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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLYQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIESSECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172020
Commission file number: 1-3285
3M COMPANY
(Exact name of registrant as specified in its charter)
| | |
| | 41-0417775 |
(State or other jurisdiction of incorporation) | | ( |
| Identification No.) | |
| | |
3M Center, St. Paul, Minnesota | |
|
(Address of | | (Zip Code) |
| | |
(Registrant’s Telephone Number, Including Area Code) (651) 733-1110 Not Applicable | ||
(Former Name or Former Address, if Changed Since Last Report) Securities registered pursuant to Section 12(b) of the Act: | ||
| | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, Par Value $.01 Per Share | | MMM | | New York Stock Exchange, Inc. |
| | MMM | | Chicago Stock Exchange, Inc. |
0.375% Notes due 2022 | | MMM22A | | New York Stock Exchange, Inc. |
0.950% Notes due 2023 | | MMM23 | | New York Stock Exchange, Inc. |
1.500% Notes due 2026 | | MMM26 | | New York Stock Exchange, Inc. |
1.750% Notes due 2030 | | MMM30 | | New York Stock Exchange, Inc. |
1.500% Notes due 2031 | | MMM31 | | New York Stock Exchange, Inc. |
(651) 733-1110Note: The common stock of the Registrant is also traded on the SWX Swiss Exchange.
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
| | |
Large accelerated filer ☒ | | Accelerated filer ☐ |
| | |
Non-accelerated filer ☐
| | Smaller reporting company ☐ |
| | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | |
Class | | Outstanding at September 30, |
Common Stock, $0.01 par value per share | |
|
3M COMPANY
Form 10-Q for the Quarterly Period Ended September 30, 20172020
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BEGINNING | |||
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Index to Financial Statements: | | ||
| 3 | ||
| 4 | ||
| 5 | ||
| 6 | ||
| | ||
| 7 | ||
| 10 | ||
| 13 | ||
| 14 | ||
| 16 | ||
| 18 | ||
| Note 7. Supplemental Equity and Comprehensive Income Information | 19 | |
| 23 | ||
| Note | 24 | |
| 24 | ||
| 25 | ||
| 27 | ||
| 34 | ||
| 36 | ||
| 52 | ||
| 55 | ||
| |||
| | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | | ||
| Index to Management’s Discussion and Analysis: | | |
| 58 | ||
| 67 | ||
| 71 | ||
| 77 | ||
| Cautionary Note Concerning Factors That May Affect Future Results | 83 | |
| | | |
83 | |||
| | | |
84 | |||
| | | |
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| | | |
85 | |||
| | | |
85 | |||
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89 | |||
| | | |
90 | |||
| | | |
90 | |||
| | | |
90 | |||
| | | |
90 | |||
2
3M COMPANY
FORM 10-Q
For the Quarterly Period Ended September 30, 20172020
PART I. Financial Information
3M Company and Subsidiaries
Consolidated Statement of Income
(Unaudited)
| | | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended |
| ||||||||
| | September 30, | | September 30, | | ||||||||
(Millions, except per share amounts) |
| 2020 |
| 2019 |
| 2020 | | 2019 |
| ||||
Net sales | | $ | 8,350 | | $ | 7,991 | | $ | 23,601 | | $ | 24,025 | |
Operating expenses | | | | | | | | | | | | | |
Cost of sales | |
| 4,303 | |
| 4,188 | |
| 12,217 | |
| 12,811 | |
Selling, general and administrative expenses | |
| 1,677 | |
| 1,455 | |
| 5,039 | |
| 5,089 | |
Research, development and related expenses | |
| 461 | |
| 443 | |
| 1,422 | |
| 1,390 | |
Gain on sale of businesses | | | — | | | (106) | | | (389) | | | (114) | |
Total operating expenses | |
| 6,441 | |
| 5,980 | |
| 18,289 | |
| 19,176 | |
Operating income | |
| 1,909 | |
| 2,011 | |
| 5,312 | |
| 4,849 | |
| | | | | | | | | | | | | |
Other expense (income), net | |
| 104 | |
| 45 | |
| 311 | |
| 349 | |
| | | | | | | | | | | | | |
Income before income taxes | |
| 1,805 | |
| 1,966 | |
| 5,001 | |
| 4,500 | |
Provision for income taxes | |
| 387 | |
| 378 | |
| 1,002 | |
| 888 | |
Income of consolidated group | | | 1,418 | | | 1,588 | | | 3,999 | | | 3,612 | |
| | | | | | | | | | | | | |
Income (loss) from unconsolidated subsidiaries, net of taxes | | | (1) | | | — | | | (1) | | | — | |
Net income including noncontrolling interest | | | 1,417 | | | 1,588 | | | 3,998 | | | 3,612 | |
| | | | | | | | | | | | | |
Less: Net income (loss) attributable to noncontrolling interest | |
| 4 | |
| 5 | |
| 3 | |
| 11 | |
| | | | | | | | | | | | | |
Net income attributable to 3M | | $ | 1,413 | | $ | 1,583 | | $ | 3,995 | | $ | 3,601 | |
| | | | | | | | | | | | | |
Weighted average 3M common shares outstanding — basic | |
| 577.8 | |
| 576.5 | |
| 577.2 | |
| 577.2 | |
Earnings per share attributable to 3M common shareholders — basic | | $ | 2.45 | | $ | 2.75 | | $ | 6.92 | | $ | 6.24 | |
| | | | | | | | | | | | | |
Weighted average 3M common shares outstanding — diluted | |
| 582.4 | |
| 583.0 | |
| 581.6 | |
| 585.9 | |
Earnings per share attributable to 3M common shareholders — diluted | | $ | 2.43 | | $ | 2.72 | | $ | 6.87 | | $ | 6.15 | |
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(Millions, except per share amounts) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net sales |
| $ | 8,172 |
| $ | 7,709 |
| $ | 23,667 |
| $ | 22,780 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
| 4,045 |
|
| 3,847 |
|
| 11,921 |
|
| 11,324 |
|
Selling, general and administrative expenses |
|
| 1,623 |
|
| 1,531 |
|
| 4,830 |
|
| 4,624 |
|
Research, development and related expenses |
|
| 463 |
|
| 427 |
|
| 1,407 |
|
| 1,314 |
|
Gain on sale of businesses |
|
| — |
|
| — |
|
| (490) |
|
| (40) |
|
Total operating expenses |
|
| 6,131 |
|
| 5,805 |
|
| 17,668 |
|
| 17,222 |
|
Operating income |
|
| 2,041 |
|
| 1,904 |
|
| 5,999 |
|
| 5,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and income |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 57 |
|
| 50 |
|
| 156 |
|
| 135 |
|
Interest income |
|
| (13) |
|
| (8) |
|
| (33) |
|
| (20) |
|
Total interest expense — net |
|
| 44 |
|
| 42 |
|
| 123 |
|
| 115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
| 1,997 |
|
| 1,862 |
|
| 5,876 |
|
| 5,443 |
|
Provision for income taxes |
|
| 564 |
|
| 531 |
|
| 1,532 |
|
| 1,541 |
|
Net income including noncontrolling interest |
| $ | 1,433 |
| $ | 1,331 |
| $ | 4,344 |
| $ | 3,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interest |
|
| 4 |
|
| 2 |
|
| 9 |
|
| 7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to 3M |
| $ | 1,429 |
| $ | 1,329 |
| $ | 4,335 |
| $ | 3,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average 3M common shares outstanding — basic |
|
| 597.6 |
|
| 604.4 |
|
| 597.9 |
|
| 606.2 |
|
Earnings per share attributable to 3M common shareholders — basic |
| $ | 2.39 |
| $ | 2.20 |
| $ | 7.25 |
| $ | 6.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average 3M common shares outstanding — diluted |
|
| 612.7 |
|
| 618.8 |
|
| 612.5 |
|
| 620.3 |
|
Earnings per share attributable to 3M common shareholders — diluted |
| $ | 2.33 |
| $ | 2.15 |
| $ | 7.08 |
| $ | 6.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per 3M common share |
| $ | 1.175 |
| $ | 1.11 |
| $ | 3.525 |
| $ | 3.33 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
3
Consolidated Statement of Comprehensive Income
(Unaudited)
| | | | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended | |
| ||||||||
| | September 30, | | September 30, | | | ||||||||
(Millions) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | |
| ||||
Net income including noncontrolling interest | | $ | 1,417 | | $ | 1,588 | | $ | 3,998 | | $ | 3,612 | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | |
Cumulative translation adjustment | |
| 271 | |
| (202) | |
| (67) | |
| (2) | | |
Defined benefit pension and postretirement plans adjustment | |
| 127 | |
| 76 | |
| 304 | |
| 356 | | |
Cash flow hedging instruments | |
| (71) | |
| 8 | |
| (60) | |
| (24) | | |
Total other comprehensive income (loss), net of tax | |
| 327 | |
| (118) | |
| 177 | |
| 330 | | |
Comprehensive income (loss) including noncontrolling interest | |
| 1,744 | |
| 1,470 | |
| 4,175 | |
| 3,942 | | |
Comprehensive (income) loss attributable to noncontrolling interest | |
| (5) | |
| (3) | |
| (1) | |
| (10) | | |
Comprehensive income (loss) attributable to 3M | | $ | 1,739 | | $ | 1,467 | | $ | 4,174 | | $ | 3,932 | | |
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(Millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net income including noncontrolling interest |
| $ | 1,433 |
| $ | 1,331 |
| $ | 4,344 |
| $ | 3,902 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment |
|
| 44 |
|
| 17 |
|
| 269 |
|
| 192 |
|
Defined benefit pension and postretirement plans adjustment |
|
| 80 |
|
| 67 |
|
| 241 |
|
| 203 |
|
Cash flow hedging instruments, unrealized gain (loss) |
|
| (49) |
|
| (45) |
|
| (176) |
|
| (182) |
|
Total other comprehensive income (loss), net of tax |
|
| 75 |
|
| 39 |
|
| 334 |
|
| 213 |
|
Comprehensive income (loss) including noncontrolling interest |
|
| 1,508 |
|
| 1,370 |
|
| 4,678 |
|
| 4,115 |
|
Comprehensive (income) loss attributable to noncontrolling interest |
|
| (3) |
|
| (3) |
|
| (11) |
|
| (7) |
|
Comprehensive income (loss) attributable to 3M |
| $ | 1,505 |
| $ | 1,367 |
| $ | 4,667 |
| $ | 4,108 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
4
Consolidated Balance Sheet
(Unaudited)
| | | | | | | |
|
| September 30, |
| December 31, |
| ||
(Dollars in millions, except per share amount) |
| 2020 |
| 2019 |
| ||
Assets | | | | | | | |
Current assets | | | | | | | |
Cash and cash equivalents | | $ | 4,121 | | $ | 2,353 | |
Marketable securities — current | |
| 440 | |
| 98 | |
Accounts receivable — net of allowances of $228 and $161 | |
| 4,623 | |
| 4,791 | |
Inventories | | | | | | | |
Finished goods | |
| 1,859 | |
| 2,003 | |
Work in process | |
| 1,224 | |
| 1,194 | |
Raw materials and supplies | |
| 901 | |
| 937 | |
Total inventories | |
| 3,984 | |
| 4,134 | |
Prepaids | | | 516 | | | 704 | |
Other current assets | |
| 426 | |
| 891 | |
Total current assets | |
| 14,110 | |
| 12,971 | |
Property, plant and equipment | |
| 26,452 | |
| 26,124 | |
Less: Accumulated depreciation | |
| (17,236) | |
| (16,791) | |
Property, plant and equipment — net | |
| 9,216 | |
| 9,333 | |
Operating lease right of use assets | | | 844 | | | 858 | |
Goodwill | |
| 13,535 | |
| 13,444 | |
Intangible assets — net | |
| 5,926 | |
| 6,379 | |
Other assets | |
| 1,759 | |
| 1,674 | |
Total assets | | $ | 45,390 | | $ | 44,659 | |
Liabilities | | | | | | | |
Current liabilities | | | | | | | |
Short-term borrowings and current portion of long-term debt | | $ | 1,169 | | $ | 2,795 | |
Accounts payable | |
| 2,208 | |
| 2,228 | |
Accrued payroll | |
| 721 | |
| 702 | |
Accrued income taxes | |
| 220 | |
| 194 | |
Operating lease liabilities — current | | | 252 | | | 247 | |
Other current liabilities | |
| 2,840 | |
| 3,056 | |
Total current liabilities | |
| 7,410 | |
| 9,222 | |
| | | | | | | |
Long-term debt | |
| 18,429 | |
| 17,518 | |
Pension and postretirement benefits | |
| 3,679 | |
| 3,911 | |
Operating lease liabilities | | | 605 | |
| 607 | |
Other liabilities | |
| 3,324 | |
| 3,275 | |
Total liabilities | | $ | 33,447 | | $ | 34,533 | |
Commitments and contingencies (Note 14) | | | | | | | |
Equity | | | | | | | |
3M Company shareholders’ equity: | | | | | | | |
Common stock par value, $.01 par value; 944,033,056 shares issued | | $ | 9 | | $ | 9 | |
Shares outstanding - September 30, 2020: 576,821,878 | | | | | | | |
Shares outstanding - December 31, 2019: 575,184,835 | | | | | | | |
Additional paid-in capital | |
| 6,116 | |
| 5,907 | |
Retained earnings | |
| 43,285 | |
| 42,135 | |
Treasury stock, at cost: | |
| (29,570) | |
| (29,849) | |
Shares at September 30, 2020: 367,211,178 | | | | | | | |
Shares at December 31, 2019: 368,848,221 | | | | | | | |
Accumulated other comprehensive income (loss) | |
| (7,960) | |
| (8,139) | |
Total 3M Company shareholders’ equity | |
| 11,880 | |
| 10,063 | |
Noncontrolling interest | |
| 63 | |
| 63 | |
Total equity | | $ | 11,943 | | $ | 10,126 | |
Total liabilities and equity | | $ | 45,390 | | $ | 44,659 | |
(Unaudited)The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
5
3M Company and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
(Dollars in millions, except per share amount) |
| 2017 |
| 2016 |
| ||
Assets |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 2,831 |
| $ | 2,398 |
|
Marketable securities — current |
|
| 586 |
|
| 280 |
|
Accounts receivable — net |
|
| 5,156 |
|
| 4,392 |
|
Inventories |
|
|
|
|
|
|
|
Finished goods |
|
| 1,962 |
|
| 1,629 |
|
Work in process |
|
| 1,164 |
|
| 1,039 |
|
Raw materials and supplies |
|
| 849 |
|
| 717 |
|
Total inventories |
|
| 3,975 |
|
| 3,385 |
|
Other current assets |
|
| 1,108 |
|
| 1,271 |
|
Total current assets |
|
| 13,656 |
|
| 11,726 |
|
Marketable securities — non-current |
|
| 17 |
|
| 17 |
|
Investments |
|
| 139 |
|
| 128 |
|
Property, plant and equipment |
|
| 24,659 |
|
| 23,499 |
|
Less: Accumulated depreciation |
|
| (16,001) |
|
| (14,983) |
|
Property, plant and equipment — net |
|
| 8,658 |
|
| 8,516 |
|
Goodwill |
|
| 9,221 |
|
| 9,166 |
|
Intangible assets — net |
|
| 2,175 |
|
