses 25,558 23,965 23,082
Operating income 7,207 7,692 7,027
Interest expense and income      
Other expense (income), net 207 144 (26)
Income before income taxes 7,000 7,548 7,053
Provision for income taxes 1,637 2,679 1,995
Net income including noncontrolling interest 5,363 4,869 5,058
Less: Net income attributable to noncontrolling interest 14 11 8
Net income attributable to 3M $ 5,349 $ 4,858 $ 5,050
Weighted average 3M common shares outstanding - basic (in shares) 588.5 597.5 604.7
Earnings per share attributable to 3M common shareholders - basic (in dollars per share) $ 9.09 $ 8.13 $ 8.35
Weighted average 3M common shares outstanding - diluted (in shares) 602.0 612.7 618.7
Earnings per share attributable to 3M common shareholders - diluted (in dollars per share) $ 8.89 $ 7.93 $ 8.16
v3.10.0.1
Consolidated Statement of Comprehensive Income - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Consolidated Statement of Comprehensive Income      
Net income including noncontrolling interest $ 5,363 $ 4,869 $ 5,058
Other comprehensive income (loss), net of tax:      
Cumulative translation adjustment (467) 373 (331)
Defined benefit pension and postretirement plans adjustment 444 52 (524)
Cash flow hedging instruments - unrealized gain (loss) 176 (203) (33)
Total other comprehensive income (loss), net of tax 153 222 (888)
Comprehensive income (loss) including noncontrolling interest 5,516 5,091 4,170
Comprehensive (income) loss attributable to noncontrolling interest (8) (14) (6)
Comprehensive income (loss) attributable to 3M $ 5,508 $ 5,077 $ 4,164
v3.10.0.1
Consolidated Balance Sheet - USD ($)
$ in Millions
Dec. 31, 2018
Dec. 31, 2017
Current assets    
Cash and cash equivalents $ 2,853 $ 3,053
Marketable securities - current 380 1,076
Accounts receivable - net of allowances of $95 and $103 5,020 4,911
Inventories    
Finished goods 2,120 1,915
Work in process 1,292 1,218
Raw materials and supplies 954 901
Total inventories 4,366 4,034
Prepaids 741 937
Other current assets 349 266
Total current assets 13,709 14,277
Property, plant and equipment 24,873 24,914
Less: Accumulated depreciation (16,135) (16,048)
Property, plant and equipment - net 8,738 8,866
Goodwill 10,051 10,513
Intangible assets - net 2,657 2,936
Other assets 1,345 1,395
Total assets 36,500 37,987
Current liabilities    
Short-term borrowings and current portion of long-term debt 1,211 1,853
Accounts payable 2,266 1,945
Accrued payroll 749 870
Accrued income taxes 243 310
Other current liabilities 2,775 2,709
Total current liabilities 7,244 7,687
Long-term debt 13,411 12,096
Pension and postretirement benefits 2,987 3,620
Other liabilities 3,010 2,962
Total liabilities 26,652 26,365
Commitments and contingencies (Note 16)
3M Company shareholders' equity:    
Common stock par value, $.01 par value Shares outstanding - 2018: 576,575,168; Shares outstanding - 2017: 594,884,237 9 9
Additional paid-in capital 5,643 5,352
Retained earnings 40,636 39,115
Treasury stock (29,626) (25,887)
Accumulated other comprehensive income (loss) (6,866) (7,026)
Total 3M Company shareholders' equity 9,796 11,563
Noncontrolling interest 52 59
Total equity 9,848 11,622
Total liabilities and equity $ 36,500 $ 37,987
v3.10.0.1
Consolidated Balance Sheet (Parenthetical) - USD ($)
$ in Millions
Dec. 31, 2018
Dec. 31, 2017
Consolidated Balance Sheet    
Allowances for doubtful accounts receivable $ 95 $ 103
Common stock, par value per share (in dollars per share) $ 0.01 $ 0.01
Common stock, Shares outstanding (in shares) 576,575,168 594,884,237
v3.10.0.1
Consolidated Statement of Changes in Equity - USD ($)
$ in Millions
Common Stock and Additional Paid-in Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interest
Total
Balance at the beginning of the period at Dec. 31, 2015 $ 4,800 $ 36,296 $ (23,308) $ (6,359) $ 39 $ 11,468
Increase (decrease) in equity            
Net income   5,050     8 5,058
Other comprehensive income (loss), net of tax:            
Cumulative translation adjustment       (329) (2) (331)
Defined benefit pension and postretirement plans adjustment       (524)   (524)
Cash flow hedging instruments - unrealized gain (loss)       (33)   (33)
Total other comprehensive income (loss), net of tax           (888)
Dividends declared   (2,678)       (2,678)
Stock-based compensation 270         270
Reacquired stock     (3,699)     (3,699)
Issuances pursuant to stock option and benefit plans   (761) 1,573     812
Balance at the end of the period at Dec. 31, 2016 5,070 37,907 (25,434) (7,245) 45 10,343
Increase (decrease) in equity            
Net income   4,858     11 4,869
Other comprehensive income (loss), net of tax:            
Cumulative translation adjustment       370 3 373
