3M CO, 10-Q filed on 5/8/2018
Quarterly Report
v3.8.0.1
Document and Entity Information
3 Months Ended
Mar. 31, 2018
shares
Document and Entity Information  
Entity Registrant Name 3M Company
Trading Symbol mmm
Entity Central Index Key 0000066740
Document Type 10-Q
Document Period End Date Mar. 31, 2018
Amendment Flag false
Current Fiscal Year End Date --12-31
Entity Current Reporting Status Yes
Entity Filer Category Large Accelerated Filer
Entity Common Stock, Shares Outstanding 593,692,282
Document Fiscal Year Focus 2018
Document Fiscal Period Focus Q1
v3.8.0.1
Consolidated Statement of Income - USD ($)
shares in Millions, $ in Millions
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Consolidated Statement of Income    
Net sales $ 8,278 $ 7,685
Operating expenses    
Cost of sales 4,236 3,882
Selling, general and administrative expenses 2,573 1,614
Research, development and related expenses 486 476
Gain on sale of businesses (24) (29)
Total operating expenses 7,271 5,943
Operating income 1,007 1,742
Interest expense and income    
Other expense (income), net 42 5
Income before income taxes 965 1,737
Provision for income taxes 359 411
Net income including noncontrolling interest 606 1,326
Less: Net income attributable to noncontrolling interest 4 3
Net income attributable to 3M $ 602 $ 1,323
Weighted average 3M common shares outstanding - basic (in shares) 596.2 598.1
Earnings per share attributable to 3M common shareholders - basic (in dollars per share) $ 1.01 $ 2.21
Weighted average 3M common shares outstanding - diluted (in shares) 612.7 612.0
Earnings per share attributable to 3M common shareholders - diluted (in dollars per share) $ 0.98 $ 2.16
Cash dividends paid per 3M common share (in dollars per share) $ 1.36 $ 1.175
v3.8.0.1
Consolidated Statement of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Consolidated Statement of Comprehensive Income    
Net income including noncontrolling interest $ 606 $ 1,326
Other comprehensive income (loss), net of tax:    
Cumulative translation adjustment 167 292
Defined benefit pension and postretirement plans adjustment 116 83
Cash flow hedging instruments unrealized gain (loss) (61) (76)
Total other comprehensive income (loss), net of tax 222 299
Comprehensive income (loss) including noncontrolling interest 828 1,625
Comprehensive (income) loss attributable to noncontrolling interest (3) (6)
Comprehensive income (loss) attributable to 3M $ 825 $ 1,619
v3.8.0.1
Consolidated Balance Sheet - USD ($)
$ in Millions
Mar. 31, 2018
Dec. 31, 2017
Current assets    
Cash and cash equivalents $ 3,491 $ 3,053
Marketable securities - current 604 1,076
Accounts receivable — net 5,252 4,911
Inventories    
Finished goods 2,025 1,915
Work in process 1,313 1,218
Raw materials and supplies 957 901
Total inventories 4,295 4,034
Prepaids 832 937
Other current assets 344 266
Total current assets 14,818 14,277
Property, plant and equipment 25,174 24,914
Less: Accumulated depreciation (16,310) (16,048)
Property, plant and equipment - net 8,864 8,866
Goodwill 10,570 10,513
Intangible assets - net 2,885 2,936
Other assets 1,438 1,395
Total assets 38,575 37,987
Current liabilities    
Short-term borrowings and current portion of long-term debt 3,449 1,853