| 2,320 |
|
Prepaid pension benefits |
|
| 105 |
|
| 52 |
|
Other assets |
|
| 1,266 |
|
| 981 |
|
Total assets |
| $ | 35,237 |
| $ | 32,906 |
|
Liabilities |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt |
| $ | 835 |
| $ | 972 |
|
Accounts payable |
|
| 1,824 |
|
| 1,798 |
|
Accrued payroll |
|
| 856 |
|
| 678 |
|
Accrued income taxes |
|
| 374 |
|
| 299 |
|
Other current liabilities |
|
| 2,709 |
|
| 2,472 |
|
Total current liabilities |
|
| 6,598 |
|
| 6,219 |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
| 10,828 |
|
| 10,678 |
|
Pension and postretirement benefits |
|
| 3,748 |
|
| 4,018 |
|
Other liabilities |
|
| 1,861 |
|
| 1,648 |
|
Total liabilities |
| $ | 23,035 |
| $ | 22,563 |
|
Commitments and contingencies (Note 12) |
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
3M Company shareholders’ equity: |
|
|
|
|
|
|
|
Common stock par value, $.01 par value, 944,033,056 shares issued |
| $ | 9 |
| $ | 9 |
|
Additional paid-in capital |
|
| 5,302 |
|
| 5,061 |
|
Retained earnings |
|
| 39,454 |
|
| 37,907 |
|
Treasury stock, at cost: 348,424,948 shares at September 30, 2017; 347,306,778 shares at December 31, 2016 |
|
| (25,706) |
|
| (25,434) |
|
Accumulated other comprehensive income (loss) |
|
| (6,913) |
|
| (7,245) |
|
Total 3M Company shareholders’ equity |
|
| 12,146 |
|
| 10,298 |
|
Noncontrolling interest |
|
| 56 |
|
| 45 |
|
Total equity |
| $ | 12,202 |
| $ | 10,343 |
|
Total liabilities and equity |
| $ | 35,237 |
| $ | 32,906 |
|
| | | | | | | |
|
| Nine months ended |
| ||||
| | September 30, | | ||||
(Millions) |
| 2020 |
| 2019 |
| ||
Cash Flows from Operating Activities | | | | | | | |
Net income including noncontrolling interest | | $ | 3,998 | | $ | 3,612 | |
Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities | | | | | | | |
Depreciation and amortization | |
| 1,413 | |
| 1,130 | |
Company pension and postretirement contributions | |
| (122) | |
| (129) | |
Company pension and postretirement expense | |
| 295 | |
| 242 | |
Stock-based compensation expense | |
| 216 | |
| 230 | |
Gain on sale of businesses | | | (389) | | | (111) | |
Deferred income taxes | |
| (57) | |
| (88) | |
Loss on deconsolidation of Venezuelan subsidiary | |
| — | |
| 162 | |
Changes in assets and liabilities | | | | | | | |
Accounts receivable | |
| 113 | |
| (14) | |
Inventories | |
| 43 | |
| 255 | |
Accounts payable | |
| (48) | |
| (222) | |
Accrued income taxes (current and long-term) | |
| 146 | |
| (53) | |
Other — net | |
| (10) | |
| (282) | |
Net cash provided by (used in) operating activities | |
| 5,598 | |
| 4,732 | |
| | | | | | | |
Cash Flows from Investing Activities | | | | | | | |
Purchases of property, plant and equipment (PP&E) | |
| (1,079) | |
| (1,161) | |
Proceeds from sale of PP&E and other assets | |
| 29 | |
| 91 | |
Acquisitions, net of cash acquired | |
| (25) | |
| (704) | |
Purchases of marketable securities and investments | |
| (1,069) | |
| (917) | |
Proceeds from maturities and sale of marketable securities and investments | |
| 1,239 | |
| 1,265 | |
Proceeds from sale of businesses, net of cash sold | |
| 576 | |
| 236 | |
Other — net | |
| 8 | |
| 45 | |
Net cash provided by (used in) investing activities | |
| (321) | |
| (1,145) | |
| | | | | | | |
Cash Flows from Financing Activities | | | | | | | |
Change in short-term debt — net | |
| (138) | |
| (466) | |
Repayment of debt (maturities greater than 90 days) | |
| (2,477) | |
| (871) | |
Proceeds from debt (maturities greater than 90 days) | |
| 1,745 | |
| 6,116 | |
Purchases of treasury stock | |
| (366) | |
| (1,243) | |
Proceeds from issuance of treasury stock pursuant to stock option and benefit plans | |
| 325 | |
| 437 | |
Dividends paid to shareholders | |
| (2,540) | |
| (2,488) | |
Other — net | |
| (47) | |
| (158) | |
Net cash provided by (used in) financing activities | |
| (3,498) | |
| 1,327 | |
| | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | |
| (11) | |
| (36) | |
| | | | | | | |
Net increase (decrease) in cash and cash equivalents | |
| 1,768 | |
| 4,878 | |
Cash and cash equivalents at beginning of year | |
| 2,353 | |
| 2,853 | |
Cash and cash equivalents at end of period | | $ | 4,121 | | $ | 7,731 | |
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
56
3M Company and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
| Nine months ended |
| ||||
|
| September 30, |
| ||||
(Millions) |
| 2017 |
| 2016 |
| ||
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
Net income including noncontrolling interest |
| $ | 4,344 |
| $ | 3,902 |
|
Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 1,195 |
|
| 1,090 |
|
Company pension and postretirement contributions |
|
| (314) |
|
| (323) |
|
Company pension and postretirement expense |
|
| 244 |
|
| 180 |
|
Stock-based compensation expense |
|
| 266 |
|
| 244 |
|
Gain on sale of businesses |
|
| (490) |
|
| (40) |
|
Deferred income taxes |
|
| (105) |
|
| (100) |
|
Changes in assets and liabilities |
|
|
|
|
|
|
|
Accounts receivable |
|
| (595) |
|
| (469) |
|
Inventories |
|
| (436) |
|
| (15) |
|
Accounts payable |
|
| (25) |
|
| (107) |
|
Accrued income taxes (current and long-term) |
|
| 249 |
|
| 155 |
|
Other — net |
|
| 47 |
|
| (64) |
|
Net cash provided by operating activities |
|
| 4,380 |
|
| 4,453 |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
Purchases of property, plant and equipment (PP&E) |
|
| (914) |
|
| (984) |
|
Proceeds from sale of PP&E and other assets |
|
| 18 |
|
| 18 |
|
Acquisitions, net of cash acquired |
|
| (12) |
|
| (17) |
|
Purchases of marketable securities and investments |
|
| (1,055) |
|
| (1,036) |
|
Proceeds from maturities and sale of marketable securities and investments |
|
| 745 |
|
| 794 |
|
Proceeds from sale of businesses, net of cash sold |
|
| 862 |
|
| 56 |
|
Other — net |
|
| 2 |
|
| (4) |
|
Net cash used in investing activities |
|
| (354) |
|
| (1,173) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
Change in short-term debt — net |
|
| 60 |
|
| (498) |
|
Repayment of debt (maturities greater than 90 days) |
|
| (650) |
|
| (992) |
|
Proceeds from debt (maturities greater than 90 days) |
|
| — |
|
| 2,832 |
|
Purchases of treasury stock |
|
| (1,564) |
|
| (2,829) |
|
Proceeds from issuance of treasury stock pursuant to stock option and benefit plans |
|
| 582 |
|
| 741 |
|
Dividends paid to shareholders |
|
| (2,104) |
|
| (2,014) |
|
Other — net |
|
| (23) |
|
| (20) |
|
Net cash used in financing activities |
|
| (3,699) |
|
| (2,780) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
| 106 |
|
| 10 |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 433 |
|
| 510 |
|
Cash and cash equivalents at beginning of year |
|
| 2,398 |
|
| 1,798 |
|
Cash and cash equivalents at end of period |
| $ | 2,831 |
| $ | 2,308 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
(Unaudited)
6
3M Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1. Significant Accounting Policies
Basis of Presentation
The interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair statement of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. These adjustments consist of normal, recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year. The interim consolidated financial statements and notes are presented as permitted by the requirements for Quarterly Reports on Form 10-Q.
As described in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K) and 3M’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2017 and June 30, 2017, effective in the first quarter of 2017, 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 integration of the former Renewable Energy Division into existing divisions, the combining of two divisions to form the Automotive and Aerospace Solutions Division, and consolidation of U.S. customer account activity, impacting dual credit reporting. Segment information presented herein reflects the impact of these changes for all periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its CurrentAnnual Report on Form 8-K dated May 4, 2017.10-K.
As described in Note 16, effective in the second quarter of 2020, the measure of segment operating performance used by 3M’s chief operating decision maker changed and, as a result, the Company’s disclosed measure of segment profit/loss has been updated. Also, effective in the first quarter of 2020, the Company changed its business segment reporting in its continuing effort to improve the alignment of businesses around markets and customers. Additionally, the Company consolidated the way it presents geographic area net sales by providing an aggregate Americas geographic region (combining former United States and Latin America and Canada areas). Information provided herein reflects the impact of these changes for all periods presented.
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. The Company considered the coronavirus (COVID-19) related impacts on its estimates, as appropriate, within its consolidated financial statements and there may be changes to those estimates in future periods. 3M believes that the accounting estimates are appropriate after giving consideration to the increased uncertainties surrounding the severity and duration of the COVID-19 pandemic. Such estimates and assumptions are subject to inherent uncertainties which may result in actual amounts differing from these estimates.
Changes to Significant Accounting Policies
The following significant accounting policies have been added or changed as applicable since the Company’s 2019 Annual Report on Form 10-K as a result of adoption of new accounting pronouncements as described in the “New Accounting Pronouncements” section.
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, and various other items. The allowances for bad debts and cash discounts are based on the best estimate of the amount of expected credit losses in existing accounts receivable and anticipated cash discounts. The Company determines the allowances based on historical write-off experience by industry and regional economic data, current expectations of future credit losses, and historical cash discounts. The Company reviews the allowances monthly. The allowances for bad debts as well as the provision for credit losses, write-off activity and recoveries for the periods presented are not material. The Company does not have any significant off-balance-sheet credit exposure related to its customers. The Company has long-term customer receivables that do not have significant credit risk, and the origination dates of which are typically not older than five years. These long-term receivables are subject to an allowance methodology similar to other receivables.
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 Securities and ASC 326-30, Available-for-Sale Debt Securities, when determining whether a decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. An impairment relating to credit losses is recorded through an allowance for credit losses. The allowance is limited by the amount that the fair value is less than the amortized cost basis. A change in the allowance for credit losses is recorded into earnings in the period of the
7
change. Any impairment that has not been recorded through an allowance for credit losses is recorded through accumulated other comprehensive income as a component of shareholders’ equity. The factors considered in determining whether a credit loss exists can include the extent to which fair value is less than the amortized cost basis, changes in the credit quality of the underlying loan obligors, credit ratings actions, as well as other factors. When a credit loss exists, the Company compares the present value of cash flows expected to be collected from the debt security with the amortized cost basis of the security to determine what allowance amount, if any, should be recorded. Amounts are reclassified out of accumulated other comprehensive income and into earnings upon sale or a change in the portions of impairment related to credit losses and not related to credit losses.
Property, plant and equipment:3M’s accounting policy with respect to property, plant and equipment, is disclosed in the Company’s notes to consolidated financial statements included in its most recent Annual Report on Form 10-K. In addition, 3M records capital-related government grants earned as reductions to the cost of property, plant and equipment; and associated unpaid liabilities and grant proceeds receivable are considered non-cash changes in such balances for purposes of preparation of statement of cash flows.
Foreign Currency Translation
Local currencies generally are considered the functional currencies outside the United States.States with the exception of 3M’s subsidiaries in Argentina, the economy of which was considered highly inflationary beginning in 2018, and accordingly the financial statements of these subsidiaries are remeasured as if their functional currency is that of their parent. 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-endaverage monthly currency exchange rates of each applicable month.in effect during the period. Cumulative translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in shareholders’ equity.