Defined benefit pension and postretirement plans adjustment       52   52
Cash flow hedging instruments - unrealized gain (loss)       (203)   (203)
Total other comprehensive income (loss), net of tax           222
Dividends declared   (2,803)       (2,803)
Stock-based compensation 291         291
Reacquired stock     (2,044)     (2,044)
Issuances pursuant to stock option and benefit plans   (847) 1,591     744
Balance at the end of the period at Dec. 31, 2017 5,361 39,115 (25,887) (7,026) 59 11,622
Increase (decrease) in equity            
Net income   5,349     14 5,363
Other comprehensive income (loss), net of tax:            
Cumulative translation adjustment       (461) (6) (467)
Defined benefit pension and postretirement plans adjustment       444   444
Cash flow hedging instruments - unrealized gain (loss)       176   176
Total other comprehensive income (loss), net of tax           153
Dividends declared   (3,193)       (3,193)
Transfer of ownership involving non-wholly owned subsidiaries   14   1 (15)  
Stock-based compensation 291         291
Reacquired stock     (4,888)     (4,888)
Issuances pursuant to stock option and benefit plans   (649) 1,149     500
Balance at the end of the period at Dec. 31, 2018 $ 5,652 $ 40,636 $ (29,626) $ (6,866) $ 52 $ 9,848
v3.10.0.1
Consolidated Statement of Changes in Equity (Parenthetical) - $ / shares
3 Months Ended 12 Months Ended
Dec. 31, 2018
Sep. 30, 2018
Jun. 30, 2018
Mar. 31, 2018
Dec. 31, 2017
Sep. 30, 2017
Jun. 30, 2017
Mar. 31, 2017
Dec. 31, 2016
Sep. 30, 2016
Jun. 30, 2016
Mar. 31, 2016
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Consolidated Statement of Changes in Equity                              
Dividends declared in current period (in dollars per share) $ 1.36 $ 1.36 $ 1.36 $ 1.36 $ 1.175 $ 1.175 $ 1.175 $ 1.175 $ 1.11 $ 1.11 $ 1.11 $ 1.11 $ 5.44 $ 4.70 $ 4.44
v3.10.0.1
Supplemental Share Information - shares
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Supplemental Share Information Treasury Stock RollForward      
Treasury Stock, Shares, Beginning Balance 349,148,819 347,306,778 334,702,932
Reacquired stock 23,526,293 10,209,963 22,602,748
Issuances pursuant to stock options and benefit plans (5,217,224) (8,367,922) (9,998,902)
Treasury Stock, Shares, Ending Balance 367,457,888 349,148,819 347,306,778
v3.10.0.1
Consolidated Statement of Cash Flows - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Cash Flows from Operating Activities      
Net income including noncontrolling interest $ 5,363 $ 4,869 $ 5,058
Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities      
Depreciation and amortization 1,488 1,544 1,474
Company pension and postretirement contributions (370) (967) (383)
Company pension and postretirement expense 410 334 250
Stock-based compensation expense 302 324 298
Gain on sale of businesses (545) (586) (111)
Deferred income taxes (57) 107 7
Changes in assets and liabilities      
Accounts receivable (305) (245) (313)
Inventories (509) (387) 57
Accounts payable 408 24 148
Accrued income taxes (current and long-term) 134 967 101
Other - net 120 256 76
Net cash provided by (used in) operating activities 6,439 6,240 6,662
Cash Flows from Investing Activities      
Purchases of property, plant and equipment (PP&E) (1,577) (1,373) (1,420)
Proceeds from sale of PP&E and other assets 262 49 58
Acquisitions, net of cash acquired 13 (2,023) (16)
Purchases of marketable securities and investments (1,828) (2,152) (1,410)
Proceeds from maturities and sale of marketable securities and investments 2,497 1,354 1,247
Proceeds from sale of businesses, net of cash sold 846 1,065 142
Other - net 9 (6) (4)
Net cash provided by (used in) investing activities 222 (3,086) (1,403)
Cash Flows from Financing Activities      
Change in short-term debt - net (284) 578 (797)
Repayment of debt (maturities greater than 90 days) (1,034) (962) (992)
Proceeds from debt (maturities greater than 90 days) 2,251 1,987 2,832
Purchases of treasury stock (4,870) (2,068) (3,753)
Proceeds from issuance of treasury stock pursuant to stock option and benefit plans 485 734 804
Dividends paid to shareholders (3,193) (2,803) (2,678)
Other - net (56) (121) (42)
Net cash provided by (used in) financing activities (6,701) (2,655) (4,626)
Effect of exchange rate changes on cash and cash equivalents (160) 156 (33)
Net increase (decrease) in cash and cash equivalents (200) 655 600
Cash and cash equivalents at beginning of year 3,053 2,398 1,798
Cash and cash equivalents at end of period $ 2,853 $ 3,053 $ 2,398
v3.10.0.1
Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Significant Accounting Policies  
Significant Accounting Policies