Accounts payable 1,874 1,945
Accrued payroll 563 870
Accrued income taxes 282 310
Other current liabilities 2,791 2,709
Total current liabilities 8,959 7,687
Long-term debt 12,211 12,096
Pension and postretirement benefits 3,381 3,620
Other liabilities 2,985 2,962
Total liabilities 27,536 26,365
Commitments and contingencies (Note 14)
3M Company shareholders' equity:    
Common stock par value, $.01 par value; 944,033,056 shares issued 9 9
Additional paid-in capital 5,496 5,352
Retained earnings 38,453 39,115
Treasury stock, at cost: 350,340,774 shares at March 31, 2018; 349,148,819 shares at December 31, 2017 (26,178) (25,887)
Accumulated other comprehensive income (loss) (6,803) (7,026)
Total 3M Company shareholders' equity 10,977 11,563
Noncontrolling interest 62 59
Total equity 11,039 11,622
Total liabilities and equity $ 38,575 $ 37,987
v3.8.0.1
Consolidated Balance Sheet (Parenthetical) - $ / shares
Mar. 31, 2018
Dec. 31, 2017
Consolidated Balance Sheet    
Common stock, par value per share (in dollars per share) $ 0.01 $ 0.01
Common stock, shares issued (in shares) 944,033,056 944,033,056
Treasury stock (in shares) 350,340,774 349,148,819
v3.8.0.1
Consolidated Statement of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Cash Flows from Operating Activities    
Net income including noncontrolling interest $ 606 $ 1,326
Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities    
Depreciation and amortization 382 438
Company pension and postretirement contributions (232) (248)
Company pension and postretirement expense 102 81
Stock-based compensation expense 159 147
Gain on sale of businesses (24) (29)
Deferred income taxes (103) (84)
Changes in assets and liabilities    
Accounts receivable (260) (237)
Inventories (209) (149)
Accounts payable (88) (124)
Accrued income taxes (current and long-term) 212 225
Other - net (402) (358)
Net cash provided by operating activities 143 988
Cash Flows from Investing Activities    
Purchases of property, plant and equipment (PP&E) (304) (287)
Proceeds from sale of PP&E and other assets 83 1
Purchases of marketable securities and investments (517) (213)
Proceeds from maturities and sale of marketable securities and investments 990 351
Proceeds from sale of businesses, net of cash sold 40 53
Other - net (11) 5
Net cash provided by (used in) investing activities 281 (90)
Cash Flows from Financing Activities    
Change in short-term debt - net 1,581 (68)
Repayment of debt (maturities greater than 90 days) (6)  
Proceeds from debt (maturities greater than 90 days) 6  
Purchases of treasury stock (937) (690)
Proceeds from issuance of treasury stock pursuant to stock option and benefit plans 219 315
Dividends paid to shareholders (810) (702)
Other - net (7) (6)
Net cash provided by (used in) financing activities 46 (1,151)
Effect of exchange rate changes on cash and cash equivalents (32) 28
Net increase (decrease) in cash and cash equivalents 438 (225)
Cash and cash equivalents at beginning of year 3,053 2,398
Cash and cash equivalents at end of period $ 3,491 $ 2,173
v3.8.0.1
Significant Accounting Policies
3 Months Ended
Mar. 31, 2018
Significant Accounting Policies  
Significant Accounting Policies