3M hashad a consolidated subsidiary in Venezuela, the financial statements of which arewere 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 represented less than 1.0was immaterial as a percent of 3M’s consolidated operating income for 2016. The Venezuelan government sets official rates of exchange and conditions precedent to purchase foreign currency at these rates with local currency. The government also operates 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,presented. In light of circumstances, including the financial statementscountry’s unstable environment and heightened unrest leading to sustained lack of 3M’sdemand, and expectation that these circumstances will continue for the foreseeable future, during May 2019, 3M concluded it no longer met the criteria of control in order to continue consolidating its 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 (DICOM2), or its predecessor. During the same periods, the Venezuelan government’s official exchange was Tipo de Cambio Protegido (DIPRO), or its predecessor.
7
Note 1 in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K) provides additional information31, 2019, the Company considersbegan reflecting its interest 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. Changesan equity investment that does not have a readily determinable fair value. This resulted in applicable exchange rates or exchange mechanisms may continuea pre-tax charge of $162 million within other expense (income) in the future. These changes could impact the ratesecond quarter of exchange applicable2019. The charge primarily relates to remeasure the Company’s net monetary assets (liabilities) denominated$144 million of foreign currency translation losses associated with foreign currency movements before Venezuela was accounted for as a highly inflationary economy and pension elements previously included in Venezuelan Bolivars (VEF). As of September 30, 2017, the Company had a balance of net monetary assets denominated in VEF of less than 10 billion VEF and the DIPRO and DICOM2 exchange rates were approximately 10 VEF and 3,300 VEF per U.S. dollar, respectively. 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 September 30, 2017, the Company continues to consolidate its Venezuelan subsidiary. As of September 30, 2017, the balance of accumulated other comprehensive loss along with write-down of intercompany receivable and investment balances associated with this subsidiary was approximately $145 millionsubsidiary. Beginning May 31, 2019, 3M’s consolidated balance sheets and statements of operations no longer include the amount of intercompany receivables due from this subsidiaryVenezuelan entity’s operations other than an immaterial equity investment and its total equity balance were not significant.
Reclassifications
Certain amounts in prior periods’ consolidated financial statements have been reclassified to conformassociated loss or income thereon largely only to the current period presentation.extent, if any, that 3M provides support or materials and receives funding or dividends.
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 dilutivean anti-dilutive effect (insignificant(18.8 million average options for the three months ended September 30, 2017; 1.12020; 19.6 million average options for the nine months ended September 30, 2017; insignificant2020; 11.9 million average options for the three months ended September 30, 2016; and 4.02019; 8.0 million average options for the nine months ended September 30, 2016)2019). The computations for basic and diluted earnings per share follow:
8
Earnings Per Share Computations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(Amounts in millions, except per share amounts) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to 3M |
| $ | 1,429 |
| $ | 1,329 |
| $ | 4,335 |
| $ | 3,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for weighted average 3M common shares outstanding – basic |
|
| 597.6 |
|
| 604.4 |
|
| 597.9 |
|
| 606.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution associated with the Company’s stock-based compensation plans |
|
| 15.1 |
|
| 14.4 |
|
| 14.6 |
|
| 14.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for weighted average 3M common shares outstanding – diluted |
|
| 612.7 |
|
| 618.8 |
|
| 612.5 |
|
| 620.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to 3M common shareholders – basic |
| $ | 2.39 |
| $ | 2.20 |
| $ | 7.25 |
| $ | 6.43 |
|
Earnings per share attributable to 3M common shareholders – diluted |
| $ | 2.33 |
| $ | 2.15 |
| $ | 7.08 |
| $ | 6.28 |
|
| | | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended |
| ||||||||
| | September 30, | | September 30, | | ||||||||
(Amounts in millions, except per share amounts) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Numerator: | | | | | | | | | | | | | |
Net income attributable to 3M | | $ | 1,413 | | $ | 1,583 | | $ | 3,995 | | $ | 3,601 | |
| | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | |
Denominator for weighted average 3M common shares outstanding – basic | |
| 577.8 | |
| 576.5 | |
| 577.2 | |
| 577.2 | |
Dilution associated with the Company’s stock-based compensation plans | |
| 4.6 | |
| 6.5 | |
| 4.4 | |
| 8.7 | |
Denominator for weighted average 3M common shares outstanding – diluted | |
| 582.4 | |
| 583.0 | |
| 581.6 | |
| 585.9 | |
| | | | | | | | | | | | | |
Earnings per share attributable to 3M common shareholders – basic | | $ | 2.45 | | $ | 2.75 | | $ | 6.92 | | $ | 6.24 | |
Earnings per share attributable to 3M common shareholders – diluted | | $ | 2.43 | | $ | 2.72 | | $ | 6.87 | | $ | 6.15 | |
New Accounting Pronouncements
In May 2014,See the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, and in August 2015 issued ASU No. 2015-14, which amendedCompany’s 2019 Annual Report on Form 10-K for a more detailed discussion of the standard as to effective date. The ASU provides a single comprehensive model to be usedstandards in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
8
guidance. The standard’s stated core principle istables 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 exchangefollow, except for those goods or services. To achieve this core principle the ASU includes provisions within a five step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) an entity satisfies a performance obligation. The standard also specifies the accounting for some costs to obtain or fulfill a contract with a customer and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. During 2016, the FASB alsopronouncements issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU No. 2016-10, Identifying Performance Obligations and Licensing; ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers which amend ASU No. 2014-09. These amendments include clarification of principal versus agent guidance in situations in which a revenue transaction involves a third party in providing goods or services to a customer. In such circumstances, an entity must determine whether the nature of its promise to the customer is to provide the underlying goods or services (i.e., the entity is the principal in the transaction) or to arrange for the third party to provide the underlying goods or services (i.e., the entity is the agent in the transaction). The amendments clarify, in terms of identifying performance obligations, how entities would determine whether promised goods or services are separately identifiable from other promises in a contract and, therefore, would be accounted for separately. The guidance allows entities to disregard goods or services that are immaterial in the context of a contract and provides an accounting policy election to account for shipping and handling activities as fulfillment costs rather than as additional promised services. With regard to the licensing, the amendments clarify how an entity would evaluate the nature of its promise in granting a license of intellectual property, which determines whether the entity recognizes revenue over time or at a point in time. The amendments also address implementation issues relative to transition (adding a practical expedient for contract modifications and clarifying what constitutes a completed contract when employing full or modified retrospective transition methods), collectability, noncash consideration, and the presentation of sales and other similar-type taxes (allowing entities to exclude sales-type taxes collected from transaction price). Finally, the amendments make certain technical corrections and provide additional guidance in the areas of disclosure of performance obligations, provisions for losses on certain types of contracts, scoping, and other areas. Overall, ASU No. 2014-09, as amended, provides for either full retrospective adoption or a modified retrospective adoption by which it is applied onlysubsequent to the most current period presented. For 3M, the ASU is effective January 1, 2018 and the Company has concluded that it will utilize the modified retrospective method of adoption. 3M continues to evaluate the standard’s impact on its consolidated results of operations and financial condition. In addition to expanded disclosures regarding revenue, the ASU could impact the timing of revenue and certain cost recognition. 3M has conducted initial analyses, executed project management relative to the process of adopting this ASU, and is finalizing detailed contract reviews to complete necessary adjustments to existing accounting policies and quantify the ASU’s effect. For most of 3M’s revenue arrangements, no significant impacts are expected as these transactions are not accounted for under industry-specific guidance that will be superseded by the ASU and generally consist of a single performance obligation to transfer promised goods or services. However, 3M engages in some arrangementsrecent Form 10-K filing date for which software industry-specific guidance (which the ASU supersedes)separate, more detailed discussion is presently utilized. The Company has considered these arrangements in the detailed contract reviews that have been conducted. While 3M will continueprovided below as applicable.
| | | | ||
| | | | ||
Standards Adopted During the Current Fiscal Year | |||||
Standard | Relevant Description | Effective Date for 3M | Impact and Other Matters | ||
ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (in conjunction with ASU Nos. 2018-19, 2019-04, 2019-05, 2019-11, and 2020-03) | 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 | Adopted using the modified retrospective approach. Adoption of this ASU did not have a material impact due to the nature and extent of 3M’s financial instruments in scope for this ASU (primarily accounts receivable) and the historical, current and expected credit quality of its customers as of the date of adoption. See Note 1 Significant Accounting Policies for updated applicable accounting policies. | ||
ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement | Eliminates, amends, and adds disclosure requirements for fair value measurements, primarily related to Level 3 fair value measurements. | January 1, 2020 | This ASU relates to disclosure only. The nature and extent of 3M’s financial instruments in scope for this ASU (primarily Level 3 fair value measurements) are immaterial to 3M’s consolidated results of operations and financial condition. | ||
ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | Aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service arrangement (i.e. hosting arrangement) with the guidance on capitalizing costs in ASC 350-40, Internal-Use Software | January 1, 2020 | Adopted on a prospective basis. Relevant capitalizable costs are included in prepaid expenses or other non-current asset, as applicable, prospectively beginning in 2020. | ||
| | | | ||
9
| | | |
Standards Issued and Not Yet Adopted | |||
Standard | Relevant Description | Effective Date for 3M | Impact and Other Matters |
ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) | Eliminates certain existing exceptions related to the general approach in ASC 740 relating to franchise taxes, reducing complexity in the interim-period accounting for year-to-date loss limitations and changes in tax laws, and clarifying the accounting for transactions outside of business combination that result in a step-up in the tax basis of goodwill. | January 1, 2021 | 3M previously disclosed it does not expect this ASU to have a material impact on its consolidated results of operations and financial condition. |
ASU No. 2020-01, Clarifying the Interactions between Topic 321, Investments—Equity Securities, Topic 323, Investments—Equity Method and Joint Ventures, and Topic 815, Derivatives and Hedging | Clarifies when accounting for certain equity securities, a Company should consider observable transactions before applying or upon discontinuing the equity method of accounting for the purposes of applying the measurement alternative. Indicates when determining the accounting for certain derivatives, a Company should not consider if the underlying securities would be accounted for under the equity method or fair value option. | January 1, 2021 | 3M previously disclosed it does not expect this ASU to have a material impact on its consolidated results of operations and financial condition, but will apply such guidance, where applicable, to future circumstances. |
| | | |
Relevant New Standards Issued Subsequent to finalize its efforts relative to the adoption of ASU No. 2014-09, based on the analysis completed to date, the Company does not expect this standard to have a material impact on its consolidated results of operations and financial condition.Most Recent Annual Report
In July 2015,March 2020, the FASB issued ASU No. 2015-11, Simplifying2020-04, Reference Rate Reform (Topic 848): Facilitation of the MeasurementEffects of Inventory, which modified previous requirements regarding measuring inventory at the lower of cost or market. Under previous standards,Reference Rate Reform on Financial Reporting.This ASU provides temporary optional expedients and exceptions to existing guidance on contract modifications and hedge accounting to facilitate the market amount required consideration of replacement cost, net realizable value (NRV),transition from existing reference rates, such as LIBOR which is being phased out in 2021, to alternate reference rates, such as SOFR. The standard was effective upon issuance and NRV less an approximately normal profit margin. The new ASU replaced market with NRV, definedallowed application to contract changes as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminated the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. 3M adopted this standard prospectively beginningearly as January 1, 2017.2020. The adoption did notprovisions have a material impact on 3M’s consolidated results of operations and financial condition.
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
9
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 securitiesas contract modifications 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. For derivative liabilities for which the FVO has been elected, however, any changes in fair value attributable to instrument-specific credit risk would continue to be presented in net income, whichoccur while LIBOR is consistent with current guidance. For 3M, this standard is effective beginning January 1, 2018 via a cumulative-effect adjustment to beginning retained earnings, except for guidance relative to equity securities without readily determinable fair values which is applied prospectively.phased out. The Company is currently assessing this ASU’s impact on 3M’s consolidated results of operations and financial condition; however, 3M has historically held limited amounts of equity securities and cost method investments (less than $75 million in aggregate at September 30, 2017), and has not elected the FVO with respect to material financial liabilities.
In February 2016, the FASB issued ASU No. 2016-02, Leases, 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. The standard requires modified retrospective transition by which it is applied at the beginning of the earliest comparative period presented in the yearprocess of adoption. For 3M,evaluating the ASU is effective January 1, 2019. Information under existing leaseoptional relief guidance with respect to rent expense for operating leases and the Company’s minimum lease payments for capital and operating leases with non-cancelable terms in excess of one year as of December 31, 2016 is included in Note 14 in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K). The Company is currently assessing this ASU’s impact on 3M’s consolidated results of operations and financial condition.
In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments. This ASU clarified guidance used to determine if debt instruments that contain contingent put or call options require separation of the embedded put or call feature from the debt instrument and trigger accounting for the feature as a derivative with changes in fair value recorded through income. Under the new guidance, fewer put or call options embedded in debt instruments require derivative accounting. For 3M,provided within this ASU was effective January 1, 2017. The Company’s outstandingand is also reviewing its debt with embedded put provisions did not require separatesecurities, bank facilities, derivative accounting under previous guidance. As a result,instruments and commercial contracts that utilize LIBOR as the adoption of this standard did not have a material impact on the Company’s consolidated results of operations and financial condition.
In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminated the previous requirement to apply the equity method of accounting retrospectively (revising prior periods as if the equity method had always been applied) when an entity obtained significant influence over a previously held investment. The new guidance requires the investor to apply the equity method prospectively from the date the investment qualifies for the equity method. The investor would add the carrying value of the existing investment to the cost of any additional investment to determine the initial cost basis of the equity method investment. For 3M, this ASU
10
was effective January 1, 2017 on a prospective basis.reference rate. 3M will apply this guidancecontinue its assessment and monitor regulatory developments during the LIBOR transition period.
| | | | |
NOTE 2. Revenue
Contract Balances:
Deferred revenue primarily relates to investmentsrevenue that transition to the equity method after the adoption date.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidanceis recognized over time for the accounting for credit losses on financial instruments within its scope. 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 results of operations and financial condition.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which was intended to reduce diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provided guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The ASU also provided guidance for classifying cash receipts and payments that have aspects of more than one class of cash flows. The Company early adopted ASU No. 2016-15 as of January 1, 2017. Since the associated changes in classification were immaterial to all prior periods presented, no impact was reflected in the Company’s pre-2017 consolidated results of operations and financial condition presented.