Notes to Consolidated Financial Statements

 

NOTE 1.  Significant Accounting Policies

 

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

 

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 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, which was redesigned by the Venezuelan government in June 2017 (DICOM), or its predecessor. During the same periods, the Venezuelan government’s official exchange was Tipo de Cambio Protegido (DIPRO), 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.  3M’s uses of these rates were based upon evaluation of a number of factors including, but not limited to, the exchange rate the Company’s Venezuelan subsidiary may legally use to convert currency, settle transactions or pay dividends; the probability of accessing and obtaining currency by use of a particular rate or mechanism; and the Company’s intent and ability to use a particular exchange mechanism. The Company continues to monitor these circumstances. Changes in applicable exchange rates or exchange mechanisms may continue in the future. As of December 31, 2018, the Company had a balance of net monetary liabilities denominated in VES of approximately 30 million VES and the DICOM exchange rate was approximately 556 VES per U.S. dollar.

 

A need to deconsolidate the Company’s Venezuelan subsidiary’s operations may result from a lack of exchangeability of VEF-denominated cash coupled with an acute degradation in the ability to make key operational decisions due to government regulations in Venezuela. 3M monitors factors such as its ability to access various exchange mechanisms; the impact of government regulations on the Company’s ability to manage its Venezuelan subsidiary’s capital structure, purchasing, product pricing, and labor relations; and the current political and economic situation within Venezuela. Based upon a review of factors as of December 31, 2018, the Company continues to consolidate its Venezuelan subsidiary. As of December 31, 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 total 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 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 December 31, 2018, the Company had a balance of net monetary assets denominated in Argentine pesos (ARS) of approximately 230 million ARS and the exchange rate was approximately 38 ARS per U.S. dollar.

 

Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

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

 

Marketable securities: Marketable securities include available-for-sale debt securities and are recorded at fair value. Cost of securities sold use the first in, first out (FIFO) method. The classification of marketable securities as current or non-current is based on the availability for use in current operations. 3M reviews impairments associated with its marketable securities in accordance with the measurement guidance provided by ASC 320, Investments-Debt and Equity Securities, when determining the classification of the impairment as “temporary” or “other-than-temporary”. A temporary impairment charge results in an unrealized loss being recorded in accumulated other comprehensive income as a component of shareholders’ equity. Such an unrealized loss does not reduce net income for the applicable accounting period because the loss is not viewed as other-than-temporary. The factors evaluated to differentiate between temporary and other-than-temporary include the projected future cash flows, credit ratings actions, and assessment of the credit quality of the underlying collateral, as well as other factors. Amounts are reclassified out of accumulated other comprehensive income and into earnings upon sale or “other-than-temporary” impairment.

 

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. The balance of these securities is disclosed in Note 7.

 

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

 

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

 

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

 

Conditional asset retirement obligations: A liability is initially recorded at fair value for an asset retirement obligation associated with the retirement of tangible long-lived assets in the period in which it is incurred if a reasonable estimate of fair value can be made. Conditional asset retirement obligations exist for certain long-term assets of the Company. The obligation is initially measured at fair value using expected present value techniques. Over time the liabilities are accreted for the change in their present value and the initial capitalized costs are depreciated over the remaining useful lives of the related assets. The asset retirement obligation liability was $122 million and $106 million at December 31, 2018 and 2017, respectively.

 

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

 

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

 

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

 

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

 

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

 

Revenue (sales) recognition: 3M adopted ASU No. 2014-09, Revenue from Contracts with Customers, and other related ASUs (collectively, ASC 606, Revenue from Contracts with Customers) on January 1, 2018 using the modified retrospective transition approach. See additional disclosure relative to adoption of this ASU in Note 2.

 

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

 

Revenue is recognized when control of goods has transferred to customers. For the majority of the Company’s customer arrangements, control transfers to customers at a point-in-time when goods/services have been delivered as that is generally when legal title, physical possession and risks and rewards of goods/services transfers to the customer. In limited arrangements, control transfers over time as the customer simultaneously receives and consumes the benefits as 3M completes the performance obligation(s).

 

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

 

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

 

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

 

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

 

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

 

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

·

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

·

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

·

Portfolio approach practical expedient relative to estimation of variable consideration.

·

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

·

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

·

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

 

Accounts receivable and allowances: Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains allowances for bad debts, cash discounts, product returns and various other items. The allowance for doubtful accounts and product returns is based on the best estimate of the amount of probable credit losses in existing accounts receivable and anticipated sales returns. The Company determines the allowances based on historical write-off experience by industry and regional economic data and historical sales returns. The Company reviews the allowance for doubtful accounts monthly. The Company does not have any significant off-balance-sheet credit exposure related to its customers.

 

Advertising and merchandising: These costs are charged to operations in the period incurred, and totaled $396 million in 2018,  $411 million in 2017 and $385 million in 2016.

 

Research, development and related expenses: These costs are charged to operations in the period incurred and are shown on a separate line of the Consolidated Statement of Income. Research, development and related expenses totaled $1.821 billion in 2018,  $1.870 billion in 2017 and $1.764 billion in 2016. Research and development expenses, covering basic scientific research and the application of scientific advances in the development of new and improved products and their uses, totaled $1.253 billion in 2018,  $1.352 billion in 2017 and $1.248 billion in 2016. Related expenses primarily include technical support; internally developed patent costs, which include costs and fees incurred to prepare, file, secure and maintain patents; amortization of externally acquired patents and externally acquired in-process research and development; and gains/losses associated with certain corporate approved investments in R&D-related ventures, such as equity method effects and impairments.