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 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 March 31, 2017

 

Previously

 

 

 

 

 

(Millions)

    

Reported

    

Revised

    

Change

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

7,685

 

$

7,685

 

$

 —

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

3,869

 

 

3,882

 

 

13

 

Selling, general and administrative expenses

 

 

1,600

 

 

1,614

 

 

14

 

Research, development and related expenses

 

 

471

 

 

476

 

 

 5

 

Gain on sale of businesses

 

 

(29)

 

 

(29)

 

 

 —

 

Total operating expenses

 

 

5,911

 

 

5,943

 

 

32

 

Operating income

 

$

1,774

 

$

1,742

 

$

(32)

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income), net

 

$

37

 

$

 5

 

$

(32)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

1,737

 

$

1,737

 

$

 —

 

 

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. The Company began reporting comparative results under this new structure with the filing of this Quarterly Report on Form 10-Q.

 

In the second quarter of 2018, the Company plans to update its financial information and disclosure in its 2017 Annual Report on Form 10-K via a Current Report on Form 8-K to reflect the retrospective application of ASU No. 2017-07 and the preceding business segment 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.

 

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 months ended March 31, 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 2018. The Venezuelan government sets official rates of exchange and conditions precedent to purchase foreign currency at these rates with local currency. The government has also operated various expanded secondary currency exchange mechanisms that have been eliminated and replaced from time to time. Such rates and conditions have been and continue to be subject to change. For the periods presented, the financial statements of 3M’s Venezuelan subsidiary were remeasured utilizing the rate associated with the secondary auction mechanism, Tipo de Cambio Complementario (DICOM), or its predecessor. During the same periods, the Venezuelan government’s official exchange was Tipo de Cambio Protegido (DIPRO), or its predecessor, until its discontinuance in the first quarter of 2018.

 

Note 1 in 3M’s 2017 Annual Report on Form 10-K provides additional information the Company considers in determining the exchange rate used relative to its Venezuelan subsidiary as well as factors which could lead to its deconsolidation. The Company continues to monitor these circumstances. Changes in applicable exchange rates or exchange mechanisms may continue in the future. These changes could impact the rate of exchange applicable to remeasure the Company’s net monetary assets (liabilities) denominated in Venezuelan Bolivars (VEF). As of March 31, 2018, the Company had a balance of net monetary assets denominated in VEF of less than 20 billion VEF and the DIPRO exchange rate was approximately 49,000 VEF per U.S. dollar. A need to deconsolidate the Company’s Venezuelan subsidiary’s operations may result from a lack of exchangeability of VEF-denominated cash coupled with an acute degradation in the ability to make key operational decisions due to government regulations in Venezuela. Based upon a review of factors as of March 31, 2018, the Company continues to consolidate its Venezuelan subsidiary. As of March 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 equity balance were not significant.

 

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 (1.9 million average options for the three months ended March 31, 2018; 3.2 million average options for the three months ended March 31, 2017). The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

 

 

March 31,

 

(Amounts in millions, except per share amounts)

    

2018

    

2017

 

Numerator:

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

602

 

$

1,323

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding basic

 

 

596.2

 

 

598.1

 

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

 

 

16.5

 

 

13.9

 

Denominator for weighted average 3M common shares outstanding diluted

 

 

612.7

 

 

612.0

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders basic

 

$

1.01

 

$

2.21

 

Earnings per share attributable to 3M common shareholders diluted

 

$

0.98

 

$

2.16

 

 

New Accounting Pronouncements

 

See the Company’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.

 

 

 

 

 

 

 

 

 

 

 

 

 

Standards Adopted During the Current Fiscal Year (continued)

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

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.

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

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

January 1, 2019

Requires modified retrospective transition applied to earliest period presented

3M is currently assessing this ASU’s impact.

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

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

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

January 1, 2020

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

3M is currently assessing this ASU’s impact.

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

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

January 1, 2019

3M’s marketable security portfolio includes limited instances of callable debt securities held at a premium.

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

Standards Issued and Not Yet Adopted (continued)

Standard

Relevant Description

Effective Date for 3M

Impact and Other Matters

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

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

January 1, 2019

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

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

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

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

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

Expands an entity’s ability to hedge nonfinancial and financial risk components.

January 1, 2019

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

3M is currently assessing this ASU’s impact.

 

Relevant New Standards Issued Subsequent to Most Recent Annual Report

 

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

v3.8.0.1
Revenue
3 Months Ended
Mar. 31, 2018
Revenue  
Revenue

NOTE 2.  Revenue

 

The Company adopted ASU No. 2014-09 and related standards (collectively, Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers), as described in Note 1, on January 1, 2018 using the modified retrospective method of adoption. Prior periods have not been restated. Due to the cumulative net impact of adopting ASC 606, the January 1, 2018 balance of retained earnings was increased by less than $2 million, primarily relating to the accelerated recognition for software installation service and training revenue. This cumulative impact reflects retrospective application of ASC 606 only to contracts that were not completed as of January 1, 2018. Further, the Company applied the practical expedient permitting the effect of all contract modifications that occurred before January 1, 2018 to be aggregated in the transition accounting. The impact of applying ASC 606 as compared with previous guidance applied to revenues and costs was not material for the three months ended March 31, 2018.