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, this ASU is effective January 1, 2018. The standard requires modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. Upon adoption, a company would write off any income tax effects that had been deferred from past intercompany transactions involving non-inventory assets to opening retained earnings. In addition, an entity would record deferred tax assets with an offset to opening retained earnings for amounts that entity had previously not recognized under existing guidance but would recognize under the new guidance. While 3M could initiate additional relevant transactions prior to this ASU’s adoption date, based on deferred tax amounts related to applicable past intercompany transactionsone-year software license contracts. Deferred revenue (current portion) as of September 30, 2017, the Company does not expect this ASU to have a material impact on 3M’s consolidated results of operations2020 and financial condition.
In October 2016, the FASB issued ASU No. 2016-17, Interests Held through Related Parties That Are under Common Control, which modified previous guidance with respect to how a decision maker that holds an indirect interest in a variable interest entity (VIE) through a common control party determines whether it is the primary beneficiaryDecember 31, 2019 was $390 million and $430 million, respectively. Approximately $100 million and $370 million of the VIEDecember 31, 2019 balance was recognized as revenue during the three and nine months ended September 30, 2020, respectively, while approximately $80 million and $560 million of the December 31, 2018 balance was recognized as revenue during the three and nine months ended September 30, 2019, respectively.
Operating Lease Revenue:
Net sales includes rental revenue from durable medical devices as part of operating lease arrangements, which was $153 million and $428 million during the analysis of whetherthree and nine months ended September 30, 2020. Applicable rental revenue for the VIE would need to be consolidated. Under the ASU, a decision maker would need to consider only its proportionate indirect interest in the VIE held through a common control party. Previous guidance had required the decision maker to treat the common control party’s interest in the VIE as if the decision makerthree and nine months ended September 30, 2019 was not material.
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Disaggregated revenue information:
The Company views the following disaggregated disclosures as useful to understanding the composition of revenue recognized during the respective reporting periods:
| | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
Net Sales (Millions) | | 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||
Abrasives | | $ | 290 | | $ | 338 | | $ | 863 | | $ | 1,059 | |
Automotive Aftermarket | | | 309 | | | 307 | | | 796 | | | 917 | |
Closure and Masking Systems | | | 242 | | | 282 | | | 745 | | | 835 | |
Electrical Markets | | | 285 | | | 299 | | | 829 | | | 912 | |
Industrial Adhesives and Tapes | | | 647 | | | 684 | | | 1,873 | | | 2,041 | |
Personal Safety | | | 1,136 | | | 812 | | | 3,221 | | | 2,653 | |
Roofing Granules | | | 114 | | | 101 | | | 295 | | | 293 | |
Other Safety and Industrial | | | 1 | | | 6 | | | 5 | | | 19 | |
Total Safety and Industrial Business Segment | | $ | 3,024 | | $ | 2,829 | | $ | 8,627 | | $ | 8,729 | |
| | | | | | | | | | | | | |
Advanced Materials | | $ | 246 | | $ | 319 | | $ | 770 | | $ | 961 | |
Automotive and Aerospace | | | 410 | | | 477 | | | 1,125 | | | 1,463 | |
Commercial Solutions | | | 390 | | | 443 | | | 1,147 | | | 1,382 | |
Electronics | | | 1,024 | | | 1,001 | | | 2,771 | | | 2,760 | |
Transportation Safety | | | 245 | | | 260 | | | 678 | | | 741 | |
Other Transportation and Electronics | | | (1) | | | — | | | (2) | | | (2) | |
Total Transportation and Electronics Business Segment | | $ | 2,314 | | $ | 2,500 | | $ | 6,489 | | $ | 7,305 | |
| | | | | | | | | | | | | |
Drug Delivery | | $ | — | | $ | 93 | | $ | 146 | | $ | 277 | |
Food Safety | | | 82 | | | 86 | | | 252 | | | 254 | |
Health Information Systems | | | 280 | | | 296 | | | 833 | | | 853 | |
Medical Solutions | | | 1,251 | | | 745 | | | 3,472 | | | 2,319 | |
Oral Care | | | 320 | | | 312 | | | 741 | | | 991 | |
Separation and Purification Sciences | | | 221 | | | 191 | | | 639 | | | 602 | |
Other Health Care | | | 6 | | | (2) | | | 5 | | | (6) | |
Total Health Care Business Group | | $ | 2,160 | | $ | 1,721 | | $ | 6,088 | | $ | 5,290 | |
| | | | | | | | | | | | | |
Consumer Health Care | | $ | 96 | | $ | 97 | | $ | 278 | | $ | 295 | |
Home Care | | | 268 | | | 243 | | | 796 | | | 747 | |
Home Improvement | | | 686 | | | 612 | | | 1,863 | | | 1,729 | |
Stationery and Office | | | 323 | | | 362 | | | 859 | | | 1,008 | |
Other Consumer | | | 44 | | | 28 | | | 115 | | | 83 | |
Total Consumer Business Group | | $ | 1,417 | | $ | 1,342 | | $ | 3,911 | | $ | 3,862 | |
| | | | | | | | | | | | | |
Corporate and Unallocated | | $ | — | | $ | 28 | | $ | (1) | | $ | 98 | |
Elimination of Dual Credit | | | (565) | | | (429) | | | (1,513) | | | (1,259) | |
Total Company | | $ | 8,350 | | $ | 7,991 | | $ | 23,601 | | $ | 24,025 | |
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held the interest itself. As a result
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | | |||||||||||||
Net Sales (Millions) |
| Americas | | Asia Pacific |
| Europe, Middle East and Africa |
| Other Unallocated |
| Worldwide | | |||||
Safety and Industrial | | $ | 1,623 | | $ | 706 | | $ | 695 | | $ | — | | $ | 3,024 | |
Transportation and Electronics | |
| 640 | |
| 1,357 | |
| 317 | |
| — | |
| 2,314 | |
Health Care | | | 1,335 | | | 377 | | | 448 | | | — | | | 2,160 | |
Consumer | |
| 1,032 | |
| 231 | |
| 154 | |
| — | |
| 1,417 | |
Corporate and Unallocated | |
| (1) | |
| — | |
| — | |
| 1 | |
| — | |
Elimination of Dual Credit | |
| (282) | |
| (197) | |
| (86) | |
| — | |
| (565) | |
Total Company | | $ | 4,347 | | $ | 2,474 | | $ | 1,528 | | $ | 1 | | $ | 8,350 | |
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 | | |||||||||||||
Net Sales (Millions) |
| Americas | | Asia Pacific |
| Europe, Middle East and Africa |
| Other Unallocated |
| Worldwide | | |||||
Safety and Industrial | | $ | 4,509 | | $ | 2,080 | | $ | 2,038 | | $ | — | | $ | 8,627 | |
Transportation and Electronics | |
| 1,847 | |
| 3,709 | |
| 933 | |
| — | |
| 6,489 | |
Health Care | | | 3,690 | | | 1,091 | | | 1,307 | | | — | | | 6,088 | |
Consumer | |
| 2,801 | |
| 699 | |
| 411 | |
| — | |
| 3,911 | |
Corporate and Unallocated | |
| (1) | |
| — | |
| — | |
| — | |
| (1) | |
Elimination of Dual Credit | |
| (724) | |
| (550) | |
| (239) | |
| — | |
| (1,513) | |
Total Company | | $ | 12,122 | | $ | 7,029 | | $ | 4,450 | | $ | — | | $ | 23,601 | |
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2019 | | |||||||||||||
Net Sales (Millions) |
| Americas | | Asia Pacific |
| Europe, Middle East and Africa |
| Other Unallocated |
| Worldwide | | |||||
Safety and Industrial | | $ | 1,497 | | $ | 706 | | $ | 626 | | $ | — | | $ | 2,829 | |
Transportation and Electronics | |
| 749 | |
| 1,388 | |
| 362 | |
| 1 | |
| 2,500 | |
Health Care | | | 973 | | | 360 | | | 388 | | | — | | | 1,721 | |
Consumer | |
| 975 | |
| 228 | |
| 140 | |
| (1) | |
| 1,342 | |
Corporate and Unallocated | |
| 27 | |
| 1 | |
| 1 | |
| (1) | |
| 28 | |
Elimination of Dual Credit | |
| (185) | |
| (193) | |
| (52) | |
| 1 | |
| (429) | |
Total Company | | $ | 4,036 | | $ | 2,490 | | $ | 1,465 | | $ | — | | $ | 7,991 | |
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2019 | | |||||||||||||
Net Sales (Millions) |
| Americas | | Asia Pacific |
| Europe, Middle East and Africa |
| Other Unallocated |
| Worldwide | | |||||
Safety and Industrial | | $ | 4,532 | | $ | 2,165 | | $ | 2,033 | | $ | (1) | | $ | 8,729 | |
Transportation and Electronics | |
| 2,256 | |
| 3,912 | |
| 1,137 | |
| — | |
| 7,305 | |
Health Care | | | 2,916 | | | 1,121 | | | 1,253 | | | — | | | 5,290 | |
Consumer | |
| 2,723 | |
| 718 | |
| 422 | |
| (1) | |
| 3,862 | |
Corporate and Unallocated | |
| 97 | |
| 1 | |
| 1 | |
| (1) | |
| 98 | |
Elimination of Dual Credit | |
| (562) | |
| (534) | |
| (164) | |
| 1 | |
| (1,259) | |
Total Company | | $ | 11,962 | | $ | 7,383 | | $ | 4,682 | | $ | (2) | | $ | 24,025 | |
Americas included United States net sales to customers of the ASU, in certain cases, previous consolidation conclusions may change. For 3M, the standard was effective January 1, 2017 with retrospective application to January 1, 2016. 3M does not have significant involvement with entities subject to consolidation considerations impacted by VIE model factors. As a result, the adoption of this ASU did not have a material impact on the Company’s consolidated results of operations$3.7 billion and financial condition.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarified guidance on the classification and presentation of restricted cash in the statement of cash flows. Under the ASU, changes in restricted cash and restricted cash equivalents would be included along with those of cash and cash equivalents in the statement of cash flows. As a result, entities would no longer present transfers between cash/equivalents and restricted cash/equivalents in the statement of cash flows. In addition, a reconciliation between the balance sheet and the statement of cash flows would be disclosed when the balance sheet includes more than one line item for cash/equivalents and restricted cash/equivalents. The Company early adopted ASU No. 2016-18 as of January 1, 2017. Due to the immaterial use of restricted cash and restricted cash equivalents, no impact was reflected in the Company’s pre-2017 consolidated results of operations and financial condition presented.
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 is effective January 1, 2018 on a prospective basis with early adoption permitted. 3M would apply this guidance to applicable transactions after the adoption date.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. For 3M, this ASU is effective prospectively to impairment tests beginning January 1, 2020, with early adoption permitted at the time of any interim impairment test that may be performed prior to that date. 3M currently plans to apply this ASU in the fourth quarter of 2017 in conjunction with its annual goodwill impairment testing.
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 is effective coincident with the Company’s January 1, 2018 adoption of ASU No. 2014-09. The Company is currently assessing this ASU’s impact on 3M’s consolidated results of operations and financial condition.
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
12
amortization) would be reported outside of operating income. For 3M, 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 components of 3M’s net periodic defined benefit pension and postretirement benefit costs are presented in Note 9. These include components totaling a benefit of $31 million and $50 million$3.3 billion for the three months ended September 30, 20172020 and 2016,2019, respectively, and $95 million$10.2 billion and $156 million$9.7 billion for the nine months ended September 30, 20172020 and 2016, respectively, that would no longer be included within operating expenses and instead would be reported outside of income from operations under the new standard.
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. Early adoption is permitted. 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 is effective January 1, 2018, with early adoption permitted. Because the Company does not typically make changes to the terms or conditions of its issued share-based payment awards, 3M does not expect this ASU to have a 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 is 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, 3M does not expect this ASU to have a 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.
respectively.
1312
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. 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. Early adoption is permitted. The Company is currently assessing this ASU’s impact on 3M’s consolidated results of operations and financial condition.
NOTE 2.3. Acquisitions and Divestitures
Acquisitions:Refer to Note 3 in 3M’s 2019 Annual Report on Form 10-K for more information on relevant pre-2020 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.
2020 acquisitions:
There were 0 acquisitions that closed during the nine months ended September 30, 2020.
2019 acquisitions:
In September 2017,February 2019, 3M purchased allcompleted the acquisition of the ownership intereststechnology business of Elution Technologies, LLC, a Vermont-based manufacturerM*Modal for $0.7 billion of test kits that help enable foodcash, net of cash acquired, and beverage companies ensure their products are free from certain potentially harmful allergens such as peanuts, soy or milk. Elutionassumption of $0.3 billion of M*Modal’s debt. The allocation of purchase consideration related to M*Modal was completed in the fourth quarter of 2019. Net sales and operating loss (inclusive of transaction and integration costs) of this business included in 3M’s consolidated results of operations for the third quarter of 2019 were approximately $75 million and $5 million, respectively. Net sales and operating loss (inclusive of transaction and integration costs) of this business included in 3M’s consolidated results of operations for the first nine months of 2019 were approximately $200 million and $40 million, respectively. M*Modal is reported within the Company’s Health Care business.