 

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

 

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

 

Income taxes: The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exists. As of December 31, 2018 and 2017, the Company had valuation allowances of $67 million and $81 million on its deferred tax assets, respectively. The Company recognizes and measures its uncertain tax positions based on the rules under ASC 740, Income Taxes.

 

Earnings per share: The difference in the weighted average 3M shares outstanding for calculating basic and diluted earnings per share attributable to 3M common shareholders is the result of the dilution associated with the Company’s stock-based compensation plans. Certain options outstanding under these stock-based compensation plans during the years 2018,  2017 and 2016 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 (2.9 million average options for 2018,  0.8 million average options for 2017, and 3.6 million average options for 2016). The computations for basic and diluted earnings per share for the years ended December 31 follow:

 

Earnings Per Share Computations

 

 

 

 

 

 

 

 

 

 

 

 

(Amounts in millions, except per share amounts)

    

2018

    

2017

    

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

5,349

 

$

4,858

 

$

5,050

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding basic

 

 

588.5

 

 

597.5

 

 

604.7

 

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

 

 

13.5

 

 

15.2

 

 

14.0

 

Denominator for weighted average 3M common shares outstanding diluted

 

 

602.0

 

 

612.7

 

 

618.7

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders basic

 

$

9.09

 

$

8.13

 

$

8.35

 

Earnings per share attributable to 3M common shareholders diluted

 

$

8.89

 

$

7.93

 

$

8.16

 

 

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

 

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

 

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

 

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

 

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

 

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

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers, and subsequently issued additional ASUs amending this ASU thought 2017 (collectively, ASC 606, Revenue from Contracts with Customers). 3M adopted ASC 606 on January 1, 2018. The Company’s revenue recognition policy under ASC 606 is described earlier in Note 1 and related additional disclosures are included in Note 2, Revenue. 3M adopted ASC 606 using the modified retrospective method of adoption. Prior periods have not been restated. Due to the cumulative net impact of adoption, 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.

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which revises the accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance requires the fair value measurement of investments in equity securities and other ownership interests in an entity, including investments in partnerships, unincorporated joint ventures and limited liability companies (collectively, equity securities) that do not result in consolidation and are not accounted for under the equity method. Entities will need to measure these investments and recognize changes in fair value in net income. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities they classify under current guidance as available-for-sale in other comprehensive income (OCI). They also will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. Instead, for these types of equity investments that do not otherwise qualify for the net asset value practical expedient, entities will be permitted to elect a practicability exception and measure the investment at cost less impairment plus or minus observable price changes (in orderly transactions). The ASU also establishes an incremental recognition and disclosure requirement related to the presentation of fair value changes of financial liabilities for which the fair value option (FVO) has been elected. Under this guidance, an entity would be required to separately present in OCI the portion of the total fair value change attributable to instrument-specific credit risk as opposed to reflecting the entire amount in earnings. This provision does not apply to derivative instruments required to be measured at fair value with changes in fair value recognized in current earnings. For 3M, this standard was effective beginning January 1, 2018 via an immaterial cumulative-effect adjustment to beginning retained earnings, except for guidance relative to equity securities without readily determinable fair values which is applied prospectively. The adoption did not have a material impact on 3M’s consolidated results of operations and financial condition.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, and in July 2018, issued ASU No. 2018-10 and 2018-11 and in December 2018, issued ASU No. 2018-20, which amended the standard, replacing existing lease accounting guidance. The new standard introduces a lessee model that would require entities to recognize assets and liabilities for most leases, but recognize expenses on their income statements in a manner similar to current accounting. The ASU does not make fundamental changes to existing lessor accounting. However, it modifies what qualifies as a sales-type and direct financing lease and related accounting and aligns a number of the underlying principles with those of the new revenue standard, ASU No. 2014-09, such as evaluating how collectability should be considered and determining when profit can be recognized. The guidance eliminates existing real estate-specific provisions and requires expanded qualitative and quantitative disclosures. For 3M, the ASU is effective January 1, 2019. As amended, the ASU 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 has conducted analyses, executed project management relative to the process of adopting this ASU including implementing a new lease accounting system, conducted detailed contract reviews, considered expanded disclosure requirements, and assessed internal controls impacts. Note 16 provides information regarding rent expense for operating leases and minimum lease payments for capital and operating leases under existing lease guidance. While 3M will provide expanded disclosures as a result of ASU No. 2016-02, it does not expect this standard to have a material impact on its consolidated results of operations. However, 3M expects to record approximately $0.8 billion of lease assets and lease liabilities related to its operating leases and an immaterial adjustment to retained earnings related to transition upon this ASU’s adoption in January 2019.