 

Performance Obligations:

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

 

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

 

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

 

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

 

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

 

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

 

Contract Balances:

Deferred income (current portion) as of March 31, 2018 and December 31, 2017 was $519 million and $513 million, respectively, and primarily relates to revenue that is recognized over time for one-year software license contracts, the changes in balance of which are related to the satisfaction or partial satisfaction of these contracts. The balance also contains a deferral of income for goods that are in-transit at period end for which control transfers to the customer upon delivery. Approximately $280 million of the December 31, 2017 balance was recognized as revenue during the first quarter of 2018. The amount of noncurrent deferred income is not considered significant.

 

Exemptions and Practical Expedients Applied or Elected:

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

·

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

·

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

·

Portfolio approach practical expedient relative to estimation of variable consideration.

·

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

·

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

·

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

 

Disaggregated revenue information:

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

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

Net Sales (Millions)

 

2018

    

2017

 

Abrasives

 

$

475

 

$

430

 

Adhesives and Tapes

 

 

1,153

 

 

1,075

 

Advanced Materials

 

 

304

 

 

287

 

Automotive and Aerospace

 

 

559

 

 

508

 

Automotive Aftermarket

 

 

418

 

 

417

 

Separation and Purification

 

 

236

 

 

220

 

Other Industrial

 

 

(1)

 

 

(1)

 

Total Industrial Business Group

 

$

3,144

 

$

2,936

 

 

 

 

 

 

 

 

 

Commercial Solutions

 

$

485

 

$

443

 

Personal Safety

 

 

962

 

 

707

 

Roofing Granules

 

 

101

 

 

97

 

Transportation Safety

 

 

236

 

 

303

 

Other Safety and Graphics

 

 

(1)

 

 

 —

 

Total Safety and Graphics Business Group

 

$

1,783

 

$

1,550

 

 

 

 

 

 

 

 

 

Drug Delivery

 

$

119

 

$

121

 

Food Safety

 

 

82

 

 

73

 

Health Information Systems

 

 

205

 

 

191

 

Medical Consumables

 

 

776

 

 

714

 

Oral Care

 

 

354

 

 

336

 

Other Health Care

 

 

 —

 

 

 —

 

Total Health Care Business Group

 

$

1,536

 

$

1,435

 

 

 

 

 

 

 

 

 

Electronics

 

$

931

 

$

878

 

Energy

 

 

420

 

 

413

 

Other Electronics and Energy

 

 

(1)

 

 

 —

 

Total Electronics and Energy Business Group

 

$

1,350

 

$

1,291

 

 

 

 

 

 

 

 

 

Consumer Health Care

 

$

102

 

$

102

 

Home Care

 

 

269

 

 

261

 

Home Improvement

 

 

447

 

 

408

 

Stationery and Office

 

 

299

 

 

292

 

Other Consumer

 

 

10

 

 

10

 

Total Consumer Business Group

 

$

1,127

 

$

1,073

 

 

 

 

 

 

 

 

 

Corporate and Unallocated

 

$

 —

 

$

 1

 

Elimination of Dual Credit

 

 

(662)

 

 

(601)

 

Total Company

 

$

8,278

 

$

7,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2018

 

Net Sales (Millions)

    

United States

 

Asia Pacific

    

Europe, Middle East and Africa

    

Latin America and Canada

    

Other Unallocated

    

Worldwide

 

Industrial

 

$

1,100

 

$

944

 

$

785

 

$

316

 

$

(1)

 

$

3,144

 

Safety and Graphics

 

 

652

 

 

497

 

 

436

 

 

198

 

 

 —

 

 

1,783

 

Health Care

 

 

702

 

 

299

 

 

394

 

 

141

 

 

 —

 

 

1,536

 

Electronics and Energy

 

 

229

 

 

911

 

 

145

 

 

66

 

 

(1)

 

 

1,350

 

Consumer

 

 

610

 

 

272

 

 

141

 

 

106

 

 

(2)

 

 

1,127

 

Corporate and Unallocated

 

 

 —

 

 

(1)

 

 

 —

 

 

(1)

 

 

 2

 

 

 —

 