In October 2017, 3M2019, the Company completed the acquisition of all of the underlying legal entitiesownership interests of Acelity Inc. and associated assets of Scott Safety, which is headquartered in Monroe, North Carolina, from Johnson Controls for $2.0 billion of cash, net of closingits KCI subsidiaries and other adjustments. 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 will be reported within 3M’s Safety and Graphics business. The Company is in the processfirst quarter of completing its initial accounting for this acquisition2020 paid certain consideration previously accrued under the terms of related agreements. Adjustments in 2020 to the purchase price allocation were approximately $34 million and accordingly, hasrelated to identification and valuation of certain acquired assets and liabilities. The change to provisional amounts did not included disclosures relativeresult in material impacts to results of operations in 2020 or any portion related to earlier quarters in the measurement period. The allocation of purchase consideration to the respective assets and liabilities acquired. 3M expects to finalize the allocation of purchase price within the one year measurement-period following the acquisition.
Pro forma information related to acquisitions has not beenAcelity was completed in the third quarter of 2020. Net sales and operating loss (inclusive of transaction and integration costs) of this business included because the impact on the Company’sin 3M’s consolidated results of operations was not considered material.in the fourth quarter of 2019 were approximately $350 million and $45 million, respectively. Acelity is reported within the Company’s Health Care business.
Divestitures:
3M may divest certain businesses from time to time based upon reviewsreview 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. As discussed in Note 16 (Business Segments), gains/losses on sale of businesses are reflected in Corporate and Unallocated.
14
2020 divestitures:
In January 2017,2020, 3M soldcompleted the assetssale of its safety prescription eyewearadvanced ballistic-protection business, formerly part of the Transportation and Electronics business, to Avon Rubber p.l.c for $86 million in cash and recognized certain contingent consideration from the outcome of pending tenders. Further contingent consideration of less than $25 million may be recognized depending on outcomes in the future. The business, with annual sales of approximately $45$85 million, consists of ballistic helmets, body armor, flat armor and related helmet-attachment products serving government and law enforcement. 3M reflected immaterial impacts in the third quarter of 2019 as a result of measuring this disposal group at the lower of its carrying amount or fair value less cost to HOYA Vision Care. The Company recorded a pre-tax gain of $29 millionsell and in the first quarter 2020 related to completion of 2017 as a resultthe divestiture and recognition of this sale, which was reported within the Company’s Safety and Graphics business.contingent consideration.
In May 2017,2020, 3M completed the related sale or transfer of control, as applicable, of its identity management business to Gemalto N.V. This business, with 2016 sales of approximately $205 million, is a leading provider in identity management solutions, including biometric hardware and software that enable identity verification and authentication, as well as secure materials and document readers. In June 2017, 3M also completed the sale of substantially all of its tollingdrug delivery business, formerly part of the Health Care business, to an affiliate of Altaris Capital Partners, LLC for $617 million in consideration including $487 million of cash, approximately $70 million in the form of an interest-bearing security, and automated license/number plateapproximately $60 million in the form of a 17 percent noncontrolling interest in the
13
new company, Kindeva Drug Delivery (Kindeva). Non-cash consideration was valued at time of initial recognition on an income-based approach using relevant estimated future cash flows and applicable market interest rates while considering impacts of restrictions related to transferability. The divested business withhad annual sales of approximately $40 million, to Neology, Inc. 3M’s tolling and automated license/number plate recognition business includes RFID readers and tags, automatic vehicle classification systems, lane controller and host software, and back office software and services. It also provides mobile and fixed cameras, software, and services in automated license/number plate recognition.$380 million. 3M received proceeds of $833 million, or $809 million net of cash sold, andretained its transdermal drug delivery components business. 3M reflected a pre-tax gain of $461$387 million in the second quarter of 2017 as a result of these two divestitures, which was reported within the Company’s Safetydivestiture. The Company reflects its ownership interest in Kindeva using the equity method of accounting incorporating the recording of 3M’s share of earnings/losses on a lag-basis based on availability of Kindeva financial statements. As a result, income/loss from this unconsolidated subsidiary began to be reflected in 3M’s financial statements in the third quarter of 2020. Kindeva and Graphics business.3M entered into certain limited-term agreements related to post-divestiture transition and supply services.
In October 2017, 3M sold its electronic monitoring business to an affiliate of Apax Partners for $200 million, net of cash sold and closing and other adjustments. This business, with annual sales of approximately $95 million, is a provider of electronic monitoring technologies, serving hundreds of correctional and law enforcement agencies around the world. 3M expects to reflect a pre-tax gain of approximately $100 million in the fourththird quarter of 20172020, 3M completed the sale of a small dermatology products business, formerly part of the Health Care business, for immaterial proceeds that approximated the business’s book value.
2019 divestitures:
During 2019, as described in Note 3 in 3M’s 2019 Annual Report on Form 10-K, the Company divested a resultnumber of this divestiture, which will be reported withinbusinesses including: certain oral care technology comprising a business and the Company’s Safetygas and Graphicsflame detection business. 3M also reflected an earnout on a previous divestiture.
Operating income and held for sale amounts:
The aggregate operating income of these divested businesses was less than $20approximately $40 million and $25 million in 2016.the first nine months of 2020 and 2019, respectively. The approximate amounts of major assets and liabilities associated with disposal groups classified as held-for-sale as of September 30, 2017 were not significant and, as of December 31, 2016,2019 included the following:
|
|
|
|
|
|
| December 31, |
| |
(Millions) |
| 2016 |
| |
Accounts receivable |
| $ | 25 |
|
Property, plant and equipment (net) |
|
| 25 |
|
Intangible assets |
|
| 35 |
|
Deferred revenue (other current liabilities) |
|
| 35 |
|
| | | | |
| December 31, | |||
(Millions) | 2019 | |||
Inventory | |
| 70 | |
Property, plant and equipment | | | 150 | |
Intangible assets | | | 35 | |
In addition, approximately $50 million and $270$30 million of goodwill was estimated to be attributable to disposal groups classified as held-for-sale as of September 30, 2017 and December 31, 2016, respectively,2019 based upon relative fair value. The amounts above have not been segregated and are classified within the existing corresponding line items on the Company’s consolidated balance sheet.
Refer to Note 2 in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K) for more information on 3M’s acquisitions and divestitures.
15
NOTE 3.4. Goodwill and Intangible Assets
PurchasedThere was no goodwill recorded from acquisitions totaled $6 million during the first nine months of 2017, all2020. 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 is deductible for tax purposes.decreased goodwill by $34 million during the nine months ended September 30, 2020. The amounts in the “Translation and other” columnrow in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balancesbalance by business segment as of December 31, 20162019 and September 30, 2017,2020, follow:
Goodwill
| | | | | | | | | | | | | | | | |
(Millions) | | Safety and Industrial | | Transportation and Electronics | | Health Care | | Consumer | | Total Company | | |||||
Balance as of December 31, 2019 | | $ | 4,621 | | $ | 1,830 | | $ | 6,739 | | $ | 254 | | $ | 13,444 | |
Acquisition activity | | | — | | | — | | | (34) | | | — | | | (34) | |
Divestiture activity | | | — | | | (10) | | | (19) | | | — | | | (29) | |
Translation and other | | | (7) | | | 13 | | | 143 | | | 5 | | | 154 | |
Balance as of September 30, 2020 | | $ | 4,614 | | $ | 1,833 | | $ | 6,829 | | $ | 259 | | $ | 13,535 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 |
| Acquisition |
| Divestiture |
| Translation |
| September 30, 2017 |
| |||||
(Millions) |
| Balance |
| activity |
| activity |
| and other |
| Balance |
| |||||
Industrial |
| $ | 2,536 |
| $ | — |
| $ | — |
| $ | 128 |
| $ | 2,664 |
|
Safety and Graphics |
|
| 3,324 |
|
| — |
|
| (276) |
|
| 98 |
|
| 3,146 |
|
Health Care |
|
| 1,609 |
|
| 6 |
|
| — |
|
| 59 |
|
| 1,674 |
|
Electronics and Energy |
|
| 1,489 |
|
| — |
|
| — |
|
| 37 |
|
| 1,526 |
|
Consumer |
|
| 208 |
|
| — |
|
| — |
|
| 3 |
|
| 211 |
|
Total Company |
| $ | 9,166 |
| $ | 6 |
| $ | (276) |
| $ | 325 |
| $ | 9,221 |
|
14
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 14,16, effective in the first quarter of 2017,2020, the Company changed its business segment reporting in its continuing effort to improve the alignment of its businesses around markets and customers.reporting. 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. Duringunits, the first quarterresults of 2017,which were immaterial. In conjunction with the Companychange in segment reporting, 3M completed itsan assessment of any potentialindicating 0 goodwill impairment for reporting units impacted byexisted as a result of this new structure and determined that no impairment existed.segment structure.
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 September 30, 2017,2020, and December 31, 2016,2019, follow:
|
|
|
|
|
|
|
| |||||||
|
| September 30, |
| December 31, |
| |||||||||
| | | | | | | | |||||||
|
| September 30, |
| December 31, |
| |||||||||
(Millions) |
| 2017 |
| 2016 |
|
| 2020 |
| 2019 |
| ||||
Customer related intangible assets |
| $ | 1,924 |
| $ | 1,939 |
| | $ | 4,232 | | $ | 4,316 | |
Patents |
|
| 586 |
|
| 602 |
| |
| 530 | |
| 538 | |
Other technology-based intangible assets |
|
| 478 |
|
| 524 |
| |
| 2,099 | |
| 2,124 | |
Definite-lived tradenames |
|
| 393 |
|
| 420 |
| |
| 1,175 | |
| 1,158 | |
Other amortizable intangible assets |
|
| 211 |
|
| 211 |
| |
| 121 | |
| 125 | |
Total gross carrying amount |
| $ | 3,592 |
| $ | 3,696 |
| | $ | 8,157 | | $ | 8,261 | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Accumulated amortization — customer related |
|
| (865) |
|
| (797) |
| |
| (1,337) | |
| (1,180) | |
Accumulated amortization — patents |
|
| (500) |
|
| (497) |
| |
| (502) | |
| (499) | |
Accumulated amortization — other technology based |
|
| (293) |
|
| (302) |
| |||||||
Accumulated amortization — other technology-based | |
| (576) | |
| (435) | | |||||||
Accumulated amortization — definite-lived tradenames |
|
| (238) |
|
| (236) |
| |
| (367) | |
| (316) | |
Accumulated amortization — other |
|
| (167) |
|
| (173) |
| |
| (87) | |
| (90) | |
Total accumulated amortization |
| $ | (2,063) |
| $ | (2,005) |
| | $ | (2,869) | | $ | (2,520) | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Total finite-lived intangible assets — net |
| $ | 1,529 |
| $ | 1,691 |
| | $ | 5,288 | | $ | 5,741 | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Non-amortizable intangible assets (primarily tradenames) |
|
| 646 |
|
| 629 |
| |
| 638 | |
| 638 | |
Total intangible assets — net |
| $ | 2,175 |
| $ | 2,320 |
| | $ | 5,926 | | $ | 6,379 | |
16
Certain tradenames acquired by 3M doesare not amortize certain acquired tradenamesamortized because they have been in existence for over 5560 years, have a history of leading-market share positions, have been and are intended to be continuously renewed, and the associated products of which are expected to generate cash flows for 3M for an indefinite period of time. As discussed in Note 13, 3M reflected an immaterial charge related to impairment of certain indefinite-lived assets in the first quarter of 2020.
Amortization expense for acquired intangible assets for the three and nine months ended September 30, 20172020 and 20162019 follows:
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(Millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Amortization expense |
| $ | 51 |
| $ | 63 |
| $ | 162 |
| $ | 195 |
|
| | | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended |
| ||||||||
| | September 30, | | September 30, | | ||||||||
(Millions) |
| 2020 |
| 2019 |
| 2020 | | 2019 |
| ||||
Amortization expense | | $ | 137 | | $ | 69 | | $ | 405 | | $ | 208 | |
Expected amortization expense for acquired amortizable intangible assets recorded as of September 30, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | |
| | Remainder of | | | | | | | | | | | | | | | | | After |
| ||
(Millions) | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2025 |
| |||||||
Amortization expense | | $ | 132 | | $ | 524 | | $ | 511 | | $ | 485 | | $ | 460 | | $ | 428 | | $ | 2,748 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Remainder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| After |
| ||
(Millions) |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2022 |
| |||||||
Amortization expense |
| $ | 49 |
| $ | 192 |
| $ | 183 |
| $ | 174 |
| $ | 162 |
| $ | 148 |
| $ | 602 |
|
15
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. The table above excludes the impact of the carrying value of finite-lived intangible assets associated with disposal groups classified as held-for-sale at September 30, 2017. See Note 2 for additional details. 3M expenses the costs incurred to renew or extend the term of intangible assets.
17
NOTE 4.5. Restructuring Actions and Exit Activities
20172020 Restructuring Actions:
Divestiture-Related Restructuring
During the second quarter of 2017,2020, following the divestiture of substantially all of the drug delivery business (see Note 3) management approved and committed to undertake certain restructuring actions primarily focused on portfolioaddressing corporate functional costs and manufacturing footprint optimization.across 3M in relation to the magnitude of amounts previously allocated/burdened to the divested business. These actions affected approximately 1,300 positions worldwide and resulted in a second quarter 20172020 pre-tax chargescharge of $99 million. $55 million, within Corporate and Unallocated. The divestiture-related restructuring actions were recorded in the income statement as follows:
| | | | |
(Millions) |
| Second Quarter 2020 |
| |
Cost of sales | | $ | 42 | |
Selling, general and administrative expenses | |
| 12 | |
Research, development and related expenses | |
| 1 | |
Total operating income impact | | $ | 55 | |
Divestiture-related restructuring actions, including cash and non-cash impacts, follow:
| | | | | | | | | | |
(Millions) |
| Employee-Related |
| Asset-Related and Other |
| Total |
| |||
Expense incurred in the second quarter of 2020 | | $ | 32 | | $ | 23 | | $ | 55 | |
Non-cash changes | | | — | | | (14) | | | (14) | |
Cash payments | |
| (7) | |
| — | |
| (7) | |
Accrued divestiture-related restructuring action balances as of September 30, 2020 | | $ | 25 | | $ | 9 | | $ | 34 | |
Remaining activities related to this divestiture-related restructuring are expected to be largely completed bythrough the second quarter of 2021.