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope, and in November 2018, issued ASU No. 2018-19, which amended the standard. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. With respect to available-for-sale (AFS) debt securities, the ASU amends the current other-than-temporary impairment model. For such securities with unrealized losses, entities will still consider if a portion of any impairment is related only to credit losses and therefore recognized as a reduction in income. However, rather than also reflecting that credit loss amount as a permanent reduction in cost (amortized cost) basis of that AFS debt security, the ASU requires that credit losses be reflected as an allowance. As a result, under certain circumstances, a recovery in value could result in previous allowances, or portions thereof, reversing back into income. For 3M, this ASU is effective January 1, 2020, with early adoption permitted. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently assessing this ASU’s impact on 3M’s consolidated result of operations and financial condition.

 

In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which modifies existing guidance and is intended to reduce diversity in practice with respect to the accounting for the income tax consequences of intra-entity transfers of assets. The ASU indicates that the current exception to income tax accounting that requires companies to defer the income tax effects of certain intercompany transactions would apply only to intercompany inventory transactions. That is, the exception would no longer apply to intercompany sales and transfers of other assets (e.g., intangible assets). Under the existing exception, income tax expense associated with intra-entity profits in an intercompany sale or transfer of assets is eliminated from earnings. Instead, that cost is deferred and recorded on the balance sheet (e.g., as a prepaid asset) until the assets leave the consolidated group. Similarly, the entity is prohibited from recognizing deferred tax assets for the increases in tax bases due to the intercompany sale or transfer. For 3M, the ASU was effective January 1, 2018 using the modified retrospective method of adoption. Prior periods have not been restated and the January 1, 2018 balance of retained earnings was decreased by less than $2 million.

 

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the existing 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. The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. To be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs. The standard also narrows the definition of outputs. The definition of a business affects areas of accounting such as acquisitions, disposals and goodwill. Under the new guidance, fewer acquired sets are expected to be considered businesses. For 3M, this ASU was effective January 1, 2018 on a prospective basis and the Company will apply this guidance to applicable transactions after the adoption date.

 

In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU addresses scope-related questions that arose after the FASB issued its revenue guidance in ASU No. 2014-09, Revenue from Contracts with Customers. The new standard clarifies the accounting for derecognition of nonfinancial assets and defines what is considered an in substance nonfinancial asset. Nonfinancial assets largely relate to items such as real estate, ships and intellectual property that do not constitute a business. The new ASU impacts entities derecognizing (e.g. selling) nonfinancial assets (or in substance nonfinancial assets), including partial interests therein, when the purchaser is not a customer. Under the new guidance, the seller would apply certain recognition and measurement principles of ASU No. 2014-09, Revenue from Contracts with Customers, even though the purchaser is not a customer. For 3M, this new standard was effective coincident with the Company’s January 1, 2018 adoption of ASU No. 2014-09.

 

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU changes how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Under the new standard, only the service cost component of net periodic benefit cost would be included in operating expenses and only the service cost component would be eligible for capitalization into assets such as inventory. All 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. 3M adopted this ASU is effective January 1, 2018 on a retrospective basis; however, guidance limiting the capitalization to only the service cost component is applied on prospective basis. The Company previously filed a Current Report on Form 8-K dated May 8, 2018 (which updated 3M’s 2017 Annual Report on Form 10-K) that provided prior period information reflecting the retrospective adoption of this ASU. The adoption had 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 were reclassified from operating expenses and are now reported outside of operating income within other expense (income), net. The financial information herein reflects these impacts for all periods presented. The prospective impact on costs capitalized into assets was not material.

 

In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium. Under existing standards, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The new guidance shortens the amortization period to the earliest call date for certain callable debt securities that have explicit, noncontingent call features and are callable at a fixed price and preset date. The amendments do not require an accounting change for securities held at a discount. For 3M, this ASU is effective January 1, 2019 with a modified retrospective transition resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. 3M’s marketable security portfolio includes very limited instances of callable debt securities held at a premium. As a result, the Company does not expect this ASU to have a material impact on 3M’s consolidated results of operations and financial condition.

 

In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. The general model for accounting for modifications of share-based payment awards is to record the incremental value arising from the changes as additional compensation cost. Under the new standard, fewer changes to the terms of an award would require accounting under this modification model. For 3M, this ASU was effective January 1, 2018. Because the Company does not typically make changes to the terms or conditions of its issued share-based payment awards, the adoption of this ASU had no material impact on its consolidated results of operations and financial condition.

 

In May 2017, the FASB issued ASU No. 2017-10, Determining the Customer of the Operation Services, that clarifies how an operating entity determines the customer of the operation services for transactions within the scope of a service concession arrangement. Service concession arrangements are typically agreements between a grantor and an operating entity whereby the operating entity will operate the grantor’s infrastructure (i.e. airports, roadways, bridges, and prisons) for a specified period of time. The operating entity also may be required to maintain the infrastructure and provide capital-intensive maintenance to enhance or extend its life. In such arrangements, typically the operation services (i.e. operation and maintenance of a roadway) would be used by third parties (i.e. drivers). The ASU clarifies that the grantor, not the third party, is the customer of the operation services in such arrangements. For 3M, this new standard was effective coincident with the Company’s January 1, 2018 adoption of ASU No. 2014-09. Because the Company is not typically a party to agreements within the scope of accounting for service concession arrangements, the adoption of this ASU had no material impact on its consolidated results of operations and financial condition.