Elimination of Dual Credit

 

 

(249)

 

 

(246)

 

 

(109)

 

 

(59)

 

 

 1

 

 

(662)

 

Total Company

 

$

3,044

 

$

2,676

 

$

1,792

 

$

767

 

$

(1)

 

$

8,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2017

 

Net Sales (Millions)

    

United States

 

Asia Pacific

    

Europe, Middle East and Africa

    

Latin America and Canada

    

Other Unallocated

    

Worldwide

 

Industrial

 

$

1,082

 

$

853

 

$

696

 

$

305

 

$

 —

 

$

2,936

 

Safety and Graphics

 

 

581

 

 

431

 

 

351

 

 

188

 

 

(1)

 

 

1,550

 

Health Care

 

 

690

 

 

260

 

 

353

 

 

133

 

 

(1)

 

 

1,435

 

Electronics and Energy

 

 

231

 

 

851

 

 

143

 

 

65

 

 

 1

 

 

1,291

 

Consumer

 

 

587

 

 

259

 

 

126

 

 

102

 

 

(1)

 

 

1,073

 

Corporate and Unallocated

 

 

 1

 

 

(1)

 

 

 —

 

 

 1

 

 

 —

 

 

 1

 

Elimination of Dual Credit

 

 

(231)

 

 

(220)

 

 

(92)

 

 

(58)

 

 

 —

 

 

(601)

 

Total Company

 

$

2,941

 

$

2,433

 

$

1,577

 

$

736

 

$

(2)

 

$

7,685

 

 

v3.8.0.1
Acquisitions and Divestitures
3 Months Ended
Mar. 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.

 

There were no business combinations that closed during the three-month periods ended March 31, 2018 and 2017.

 

As discussed in the Company’s 2017 Annual Report on Form 10-K, in October 2017, 3M completed the acquisition of Scott Safety for $2.0 billion of cash, net of cash acquired. Adjustments in 2018 to the purchase price allocation were approximately $20 million and related to identification of certain immaterial acquired assets. The change to provisional amounts did not result in material impacts to results of operations in 2018 or any portion related to earlier quarters in the measurement period. The allocation of purchase consideration related to Scott Safety is considered preliminary with provisional amounts primarily related to intangible assets and certain tax-related, contingent liability and working capital items. 3M expects to finalize the allocation of purchase price within the one year measurement-period following the acquisition.

 

Divestitures:

 

3M may divest certain businesses from time to time based upon reviews of the Company’s portfolio considering, among other items, factors relative to the extent of strategic and technological alignment and optimization of capital deployment, in addition to considering if selling the businesses results in the greatest value creation for the Company and for shareholders.

 

2018 divestitures:

In February 2018, 3M closed on the sale of certain personal safety product offerings primarily focused on noise, environmental, and heat stress monitoring to TSI, Inc. This business has annual sales of approximately $15 million. The transaction resulted in a pre-tax gain of less than $20 million that was reported within the Company’s Safety and Graphics business.

 

In addition, during the first quarter of 2018, 3M divested a polymer additives compounding business, formerly part of the Company’s Industrial business, and reflected a gain on final closing adjustments from a prior divestiture which, in aggregate, were not material.

 

In May 2018, 3M divested an abrasives glass products business, formerly part of the Company’s Industrial business, with annual sales of approximately $10 million. The transaction resulted in a pre-tax gain of less than $15 million.

 

2017 divestitures:

During the first quarter of 2017 (January 2017), 3M sold the assets of its safety prescription eyewear business, with annual sales of approximately $45 million, to HOYA Vision Care. The Company recorded a pre-tax gain of $29 million in the first quarter of 2017 as a result of this sale, which was reported within the Company’s Safety and Graphics business.

 

During the remainder of 2017, as further described in Note 2 in 3M’s 2017 Annual Report on Form 10-K, the Company closed on the divestiture of a number of business including its: identity management; tolling and automated license/number plate recognition; electronic monitoring; and electrical marking/labeling businesses.