Other Restructuring
Additionally, in the second quarter of 2020, management approved and committed to undertake certain restructuring actions addressing structural enterprise costs and operations in certain end markets as a result of 2018.the COVID-19 pandemic and related economic impacts. These actions affected approximately 400 positions worldwide and resulted in a second quarter 2020 pre-tax charge of $58 million. The restructuring charges were recorded in the income statement as follows:
| | | | |
(Millions) |
| Second Quarter 2020 |
| |
Cost of sales | | $ | 13 | |
Selling, general and administrative expenses | |
| 37 | |
Research, development and related expenses | |
| 8 | |
Total operating income impact | | $ | 58 | |
Components
16
The business segment operating income impact of these restructuring charges are summarized by business segment as follows:
|
|
|
|
| ||||||||||
|
| Second Quarter 2017 |
| |||||||||||
| | | | | | | | | | | ||||
| | Second Quarter 2020 | | |||||||||||
(Millions) |
| Employee-Related |
|
| Employee-Related |
| Asset-Related |
| Total |
| ||||
Industrial |
| $ | 39 |
| ||||||||||
Safety and Graphics |
|
| 9 |
| ||||||||||
Safety and Industrial | | $ | 7 | | $ | — | | $ | 7 | | ||||
Transportation and Electronics | | | 11 | | | — | | | 11 | | ||||
Health Care |
|
| 2 |
| | | 12 | | | — | | | 12 | |
Electronics and Energy |
|
| 7 |
| ||||||||||
Consumer |
|
| 36 |
| | | 5 | | | — | | | 5 | |
Corporate and Unallocated |
|
| 6 |
| |
| — | |
| 23 | |
| 23 | |
Total Expense |
| $ | 99 |
| ||||||||||
Total Operating Expense | | $ | 35 | | $ | 23 | | $ | 58 | | ||||
Restructuring actions, including cash and non-cash impacts, follow:
| | | | | | | | | | |
(Millions) |
| Employee-Related |
| Asset-Related |
| Total |
| |||
Expense incurred in the second quarter of 2020 | | $ | 35 | | $ | 23 | | $ | 58 | |
Non-cash changes | | | — | | | (23) | | | (23) | |
Adjustments | | | (9) | | | — | | | (9) | |
Accrued restructuring action balances as of September 30, 2020 | | $ | 26 | | $ | — | | $ | 26 | |
Remaining activities related to this restructuring are expected to be largely completed through the second quarter of 2021.
2019 Restructuring Actions:
As described in Note 5 in 3M’s 2019 Annual Report on Form 10-K, during the second quarter of 2019, in light of slower than expected 2019 sales, management approved and committed to undertake certain restructuring actions. These actions impacted approximately 2,000 positions worldwide, including attrition. The precedingCompany recorded second quarter 2019 pre-tax charges of $148 million. The restructuring charges were recorded in the income statement as follows:
|
|
|
|
| ||||
| | | | | ||||
(Millions) |
| Second Quarter 2017 |
|
| Second Quarter 2019 |
| ||
Cost of sales |
| $ | 86 |
| | $ | 18 | |
Selling, general and administrative expenses |
|
| 5 |
| |
| 89 | |
Research, development and related expenses |
|
| 8 |
| |
| 5 | |
Total |
| $ | 99 |
| ||||
Total operating income impact | | | 112 | | ||||
Other expense (income), net | | | 36 | | ||||
Total income before taxes impact | | $ | 148 | | ||||
ComponentsThe operating income impact of these restructuring charges are summarized by business segment as follows:
| | | | | | | | | | |
| | Second Quarter 2019 | | |||||||
(Millions) |
| Employee-Related |
| Asset-Related |
| Total |
| |||
Safety and Industrial | | $ | 11 | | $ | — | | $ | 11 | |
Transportation and Electronics | | | 8 | | | — | | | 8 | |
Health Care | | | 6 | | | — | | | 6 | |
Consumer | | | 5 | | | — | | | 5 | |
Corporate and Unallocated | |
| 42 | |
| 40 | |
| 82 | |
Total Operating Expense | | $ | 72 | | $ | 40 | | $ | 112 | |
The second quarter 2019 actions included a voluntary early retirement incentive (further discussed in Note 11), the charge for which is included in other expense (income), net above.
17
Restructuring action activity from 2019, which includes both second and fourth quarter actions, including cash and non-cash impacts, follow:
|
|
|
|
|
|
|
|
| |
(Millions) |
| Employee-Related |
| |
Expense incurred in the second quarter of 2017 |
| $ | 99 |
|
Accrued restructuring action balances as of June 30, 2017 |
| $ | 99 |
|
Cash payments |
|
| (3) |
|
Accrued restructuring action balances as of September 30, 2017 |
| $ | 96 |
|
| | | | |
(Millions) |
| Employee-Related |
| |
Accrued restructuring action balances as of December 31, 2019 | | $ | 140 | |
Cash Payments | | | (25) | |
Adjustments | | | (55) | |
Accrued restructuring action balances as of September 30, 2020 | | $ | 60 | |
2017 Exit Activities:Adjustments in the table above reflect changes in estimates from factors such as additional natural attrition and redeployment as COVID-19 delayed the start of plan execution and update of costs associated with the mix of impacted roles. Remaining activities related to this restructuring are expected to be completed largely through early 2021.
NOTE 6. Supplemental Income Statement Information
Other expense (income), net consists of the following:
| | | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended | | ||||||||
| | September 30, | | September 30, |
| ||||||||
(Millions) | | 2020 |
| 2019 |
| 2020 | | 2019 | | ||||
Interest expense | | $ | 128 | | $ | 109 | | $ | 388 | | $ | 324 | |
Interest income | |
| (5) | |
| (26) | |
| (24) | |
| (64) | |
Pension and postretirement net periodic benefit cost (benefit) | | | (19) | | | (38) | | | (53) | | | (73) | |
Loss on deconsolidation of Venezuelan subsidiary | |
| — | |
| — | |
| — | |
| 162 | |
Total | | $ | 104 | | $ | 45 | | $ | 311 | | $ | 349 | |
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. Pension and postretirement net periodic benefit costs include a second quarter 2019 charge related to the voluntary early retirement incentive program announced in May 2019. Refer to Note 11 for additional details on the voluntary early retirement incentive program in addition to the components of pension and postretirement net periodic benefit costs.
In the firstsecond quarter of 2017,2019, the Company recorded net pre-tax chargesincurred a charge of $24$162 million related to exit activities. These charges relatedthe deconsolidation of its Venezuelan subsidiary. Refer to employee reductions, primarily in Western Europe.Note 1 for additional details.
18
NOTE 5.7. Supplemental Equity and Comprehensive Income Information
Cash dividends declared and paid totaled $1.47 and $1.44 per share for the first, second, and third quarters 2020 and 2019, respectively, or $4.41 and $4.32 per share for the first nine months of 2020 and 2019, respectively.
Consolidated Statement of Changes in Equity
Three months ended September 30, 20172020
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| controlling |
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| | | | | 3M Company Shareholders | | | |
| |||||||||||||||||||||||||||||
| | | | | Common | | | | | | | | Accumulated | | | |
| |||||||||||||||||||||
| | | | | Stock and | | | | | | | | Other | | | |
| |||||||||||||||||||||
| | | | | Additional | | | | | | | | Comprehensive | | Non- |
| ||||||||||||||||||||||
| | | | | Paid-in | | Retained | | Treasury | | Income | | controlling |
| ||||||||||||||||||||||||
(Millions) |
| Total |
| Capital |
| Earnings |
| Stock |
| (Loss) |
| Interest |
|
| Total |
| Capital |
| Earnings |
| Stock |
| (Loss) |
| Interest |
| ||||||||||||
Balance at June 30, 2017 |
| $ | 11,644 |
| $ | 5,253 |
| $ | 38,793 |
| $ | (25,466) |
| $ | (6,989) |
| $ | 53 |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance at June 30, 2020 |
| $ | 10,915 |
| $ | 6,083 |
| $ | 42,759 |
| $ | (29,699) |
| $ | (8,286) |
| $ | 58 | | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Net income |
|
| 1,433 |
|
|
|
|
| 1,429 |
|
|
|
|
|
|
|
| 4 |
| |
| 1,417 | | | | |
| 1,413 | | | | | | | |
| 4 | |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | |
Cumulative translation adjustment |
|
| 44 |
|
|
|
|
|
|
|
|
|
|
| 45 |
|
| (1) |
| |
| 271 | | | | | | | | | | |
| 270 | |
| 1 | |
Defined benefit pension and post-retirement plans adjustment |
|
| 80 |
|
|
|
|
|
|
|
|
|
|
| 80 |
|
| — |
| |
| 127 | | | | | | | | | | |
| 127 | |
| — | |
Cash flow hedging instruments - unrealized gain (loss) |
|
| (49) |
|
|
|
|
|
|
|
|
|
|
| (49) |
|
| — |
| |||||||||||||||||||
Cash flow hedging instruments | |
| (71) | | | | | | | | | | |
| (71) | |
| — | | |||||||||||||||||||
Total other comprehensive income (loss), net of tax |
|
| 75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| 327 | | | | | | | | | | | | | | | | |
Dividends declared |
|
| (701) |
|
|
|
|
| (701) |
|
|
|
|
|
|
|
|
|
| |
| (847) | | | | |
| (847) | | | | | | | | | | |
Stock-based compensation |
|
| 58 |
|
| 58 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| 42 | |
| 42 | | | | | | | | | | | | | |
Reacquired stock |
|
| (394) |
|
|
|
|
|
|
|
| (394) |
|
|
|
|
|
|
| |
| (1) | | | | | | | |
| (1) | | | | | | | |
Issuances pursuant to stock option and benefit plans |
|
| 87 |
|
|
|
|
| (67) |
|
| 154 |
|
|
|
|
|
|
| |
| 90 | | | | |
| (40) | |
| 130 | | | | | | | |
Balance at September 30, 2017 |
| $ | 12,202 |
| $ | 5,311 |
| $ | 39,454 |
| $ | (25,706) |
| $ | (6,913) |
| $ | 56 |
| |||||||||||||||||||
Balance at September 30, 2020 |
| $ | 11,943 |
| $ | 6,125 |
| $ | 43,285 |
| $ | (29,570) |
| $ | (7,960) |
| $ | 63 | | |||||||||||||||||||
Nine months ended September 30, 20172020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
|
|
|
| 3M Company Shareholders |
|
|
|
| |||||||||||||||||||||||||||||
|
|
|
|
| Common |
|
|
|
|
|
|
| Accumulated |
|
|
|
| |||||||||||||||||||||
|
|
|
|
| Stock and |
|
|
|
|
|
|
| Other |
|
|
|
| |||||||||||||||||||||
|
|
|
|
| Additional |
|
|
|
|
|
|
| Comprehensive |
| Non- |
| ||||||||||||||||||||||
|
|
|
|
| Paid-in |
| Retained |
| Treasury |
| Income |
| controlling |
| ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
| | | | | 3M Company Shareholders | | | |
| |||||||||||||||||||||||||||||
| | | | | Common | | | | | | | | Accumulated | | | |
| |||||||||||||||||||||
| | | | | Stock and | | | | | | | | Other | | | |
| |||||||||||||||||||||
| | | | | Additional | | | | | | | | Comprehensive | | Non- |
| ||||||||||||||||||||||
| | | | | Paid-in | | Retained | | Treasury | | Income | | controlling |
| ||||||||||||||||||||||||
(Millions) |
| Total |
| Capital |
| Earnings |
| Stock |
| (Loss) |
| Interest |
|
| Total |
| Capital |
| Earnings |
| Stock |
| (Loss) |
| Interest |
| ||||||||||||
Balance at December 31, 2016 |
| $ | 10,343 |
| $ | 5,070 |
| $ | 37,907 |
| $ | (25,434) |
| $ | (7,245) |
| $ | 45 |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance at December 31, 2019 |
| $ | 10,126 |
| $ | 5,916 |
| $ | 42,135 |
| $ | (29,849) |
| $ | (8,139) |
| $ | 63 | | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Net income |
|
| 4,344 |
|
|
|
|
| 4,335 |
|
|
|
|
|
|
|
| 9 |
| |
| 3,998 | | | | |
| 3,995 | | | | | | | |
| 3 | |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | |
Cumulative translation adjustment |
|
| 269 |
|
|
|
|
|
|
|
|
|
|
| 267 |
|
| 2 |
| |
| (67) | | | | | | | | | | |
| (65) | |
| (2) | |
Defined benefit pension and post-retirement plans adjustment |
|
| 241 |
|
|
|
|
|
|
|
|
|
|
| 241 |
|
| — |
| |
| 304 | | | | | | | | | | |
| 304 | |
| — | |
Cash flow hedging instruments - unrealized gain (loss) |
|
| (176) |
|
|
|
|
|
|
|
|
|
|
| (176) |
|
| — |
| |||||||||||||||||||
Cash flow hedging instruments | |
| (60) | | | | | | | | | | |
| (60) | |
| — | | |||||||||||||||||||
Total other comprehensive income (loss), net of tax |
|
| 334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| 177 | | | | | | | | | | | | | | | | |
Dividends declared |
|
| (2,104) |
|
|
|
|
| (2,104) |
|
|
|
|
|
|
|
|
|
| |
| (2,540) | | | | |
| (2,540) | | | | | | | | | | |
Purchase of subsidiary shares | | | (1) | | | | | | | | | | | | | | | (1) | | |||||||||||||||||||