 

In July 2017, the FASB issued 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. The new standard applies to issuers of financial instruments with down-round features. A down-round provision is a term in an equity-linked financial instrument (i.e. a freestanding warrant contract or an equity conversion feature embedded within a host debt or equity contract) that triggers a downward adjustment to the instrument’s strike price (or conversion price) if equity shares are issued at a lower price (or equity-linked financial instruments are issued at a lower strike price) than the instrument’s then-current strike price. The purpose of the feature is typically to protect the instrument’s counterparty from future issuances of equity shares at a more favorable price. The ASU amends (1) the classification of such instruments as liabilities or equity by revising the 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. For 3M, this ASU is effective January 1, 2019, with early adoption permitted. Because the Company has not issued financial instruments with down-round features, 3M does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.

 

In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities and in October 2018, issued ASU No. 2018-16, which amended the standard. The ASU amends existing guidance to simplify the application of hedge accounting in certain situations and allow companies to better align their hedge accounting with their risk management activities. Existing standards contain certain requirements for an instrument to qualify for hedge accounting relative to initial and ongoing assessments of hedge effectiveness. While an initial quantitative test to establish the hedge relationship is highly effective would still be required, the new ASU permits subsequent qualitative assessments for certain hedges instead of a quantitative test and expands the timeline for performing the initial quantitative assessment. The ASU also simplifies related accounting by eliminating the requirement to separately measure and report hedge ineffectiveness. Instead, for qualifying cash flow and net investment hedges, the entire change in fair value (including the amount attributable to ineffectiveness) will be recorded within other comprehensive income and reclassified to earnings in the same income statement line that is used to present the earnings effect of the hedged item when the hedged item affects earnings. For fair value hedges, generally, the entire change in fair value of the hedging instrument would also be presented in the same income statement line as the hedged item. The new standard also simplifies the accounting for fair value hedges of interest rate risks and expands an entity’s ability to hedge nonfinancial and financial risk components. In addition, the guidance also eases certain documentation requirements, modifies the accounting for components excluded from the assessment of hedge effectiveness, and requires additional tabular disclosures of derivative and hedge-related information. For 3M, this ASU is effective January 1, 2019, with a modified retrospective transition resulting in a cumulative-effect adjustment recorded to the opening balance of retained earnings as of the adoption date. The Company does not expect this ASU to have a material impact on 3M’s consolidated results of operations and financial condition.

 

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, this ASU will be adopted effective January 1, 2019 and will result in a reclassification between retained earnings and AOCI. The Company estimates that the impact from this ASU will increase retained earnings by approximately $0.9 billion, with an offsetting increase to accumulated other comprehensive loss for the same amount.


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


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


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


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. The Company elected to early adopt this ASU in the fourth quarter 2018 on a retrospective basis. As this ASU relates only to disclosures, there was 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.

 

In October 2018, the FASB issued ASU No. 2018-16, Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which adds the OIS rate based on the SOFR to the list of US benchmark interest rates in ASC 815 that are eligible to be hedged. This ASU has the same transition requirements and effective date as ASU No. 2017-12, which for 3M is 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 October 2018, the FASB issued ASU No. 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities, which changes how entities evaluate decision-making fees under the variable interest guidance. Entities will consider indirect interests held through related parties under common control on a proportionate basis rather than in their entirety. For 3M, the ASU is effective as of January 1, 2020. 3M does not have significant involvement with entities subject to consolidation considerations impacted by variable interest entity model factors. As a result, the Company does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.

 

In November 2018, the FASB issued ASU No. 2018-18, Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. The ASU 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. Further, the ASU amends ASC 808 to refer to the unit-of-account guidance in ASC 606 and requires it to be used only when assessing whether a transaction is in the scope of ASC 606. For 3M, the ASU is effective as of January 1, 2020. 3M has limited collaborative arrangements. As a result, the Company does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.

 

In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments, which clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the lease standard. This ASU has the same transition requirements and effective date as ASU No. 2016-13, which for 3M is January 1, 2020. The Company does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.

 

In December 2018, the FASB issued ASU No. 2018-20, Narrow-Scope Improvements for Lessors, which amends ASU No. 2016-02, Leases. The new ASU provides narrow-scope amendments to help lessors apply the new leases standard. This ASU has the same transition requirements and effective date as ASU No. 2016-02, which for 3M is January 1, 2019. The Company does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.

v3.10.0.1
Revenue
12 Months Ended
Dec. 31, 2018
Revenue  
Revenue

Note 2.  Revenue

 

The Company adopted ASU No. 2014-09 and related standards (collectively, ASC 606, Revenue from Contracts with Customers), 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 year ended December 31, 2018.