 

Other:

In December 2017, 3M agreed to sell substantially all of its Communication Markets Division to Corning Incorporated, for $900 million, subject to closing and other adjustments. This business, with annual sales of approximately $400 million consists of optical fiber and copper passive connectivity solutions for the telecommunications industry including 3M’s xDSL, FTTx, and structured cabling solutions and, in certain countries, telecommunications system integration services. This sale is expected to close in 2018, subject to consultation or information requirements with relevant works councils and to customary closing conditions and regulatory approvals. 3M expects a pre-tax gain of approximately $500 million as a result of this divestiture that will be reported within the Company’s Electronics and Energy business.  

 

The aggregate operating income of these businesses was approximately $15 million and $10 million in the first quarters of 2018 and 2017, respectively. The approximate amounts of major assets and liabilities associated with disposal groups classified as held-for-sale as of March 31, 2018 and December 31, 2017 included the following:

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

(Millions)

    

2018

    

2017

 

Accounts receivable

 

$

20

 

$

25

 

Property, plant and equipment (net)

 

 

 —

 

 

20

 

 

In addition, approximately $275 million of goodwill was estimated to be attributable to disposal groups classified as held-for-sale as of March 31, 2018 and December 31, 2017 based upon relative fair value. The amounts above have not been segregated and are classified within the existing corresponding line items on the Company’s consolidated balance sheet.

 

Refer to Note 2 in 3M’s 2017 Annual Report on Form 10-K for more information on 3M’s acquisitions and divestitures.

v3.8.0.1
Goodwill and Intangible Assets
3 Months Ended
Mar. 31, 2018
Goodwill and Intangible Assets  
Goodwill and Intangible Assets

NOTE 4.  Goodwill and Intangible Assets

 

There were no acquisitions that closed during the first three months of 2018. The acquisition activity in the following table relates to the net impact of adjustments to the preliminary allocation of purchase price within the one year measurement period following prior acquisitions, which decreased goodwill by $20 million during the three months ended March 31, 2018. The amounts in the “Translation and other” column in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balances by business segment as of December 31, 2017 and March 31, 2018, follow:

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Acquisition

 

Divestiture

 

Translation

 

March 31, 2018

 

(Millions)

    

Balance

    

activity

    

activity

    

and other

    

Balance

 

Industrial

 

$

2,678

 

$

 —

 

$

(4)

 

$

38

 

$

2,712

 

Safety and Graphics

 

 

4,419

 

 

(20)

 

 

(8)

 

 

18

 

 

4,409

 

Health Care

 

 

1,682

 

 

 —

 

 

 —

 

 

17

 

 

1,699

 

Electronics and Energy

 

 

1,524

 

 

 —

 

 

 —

 

 

12

 

 

1,536

 

Consumer

 

 

210

 

 

 —

 

 

 —

 

 

 4

 

 

214

 

Total Company

 

$

10,513

 

$

(20)

 

$

(12)

 

$

89

 

$

10,570

 

 

Accounting standards require that goodwill be tested for impairment annually and between annual tests in certain circumstances such as a change in reporting units or the testing of recoverability of a significant asset group within a reporting unit. At 3M, reporting units generally correspond to a division.

 

As described in Note 16, effective in the first quarter of 2018, the Company changed its business segment reporting in its continuing effort to improve the alignment of its businesses around markets and customers. In addition, certain shared film manufacturing and supply technology platform resources formerly reflected within the Electronics and Energy business segment were combined with other shared and centrally managed material resource centers of expertise within Corporate and Unallocated. For any product changes that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill of the associated reporting units. During the first quarter of 2018, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.