Stock-based compensation |
|
| 241 |
|
| 241 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| 209 | |
| 209 | | | | | | | | | | | | | |
Reacquired stock |
|
| (1,547) |
|
|
|
|
|
|
|
| (1,547) |
|
|
|
|
|
|
| |
| (357) | | | | | | | |
| (357) | | | | | | | |
Issuances pursuant to stock option and benefit plans |
|
| 591 |
|
|
|
|
| (684) |
|
| 1,275 |
|
|
|
|
|
|
| |
| 331 | | | | |
| (305) | |
| 636 | | | | | | | |
Balance at September 30, 2017 |
| $ | 12,202 |
| $ | 5,311 |
| $ | 39,454 |
| $ | (25,706) |
| $ | (6,913) |
| $ | 56 |
| |||||||||||||||||||
Balance at September 30, 2020 |
| $ | 11,943 |
| $ | 6,125 |
| $ | 43,285 |
| $ | (29,570) |
| $ | (7,960) |
| $ | 63 | | |||||||||||||||||||
19
Three months ended September 30, 20162019
| | | | | | | | | | | | | | | | | | | |
| | | | | 3M Company Shareholders | | | |
| ||||||||||
| | | | | Common | | | | | | | | Accumulated | | | |
| ||
| | | | | Stock and | | | | | | | | Other | | | |
| ||
| | | | | Additional | | | | | | | | Comprehensive | | Non- |
| |||
| | | | | Paid-in | | Retained | | Treasury | | Income | | controlling |
| |||||
(Millions) |
| Total |
| Capital |
| Earnings |
| Stock |
| (Loss) |
| Interest |
| ||||||
Balance at June 30, 2019 |
| $ | 10,142 |
| $ | 5,821 |
| $ | 41,362 |
| $ | (29,828) |
| $ | (7,272) |
| $ | 59 | |
| | | | | | | | | | | | | | | | | | | |
Net income | |
| 1,588 | | | | |
| 1,583 | | | | | | | |
| 5 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | | |
Cumulative translation adjustment | |
| (202) | | | | | | | | | | |
| (200) | |
| (2) | |
Defined benefit pension and post-retirement plans adjustment | |
| 76 | | | | | | | | | | |
| 76 | |
| — | |
Cash flow hedging instruments | |
| 8 | | | | | | | | | | |
| 8 | |
| — | |
Total other comprehensive income (loss), net of tax | |
| (118) | | | | | | | | | | | | | | | | |
Dividends declared | |
| (828) | | | | |
| (828) | | | | | | | | | | |
Stock-based compensation | |
| 49 | |
| 49 | | | | | | | | | | | | | |
Reacquired stock | |
| (141) | | | | | | | |
| (141) | | | | | | | |
Issuances pursuant to stock option and benefit plans | |
| 72 | | | | |
| (32) | |
| 104 | | | | | | | |
Balance at September 30, 2019 |
| $ | 10,764 |
| $ | 5,870 |
| $ | 42,085 |
| $ | (29,865) |
| $ | (7,388) |
| $ | 62 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3M Company Shareholders |
|
|
|
| ||||||||||
|
|
|
|
| Common |
|
|
|
|
|
|
| Accumulated |
|
|
|
| ||
|
|
|
|
| Stock and |
|
|
|
|
|
|
| Other |
|
|
|
| ||
|
|
|
|
| Additional |
|
|
|
|
|
|
| Comprehensive |
| Non- |
| |||
|
|
|
|
| Paid-in |
| Retained |
| Treasury |
| Income |
| controlling |
| |||||
(Millions) |
| Total |
| Capital |
| Earnings |
| Stock |
| (Loss) |
| Interest |
| ||||||
Balance at June 30, 2016 |
| $ | 11,658 |
| $ | 4,972 |
| $ | 36,915 |
| $ | (24,088) |
| $ | (6,184) |
| $ | 43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 1,331 |
|
|
|
|
| 1,329 |
|
|
|
|
|
|
|
| 2 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment |
|
| 17 |
|
|
|
|
|
|
|
|
|
|
| 16 |
|
| 1 |
|
Defined benefit pension and post-retirement plans adjustment |
|
| 67 |
|
|
|
|
|
|
|
|
|
|
| 67 |
|
| — |
|
Cash flow hedging instruments - unrealized gain (loss) |
|
| (45) |
|
|
|
|
|
|
|
|
|
|
| (45) |
|
| — |
|
Total other comprehensive income (loss), net of tax |
|
| 39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
| (670) |
|
|
|
|
| (670) |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
| 49 |
|
| 49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reacquired stock |
|
| (771) |
|
|
|
|
|
|
|
| (771) |
|
|
|
|
|
|
|
Issuances pursuant to stock option and benefit plans |
|
| 133 |
|
|
|
|
| (108) |
|
| 241 |
|
|
|
|
|
|
|
Balance at September 30, 2016 |
| $ | 11,769 |
| $ | 5,021 |
| $ | 37,466 |
| $ | (24,618) |
| $ | (6,146) |
| $ | 46 |
|
Nine months ended September 30, 20162019
| | | | | | | | | | | | | | | | | | | |
| | | | | 3M Company Shareholders | | | |
| ||||||||||
| | | | | Common | | | | | | | | Accumulated | | | |
| ||
| | | | | Stock and | | | | | | | | Other | | | |
| ||
| | | | | Additional | | | | | | | | Comprehensive | | Non- |
| |||
| | | | | Paid-in | | Retained | | Treasury | | Income | | controlling |
| |||||
(Millions) |
| Total |
| Capital |
| Earnings |
| Stock |
| (Loss) |
| Interest |
| ||||||
Balance at December 31, 2018 |
| $ | 9,848 |
| $ | 5,652 |
| $ | 40,636 |
| $ | (29,626) |
| $ | (6,866) |
| $ | 52 | |
| | | | | | | | | | | | | | | | | | | |
Impact of adoption of ASU No. 2018-02* | | | — | | | | | | 853 | | | | | | (853) | | | | |
Impact of adoption of ASU No. 2016-02* | | | 14 | | | | | | 14 | | | | | | | | | | |
Net income | |
| 3,612 | | | | |
| 3,601 | | | | | | | |
| 11 | |
Other comprehensive income (loss), net of tax: | | | | | | | | �� | | | | | | | | | | | |
Cumulative translation adjustment | |
| (2) | | | | | | | | | | |
| (1) | |
| (1) | |
Defined benefit pension and post-retirement plans adjustment | |
| 356 | | | | | | | | | | |
| 356 | |
| — | |
Cash flow hedging instruments | |
| (24) | | | | | | | | | | |
| (24) | |
| — | |
Total other comprehensive income (loss), net of tax | |
| 330 | | | | | | | | | | | | | | | | |
Dividends declared | |
| (2,488) | | | | |
| (2,488) | | | | | | | | | | |
Stock-based compensation | |
| 218 | |
| 218 | | | | | | | | | | | | | |
Reacquired stock | |
| (1,211) | | | | | | | |
| (1,211) | | | | | | | |
Issuances pursuant to stock option and benefit plans | |
| 441 | | | | |
| (531) | |
| 972 | | | | | | | |
Balance at September 30, 2019 |
| $ | 10,764 |
| $ | 5,870 |
| $ | 42,085 |
| $ | (29,865) |
| $ | (7,388) |
| $ | 62 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3M Company Shareholders |
|
|
|
| ||||||||||
|
|
|
|
| Common |
|
|
|
|
|
|
| Accumulated |
|
|
|
| ||
|
|
|
|
| Stock and |
|
|
|
|
|
|
| Other |
|
|
|
| ||
|
|
|
|
| Additional |
|
|
|
|
|
|
| Comprehensive |
| Non- |
| |||
|
|
|
|
| Paid-in |
| Retained |
| Treasury |
| Income |
| controlling |
| |||||
(Millions) |
| Total |
| Capital |
| Earnings |
| Stock |
| (Loss) |
| Interest |
| ||||||
Balance at December 31, 2015 |
| $ | 11,468 |
| $ | 4,800 |
| $ | 36,296 |
| $ | (23,308) |
| $ | (6,359) |
| $ | 39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 3,902 |
|
|
|
|
| 3,895 |
|
|
|
|
|
|
|
| 7 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment |
|
| 192 |
|
|
|
|
|
|
|
|
|
|
| 192 |
|
| — |
|
Defined benefit pension and post-retirement plans adjustment |
|
| 203 |
|
|
|
|
|
|
|
|
|
|
| 203 |
|
| — |
|
Cash flow hedging instruments - unrealized gain (loss) |
|
| (182) |
|
|
|
|
|
|
|
|
|
|
| (182) |
|
| — |
|
Total other comprehensive income (loss), net of tax |
|
| 213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
| (2,014) |
|
|
|
|
| (2,014) |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
| 221 |
|
| 221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reacquired stock |
|
| (2,771) |
|
|
|
|
|
|
|
| (2,771) |
|
|
|
|
|
|
|
Issuances pursuant to stock option and benefit plans |
|
| 750 |
|
|
|
|
| (711) |
|
| 1,461 |
|
|
|
|
|
|
|
Balance at September 30, 2016 |
| $ | 11,769 |
| $ | 5,021 |
| $ | 37,466 |
| $ | (24,618) |
| $ | (6,146) |
| $ | 46 |
|
*See Note 1 in 3M’s 2019 Annual Report on Form 10-K.
20
Changes in Accumulated Other Comprehensive Income (Loss) Attributable to 3M by Component
Three months ended September 30, 20172020
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
| Total |
| ||||||||||||||
|
|
|
|
| Defined Benefit |
| Cash Flow |
| Accumulated |
| ||||||||||||||||
|
|
|
|
| Pension and |
| Hedging |
| Other |
| ||||||||||||||||
|
| Cumulative |
| Postretirement |
| Instruments, |
| Comprehensive |
| |||||||||||||||||
|
| Translation |
| Plans |
| Unrealized |
| Income |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
|
| | |
| | |
| | |
| Total |
| ||||||||||||||
| | | | | Defined Benefit | | Cash Flow | | Accumulated |
| ||||||||||||||||
| | | | | Pension and | | Hedging | | Other |
| ||||||||||||||||
| | Cumulative | | Postretirement | | Instruments, | | Comprehensive |
| |||||||||||||||||
| | Translation | | Plans | | Unrealized | | Income |
| |||||||||||||||||
(Millions) |
| Adjustment |
| Adjustment |
| Gain (Loss) |
| (Loss) |
| | Adjustment | | Adjustment | | Gain (Loss) | | (Loss) |
| ||||||||
Balance at June 30, 2017, net of tax: |
| $ | (1,786) |
| $ | (5,167) |
| $ | (36) |
| $ | (6,989) |
| |||||||||||||
Balance at June 30, 2020, net of tax: | | $ | (2,234) | | $ | (6,032) | | $ | (20) | | $ | (8,286) | | |||||||||||||
Other comprehensive income (loss), before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Amounts before reclassifications |
|
| (29) |
|
| — |
|
| (80) |
|
| (109) |
| |
| 237 | |
| — | |
| (72) | |
| 165 | |
Amounts reclassified out |
|
| — |
|
| 119 |
|
| 2 |
|
| 121 |
| |
| — | |
| 163 | |
| (21) | |
| 142 | |
Total other comprehensive income (loss), before tax |
|
| (29) |
|
| 119 |
|
| (78) |
|
| 12 |
| |
| 237 | |
| 163 | |
| (93) | |
| 307 | |
Tax effect |
|
| 74 |
|
| (39) |
|
| 29 |
|
| 64 |
| |
| 33 | |
| (36) | |
| 22 | |
| 19 | |
Total other comprehensive income (loss), net of tax |
|
| 45 |
|
| 80 |
|
| (49) |
|
| 76 |
| |
| 270 | |
| 127 | |
| (71) | |
| 326 | |
Balance at September 30, 2017, net of tax: |
| $ | (1,741) |
| $ | (5,087) |
| $ | (85) |
| $ | (6,913) |
| |||||||||||||
Balance at September 30, 2020, net of tax: | | $ | (1,964) | | $ | (5,905) | | $ | (91) | | $ | (7,960) | | |||||||||||||
Nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| |
|
|
|
|
| Defined Benefit |
| Cash Flow |
| Accumulated |
| |||
|
|
|
|
| Pension and |
| Hedging |
| Other |
| |||
|
| Cumulative |
| Postretirement |
| Instruments, |
| Comprehensive |
| ||||
|
| Translation |
| Plans |
| Unrealized |
| Income |
| ||||
(Millions) |
| Adjustment |
| Adjustment |
| Gain (Loss) |
| (Loss) |
| ||||
Balance at December 31, 2016, net of tax: |
| $ | (2,008) |
| $ | (5,328) |
| $ | 91 |
| $ | (7,245) |
|
Other comprehensive income (loss), before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts before reclassifications |
|
| 30 |
|
| — |
|
| (255) |
|
| (225) |
|
Amounts reclassified out |
|
| — |
|
| 357 |
|
| (21) |
|
| 336 |
|
Total other comprehensive income (loss), before tax |
|
| 30 |
|
| 357 |
|
| (276) |
|
| 111 |
|
Tax effect |
|
| 237 |
|
| (116) |
|
| 100 |
|
| 221 |
|
Total other comprehensive income (loss), net of tax |
|
| 267 |
|
| 241 |
|
| (176) |
|
| 332 |
|
Balance at September 30, 2017, net of tax: |
| $ | (1,741) |
| $ | (5,087) |
| $ | (85) |
| $ | (6,913) |
|
2020
| | | | | | | | | | | | | |
|
| | |
| | |
| | |
| Total |
| |
| | | | | Defined Benefit | | Cash Flow | | Accumulated |
| |||
| | | | | Pension and | | Hedging | | Other |
| |||
| | Cumulative | | Postretirement | | Instruments, | | Comprehensive |
| ||||
| | Translation | | Plans | | Unrealized | | Income |
| ||||
(Millions) | | Adjustment | | Adjustment | | Gain (Loss) | | (Loss) |
| ||||
Balance at December 31, 2019, net of tax: | | $ | (1,899) | | $ | (6,209) | | $ | (31) | | $ | (8,139) | |
Other comprehensive income (loss), before tax: | | | | | | | | | | | | | |
Amounts before reclassifications | |
| (98) | |
| (80) | |
| (10) | |
| (188) | |
Amounts reclassified out | |
| — | |
| 489 | |
| (68) | |
| 421 | |
Total other comprehensive income (loss), before tax | |
| (98) | |
| 409 | |
| (78) | |
| 233 | |
Tax effect | |
| 33 | |
| (105) | |
| 18 | |
| (54) | |
Total other comprehensive income (loss), net of tax | |
| (65) | |
| 304 | |
| (60) | |
| 179 | |
Balance at September 30, 2020, net of tax: | | $ | (1,964) | | $ | (5,905) | | $ | (91) | | $ | (7,960) | |
Three months ended September 30, 20162019
| | | | | | | | | | | | | |
|
| | |
| | |
| | |
| Total |
| |
| | | | | Defined Benefit | | Cash Flow | | Accumulated |
| |||
| | | | | Pension and | | Hedging | | Other |