 

Contract Balances:

Deferred revenue (current portion) as of December 31, 2018 and December 31, 2017 was $617 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 $500 million of the December 31, 2017 balance was recognized as revenue during the year ended December 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended 

 

 

 

December 31,

 

Net Sales (Millions)

 

2018

    

2017

    

2016

 

Abrasives

 

$

1,804

 

$

1,746

 

$

1,626

 

Adhesives and Tapes

 

 

4,607

 

 

4,468

 

 

4,239

 

Advanced Materials

 

 

1,239

 

 

1,124

 

 

1,039

 

Automotive and Aerospace

 

 

2,063

 

 

1,994

 

 

1,871

 

Automotive Aftermarket

 

 

1,642

 

 

1,645

 

 

1,590

 

Separation and Purification

 

 

913

 

 

886

 

 

859

 

Other Industrial

 

 

(1)

 

 

 3

 

 

(7)

 

Total Industrial Business Group

 

$

12,267

 

$

11,866

 

$

11,217

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Solutions

 

$

1,842

 

$

1,759

 

$

1,751

 

Personal Safety

 

 

3,681

 

 

3,012

 

 

2,597

 

Roofing Granules

 

 

353

 

 

372

 

 

344

 

Transportation Safety

 

 

950

 

 

1,091

 

 

1,259

 

Other Safety and Graphics

 

 

 1

 

 

 1

 

 

(3)

 

Total Safety and Graphics Business Group

 

$

6,827

 

$

6,235

 

$

5,948

 

 

 

 

 

 

 

 

 

 

 

 

Drug Delivery

 

$

444

 

$

486

 

$

451

 

Food Safety

 

 

332

 

 

306

 

 

280

 

Health Information Systems

 

 

837

 

 

791

 

 

780

 

Medical Solutions

 

 

3,049

 

 

2,947

 

 

2,824

 

Oral Care

 

 

1,353

 

 

1,322

 

 

1,274

 

Other Health Care

 

 

 6

 

 

 1

 

 

(3)

 

Total Health Care Business Group

 

$

6,021

 

$

5,853

 

$

5,606

 

 

 

 

 

 

 

 

 

 

 

 

Electronics

 

$

3,974

 

$

3,850

 

$

3,304

 

Energy

 

 

1,487

 

 

1,645

 

 

1,616

 

Other Electronics and Energy

 

 

11

 

 

 6

 

 

 6

 

Total Electronics and Energy Business Group

 

$

5,472

 

$

5,501

 

$

4,926

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Health Care

 

$

389

 

$

421

 

$

382

 

Home Care

 

 

1,012

 

 

1,028

 

 

1,000

 

Home Improvement

 

 

1,961

 

 

1,858

 

 

1,723

 

Stationery and Office

 

 

1,383

 

 

1,377

 

 

1,435

 

Other Consumer

 

 

51

 

 

47

 

 

38

 

Total Consumer Business Group

 

$

4,796

 

$

4,731

 

$

4,578

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and Unallocated

 

$

50

 

$

 3

 

$

 6

 

Elimination of Dual Credit

 

 

(2,668)

 

 

(2,532)

 

 

(2,172)

 

Total Company

 

$

32,765

 

$

31,657

 

$

30,109

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2018

 

Net Sales (Millions)

    

United States

 

Asia Pacific

    

Europe, Middle East and Africa

    

Latin America and Canada

    

Other Unallocated

    

Worldwide

 

Industrial

 

$

4,538

 

$

3,554

 

$

2,939

 

$

1,238

 

$

(2)

 

$

12,267

 

Safety and Graphics

 

 

2,699

 

 

1,688

 

 

1,658

 

 

784

 

 

(2)

 

 

6,827

 

Health Care

 

 

2,830

 

 

1,148

 

 

1,488

 

 

556

 

 

(1)

 

 

6,021

 

Electronics and Energy

 

 

900

 

 

3,866

 

 

462

 

 

245

 

 

(1)

 

 

5,472

 

Consumer

 

 

2,868

 

 

961

 

 

535

 

 

432

 

 

 —

 

 

4,796

 

Corporate and Unallocated

 

 

47

 

 

 —

 

 

 —

 

 

 3

 

 

 —

 

 

50

 

Elimination of Dual Credit

 

 

(1,042)

 

 

(963)

 

 

(428)

 

 

(234)

 

 

(1)

 

 

(2,668)

 

Total Company

 

$

12,840

 

$

10,254

 

$

6,654

 

$

3,024

 

$

(7)

 

$

32,765

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2017

 

Net Sales (Millions)

    

United States

 

Asia Pacific

    

Europe, Middle East and Africa

    

Latin America and Canada

    

Other Unallocated

    

Worldwide

 

Industrial

 

$

4,382

 

$

3,405

 

$

2,822

 

$

1,261

 

$

(4)

 

$

11,866

 

Safety and Graphics

 

 

2,427

 

 

1,578

 

 

1,468

 

 

765

 

 

(3)

 

 

6,235

 

Health Care

 

 

2,835

 

 

1,041

 

 

1,433

 

 

546

 

 

(2)

 

 

5,853

 

Electronics and Energy

 

 

929

 

 

3,731

 

 

571

 

 

273

 

 

(3)

 

 

5,501

 

Consumer

 

 

2,767

 

 

983

 

 

547

 

 

436

 

 

(2)

 

 

4,731

 

Corporate and Unallocated

 

 

 6

 

 

 —

 

 

 1

 

 

(5)

 

 

 1

 

 

 3

 

Elimination of Dual Credit

 

 

(974)

 

 

(929)

 

 