 

Acquired Intangible Assets

 

The carrying amount and accumulated amortization of acquired finite-lived intangible assets, in addition to the balance of non-amortizable intangible assets, as of March 31, 2018, and December 31, 2017, follow:

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

(Millions)

    

2018

    

2017

 

Customer related intangible assets

 

$

2,341

 

$

2,332

 

Patents

 

 

564

 

 

561

 

Other technology-based intangible assets

 

 

584

 

 

583

 

Definite-lived tradenames

 

 

679

 

 

678

 

Other amortizable intangible assets

 

 

208

 

 

207

 

Total gross carrying amount

 

$

4,376

 

$

4,361

 

 

 

 

 

 

 

 

 

Accumulated amortization — customer related

 

 

(912)

 

 

(874)

 

Accumulated amortization — patents

 

 

(496)

 

 

(489)

 

Accumulated amortization — other technology based

 

 

(304)

 

 

(292)

 

Accumulated amortization — definite-lived tradenames

 

 

(265)

 

 

(256)

 

Accumulated amortization — other

 

 

(166)

 

 

(162)

 

Total accumulated amortization

 

$

(2,143)

 

$

(2,073)

 

 

 

 

 

 

 

 

 

Total finite-lived intangible assets — net

 

$

2,233

 

$

2,288

 

 

 

 

 

 

 

 

 

Non-amortizable intangible assets (primarily tradenames)

 

 

652

 

 

648

 

Total intangible assets — net

 

$

2,885

 

$

2,936

 

 

3M does not amortize certain acquired tradenames because they have been in existence for over 55 years, have a history of leading-market share positions, are intended to be continuously renewed, and the associated products are expected to generate cash flows for 3M for an indefinite period of time.

 

Amortization expense for acquired intangible assets for the three-month periods ended March 31, 2018 and 2017 follows:

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

 

 

 

March 31,

 

 

(Millions)

    

2018

    

2017

 

 

Amortization expense

 

$

64

 

$

64

 

 

 

Expected amortization expense for acquired amortizable intangible assets recorded as of March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remainder of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After

 

(Millions)

 

2018

 

2019

 

2020

 

2021

 

2022

 

2023

 

2023

 

Amortization expense

 

$

190

 

$

243

 

$

232

 

$

222

 

$

208

 

$

176

 

$

962

 

 

The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible assets and other events. 3M expenses the costs incurred to renew or extend the term of intangible assets.

v3.8.0.1
Restructuring Actions and Exit Activities
3 Months Ended
Mar. 31, 2018
Restructuring Actions and Exit Activities  
Restructuring Actions and Exit Activities

NOTE 5.  Restructuring Actions and Exit Activities

2017 Restructuring Actions:

 

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

 

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

 

 

 

 

 

 

(Millions)

    

Employee-Related

 

Expense incurred in the second quarter of 2017

 

$

99

 

Cash payments

 

 

(8)

 

Adjustments

 

 

(3)

 

Accrued restructuring actions balance as of December 31, 2017

 

$

88

 

Cash payments

 

 

(5)

 

Adjustments

 

 

(4)

 

Accrued restructuring actions balance as of March 31, 2018

 

$

79

 

 

Remaining activities related to restructuring are expected to be completed by the end of 2018.

 

2017 Exit Activities: 

   

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

v3.8.0.1
Supplemental Income Statement Information
3 Months Ended
Mar. 31, 2018
Supplemental Income Statement Information  
Supplemental Income Statement Information

NOTE 6.  Supplemental Income Statement Information

 

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

 

 

 

 

 

 

 

 

 

    

Three months ended 

    

 

 

March 31,

 

(Millions)

 

2018

    

2017

    

Interest expense

 

$

82

 

$

45

 

Interest income

 

 

(21)

 

 

(8)

 

Pension and postretirement net periodic benefit cost (benefit)

 

 

(19)

 

 

(32)

 

Total

 

$

42

 

$

 5

 

 

Pension and postretirement net periodic benefit costs described in the table above include all components of defined benefit plan net periodic benefit costs except service cost, which is reported in various operating expense lines. Refer to Note 11 for additional details on the components of pension and postretirement net periodic benefit costs.

v3.8.0.1
Supplemental Equity and Comprehensive Income Information
3 Months Ended
Mar. 31, 2018
Supplemental Equity and Comprehensive Income Information  
Supplemental Equity and Comprehensive Income Information

NOTE 7.  Supplemental Equity and Comprehensive Income Information

 

Consolidated Statement of Changes in Equity

 

Three months ended March 31, 2018