(386)

 

 

(243)

 

 

 —

 

 

(2,532)

 

Total Company

 

$

12,372

 

$

9,809

 

$

6,456

 

$

3,033

 

$

(13)

 

$

31,657

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2016

 

Net Sales (Millions)

    

United States

 

Asia Pacific

    

Europe, Middle East and Africa

    

Latin America and Canada

    

Other Unallocated

    

Worldwide

 

Industrial

 

$

4,251

 

$

3,133

 

$

2,649

 

$

1,181

 

$

 3

 

$

11,217

 

Safety and Graphics

 

 

2,397

 

 

1,434

 

 

1,355

 

 

760

 

 

 2

 

 

5,948

 

Health Care

 

 

2,733

 

 

959

 

 

1,412

 

 

500

 

 

 2

 

 

5,606

 

Electronics and Energy

 

 

918

 

 

3,183

 

 

559

 

 

264

 

 

 2

 

 

4,926

 

Consumer

 

 

2,761

 

 

874

 

 

535

 

 

407

 

 

 1

 

 

4,578

 

Corporate and Unallocated

 

 

 6

 

 

 —

 

 

 1

 

 

(1)

 

 

 —

 

 

 6

 

Elimination of Dual Credit

 

 

(878)

 

 

(736)

 

 

(348)

 

 

(210)

 

 

 —

 

 

(2,172)

 

Total Company

 

$

12,188

 

$

8,847

 

$

6,163

 

$

2,901

 

$

10

 

$

30,109

 

 

v3.10.0.1
Acquisitions and Divestitures
12 Months Ended
Dec. 31, 2018
Acquisitions and Divestitures  
Acquisitions and Divestitures

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.

 

In addition to business combinations, 3M periodically acquires certain tangible and/or intangible assets and purchases interests in certain enterprises that do not otherwise qualify for accounting as business combinations. These transactions are largely reflected as additional asset purchase and investment activity.

 

There were no acquisitions that closed during 2018.

 

In February 2019, 3M completed the acquisition of the technology business of M*Modal for cash of approximately $0.7 billion, subject to closing and other adjustments, and assumption of approximately $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 transaction will be reflected within the Company’s Health Care business.

 

2017 acquisitions:

 

In September 2017, 3M purchased all of the ownership interests of Elution Technologies, LLC, a Vermont-based manufacturer of test kits that help enable food and beverage companies ensure their products are free from certain potentially harmful allergens such as peanuts, soy or milk. Elution is reported within the Company’s Health Care business.

 

In October 2017, 3M completed the acquisition of the underlying legal entities and associated assets of Scott Safety, which is headquartered in Monroe, North Carolina, from Johnson Controls for $2.0 billion of cash, net of cash acquired. Scott Safety is a premier manufacturer of innovative products, including self-contained breathing apparatus systems, gas and flame detection instruments, and other safety devices that complement 3M’s personal safety portfolio. The business had revenues of approximately $570 million in 2016. Scott Safety is reported within 3M’s Safety and Graphics business. Adjustments in 2018 to the purchase price allocation were approximately $7 million and related to identification of certain immaterial acquired assets, tax-related and contingent liabilities, and resolution of certain acquired working capital and other purchase price adjustments with the seller. The change to provisional amounts did not result in material impacts to results of operations in 2018 or any portion related to earlier quarters in the measurement period. The allocation of purchase consideration related to Scott Safety was completed in the third quarter of 2018

 

Pro forma information related to acquisitions has not been included because the impact on the Company’s consolidated results of operations was not considered material. The following table shows the impact on the consolidated balance sheet of the purchase price allocations related to 2017 acquisitions and assigned finite-lived intangible asset weighted-average lives.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 Acquisition Activity

 

 

 

 

 

 

 

 

 

 

 

 

Finite-Lived

 

 

 

 

 

 

 

 

 

 

 

 

Intangible-Asset

 

(Millions)

    

Scott

    

    

 

    

    

 

    

Weighted-Average

 

Asset (Liability)

 

Safety

 

Other

 

Total

 

Lives (Years)

 

Accounts receivable

 

$

100

 

$

 —

 

$

100

 

 

 

Inventory

 

 

79

 

 

 —

 

 

79

 

 

 

Other current assets

 

 

10

 

 

 —

 

 

10

 

 

 

Property, plant, and equipment

 

 

74

 

 

 —

 

 

74

 

 

 

Purchased finite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Customer related intangible assets

 

 

439

 

 

 3

 

 

442

 

15

 

Other technology-based intangible assets

 

 

125

 

 

 2

 

 

127

 

10

 

Definite-lived tradenames

 

 

285

 

 

 —

 

 

285

 

17

 

Other amortizable intangible assets

 

 

 —

 

 

 1

 

 

 1

 

5

 

Purchased goodwill

 

 

1,296

 

 

 6

 

 

1,302

 

 

 

Accounts payable and other liabilities

 

 

(100)

 

 

 —

 

 

(100)

 

 

 

Deferred tax asset/(liability)

 

 

(297)

 

 

 —

 

 

(297)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net assets acquired

 

$

2,011

 

$

12

 

$

2,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid

 

$

2,020