| |||
| | Cumulative | | Postretirement | | Instruments, | | Comprehensive |
| ||||
| | Translation | | Plans | | Unrealized | | Income |
| ||||
(Millions) | | Adjustment | | Adjustment | | Gain (Loss) | | (Loss) |
| ||||
Balance at June 30, 2019, net of tax: | | $ | (1,912) | | $ | (5,369) | | $ | 9 | | $ | (7,272) | |
Other comprehensive income (loss), before tax: | | | | | | | | | | | | | |
Amounts before reclassifications | |
| (149) | |
| — | |
| 31 | |
| (118) | |
Amounts reclassified out | |
| — | |
| 101 | |
| (21) | |
| 80 | |
Total other comprehensive income (loss), before tax | |
| (149) | |
| 101 | |
| 10 | |
| (38) | |
Tax effect | |
| (51) | |
| (25) | |
| (2) | |
| (78) | |
Total other comprehensive income (loss), net of tax | |
| (200) | |
| 76 | |
| 8 | |
| (116) | |
Balance at September 30, 2019, net of tax: | | $ | (2,112) | | $ | (5,293) | | $ | 17 | | $ | (7,388) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| |
|
|
|
|
| Defined Benefit |
| Cash Flow |
| Accumulated |
| |||
|
|
|
|
| Pension and |
| Hedging |
| Other |
| |||
|
| Cumulative |
| Postretirement |
| Instruments, |
| Comprehensive |
| ||||
|
| Translation |
| Plans |
| Unrealized |
| Income |
| ||||
(Millions) |
| Adjustment |
| Adjustment |
| Gain (Loss) |
| (Loss) |
| ||||
Balance at June 30, 2016, net of tax: |
| $ | (1,503) |
| $ | (4,668) |
| $ | (13) |
| $ | (6,184) |
|
Other comprehensive income (loss), before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts before reclassifications |
|
| (8) |
|
| — |
|
| (44) |
|
| (52) |
|
Amounts reclassified out |
|
| — |
|
| 103 |
|
| (24) |
|
| 79 |
|
Total other comprehensive income (loss), before tax |
|
| (8) |
|
| 103 |
|
| (68) |
|
| 27 |
|
Tax effect |
|
| 24 |
|
| (36) |
|
| 23 |
|
| 11 |
|
Total other comprehensive income (loss), net of tax |
|
| 16 |
|
| 67 |
|
| (45) |
|
| 38 |
|
Balance at September 30, 2016, net of tax: |
| $ | (1,487) |
| $ | (4,601) |
| $ | (58) |
| $ | (6,146) |
|
21
Nine months ended September 30, 20162019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| |
|
|
|
|
| Defined Benefit |
| Cash Flow |
| Accumulated |
| |||
|
|
|
|
| Pension and |
| Hedging |
| Other |
| |||
|
| Cumulative |
| Postretirement |
| Instruments, |
| Comprehensive |
| ||||
|
| Translation |
| Plans |
| Unrealized |
| Income |
| ||||
(Millions) |
| Adjustment |
| Adjustment |
| Gain (Loss) |
| (Loss) |
| ||||
Balance at December 31, 2015, net of tax: |
| $ | (1,679) |
| $ | (4,804) |
| $ | 124 |
| $ | (6,359) |
|
Other comprehensive income (loss), before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts before reclassifications |
|
| 111 |
|
| — |
|
| (180) |
|
| (69) |
|
Amounts reclassified out |
|
| — |
|
| 307 |
|
| (104) |
|
| 203 |
|
Total other comprehensive income (loss), before tax |
|
| 111 |
|
| 307 |
|
| (284) |
|
| 134 |
|
Tax effect |
|
| 81 |
|
| (104) |
|
| 102 |
|
| 79 |
|
Total other comprehensive income (loss), net of tax |
|
| 192 |
|
| 203 |
|
| (182) |
|
| 213 |
|
Balance at September 30, 2016, net of tax |
| $ | (1,487) |
| $ | (4,601) |
| $ | (58) |
| $ | (6,146) |
|
| | | | | | | | | | | | | |
|
| | |
| | |
| | |
| Total |
| |
| | | | | Defined Benefit | | Cash Flow | | Accumulated |
| |||
| | | | | Pension and | | Hedging | | Other |
| |||
| | Cumulative | | Postretirement | | Instruments, | | Comprehensive |
| ||||
| | Translation | | Plans | | Unrealized | | Income |
| ||||
(Millions) | | Adjustment | | Adjustment | | Gain (Loss) | | (Loss) |
| ||||
Balance at December 31, 2018, net of tax: | | $ | (2,098) | | $ | (4,832) | | $ | 64 | | $ | (6,866) | |
Impact of adoption of ASU No. 2018-02* | | | (13) | | | (817) | | | (23) | | | (853) | |
Other comprehensive income (loss), before tax: | | | | | | | | | | | | | |
Amounts before reclassifications | |
| (86) | |
| 153 | |
| 14 | |
| 81 | |
Amounts reclassified out | |
| 142 | |
| 310 | |
| (48) | |
| 404 | |
Total other comprehensive income (loss), before tax | |
| 56 | |
| 463 | |
| (34) | |
| 485 | |
Tax effect | |
| (57) | |
| (107) | |
| 10 | |
| (154) | |
Total other comprehensive income (loss), net of tax | |
| (1) | |
| 356 | |
| (24) | |
| 331 | |
Balance at September 30, 2019, net of tax | | $ | (2,112) | | $ | (5,293) | | $ | 17 | | $ | (7,388) | |
*See Note 1 in 3M’s 2019 Annual Report on Form 10-K.
Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation does include impacts from items such as net investment hedge transactions. Reclassification adjustments are made to avoid double counting in comprehensive income items that are alsosubsequently recorded as part of net income.
Reclassifications out of Accumulated Other Comprehensive Income Attributable to 3M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| Amount Reclassified from |
|
|
| |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
| | Amount Reclassified from | | |
| |||||||||||||||||||||||||
Details about Accumulated Other |
| Accumulated Other Comprehensive Income |
|
|
| | Accumulated Other Comprehensive Income | | | | ||||||||||||||||||||
Comprehensive Income Components |
| Three months ended September 30, |
| Nine months ended September 30, |
| Location on Income |
| | Three months ended September 30, | | Nine months ended September 30, | | Location on Income |
| ||||||||||||||||
(Millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| Statement |
| | 2020 |
| 2019 |
| 2020 |
| 2019 | | Statement |
| ||||||||
Gains (losses) associated with, defined benefit pension and postretirement plans amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Cumulative translation adjustment | | | | | | | | | | | | | | | | |||||||||||||||
Deconsolidation of Venezuelan subsidiary | | $ | — | | $ | — | | $ | — | | $ | (142) | | Other income (expense), net | | |||||||||||||||
Total before tax | | | — | | | — | | | — | | | (142) | | | | |||||||||||||||
Tax effect | | | — | | | — | | | — | | | — | | Provision for income taxes | | |||||||||||||||
Net of tax | | $ | — | | $ | — | | $ | — | | $ | (142) | | | | |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
Defined benefit pension and postretirement plans adjustments | | | | | | | | | | | | | | | | |||||||||||||||
Gains (losses) associated with defined benefit pension and postretirement plans amortization | | | | | | | | | | | | | | | | |||||||||||||||
Transition asset |
| $ | — |
| $ | — |
| $ | — |
| $ | 1 |
| See Note 9 |
| | $ | (1) | | $ | — | | $ | (2) |
| $ | — |
| See Note 11 | |
Prior service benefit |
|
| 21 |
|
| 22 |
|
| 65 |
|
| 69 |
| See Note 9 |
| | | 15 | | | 18 | | | 46 |
| | 50 |
| See Note 11 | |
Net actuarial loss |
|
| (140) |
|
| (125) |
|
| (422) |
|
| (377) |
| See Note 9 |
| | | (176) | | | (119) | | | (530) | | | (358) | | See Note 11 | |
Curtailments/Settlements | |
| (1) | |
| — | |
| (3) |
|
| — |
| See Note 11 | | |||||||||||||||
Deconsolidation of Venezuelan subsidiary | | | — | | | — | | | — | | | (2) | | Other income (expense), net | | |||||||||||||||
Total before tax |
|
| (119) |
|
| (103) |
|
| (357) |
|
| (307) |
|
|
| |
| (163) | |
| (101) | |
| (489) | |
| (310) | | | |
Tax effect |
|
| 39 |
|
| 36 |
|
| 116 |
|
| 104 |
| Provision for income taxes |
| |
| 36 | |
| 25 | |
| 118 |
|
| 70 |
| Provision for income taxes | |
Net of tax |
| $ | (80) |
| $ | (67) |
| $ | (241) |
| $ | (203) |
|
|
| | $ | (127) | | $ | (76) | | $ | (371) | | $ | (240) | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
Cash flow hedging instruments gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | |
Foreign currency forward/option contracts |
| $ | (2) |
| $ | 24 |
| $ | 21 |
| $ | 105 |
| Cost of sales |
| | $ | 23 | | $ | 22 | | $ | 74 |
| $ | 50 |
| Cost of sales | |
Interest rate swap contracts |
|
| — |
|
| — |
|
| — |
|
| (1) |
| Interest expense |
| |||||||||||||||
Interest rate contracts | |
| (2) | |
| (1) | |
| (6) |
|
| (2) |
| Interest expense | | |||||||||||||||
Total before tax |
|
| (2) |
|
| 24 |
|
| 21 |
|
| 104 |
|
|
| |
| 21 | |
| 21 | |
| 68 | |
| 48 | | | |
Tax effect |
|
| — |
|
| (9) |
|
| (8) |
|
| (38) |
| Provision for income taxes |
| |
| (5) | |
| (4) | |
| (16) |
|
| (9) |
| Provision for income taxes | |
Net of tax |
| $ | (2) |
| $ | 15 |
| $ | 13 |
| $ | 66 |
|
|
| | $ | 16 | | $ | 17 | | $ | 52 | | $ | 39 | | | |
Total reclassifications for the period, net of tax |
| $ | (82) |
| $ | (52) |
| $ | (228) |
| $ | (137) |
|
|
| | $ | (111) | | $ | (59) | | $ | (319) | | $ | (343) | | | |
22
The Company files incomeis under IRS examination or appeals for the tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2005.
2017 through 2018. The IRS has completed its field examination of the Company’s U.S. federal income tax returns for all years for 2005 through 2016, but the years 2005 through 2014. The Company protested certain IRS positions within these tax years and entered into the administrative appeals process with the IRS. In December 2012, the Company received a statutory notice of deficiency for the 2006 year. The Company filed a petition in Tax Court in the first quarter of 2013 relating to the 2006 tax year.
Currently,have not closed as the Company is under examination byin the IRS for its U.S. federal income tax returns for the years 2015, 2016, and 2017. It is anticipated that the IRS will complete its examinationprocess of the Company for 2015 by the end of the fourth quarter of 2017, for 2016 by the end of the first quarter of 2018, and for 2017 by the end of the first quarter of 2019. As of September 30, 2017, the IRS has not proposed any significant adjustments to the Company’s tax positions for which the Company is not adequately reserved.
Payments relating to other proposed assessments arising from the 2005 through 2017 examinations may not be made until a final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from the administrative appeals process or judicial action.resolving issues identified during those examinations. In addition to the U.S. federal examination, there is also audit activity in several U.S. state and foreign jurisdictions where the Company is subject to ongoing tax examinations and governmental assessments, which could be impacted by evolving political environments in those jurisdictions.
3M anticipates changes As of September 30, 2020, no taxing authority has proposed significant adjustments to the Company’s uncertain tax positions due to the closing and resolution of audit issues for various audit years mentioned above and closure of statutes. Currently,which the Company is estimating a decrease innot adequately reserved.
It is reasonably possible that the amount of unrecognized tax benefits duringcould significantly change within the next 12 months as a result of anticipated resolutions of audit issues.months. At this time, the Company is not able to estimate the range by which these potential events could impact 3M’s unrecognized tax benefits in the next 12 months. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of September 30, 20172020 and December 31, 20162019 are $384$1,155 million and $333$1,178 million, respectively.
The Company recognizes interest and penalties accrued related tochange in unrecognized tax benefits induring 2020 includes a $52 million decrease associated with the tax expense. The Company recognized intreatment of the consolidated statement2018 agreement reached with the State of income on a gross basis approximately $8 million and $11 millionMinnesota that resolved the Natural Resources Damages (NRD) lawsuit.
As of expense for the three months ended September 30, 2017 and September 30, 2016, respectively, and approximately $16 million and $8 million of expense for the nine months ended September 30, 2017 and September 30, 2016, respectively. At September 30, 20172020 and December 31, 2016, accrued interest and penalties in2019, the consolidated balance sheet on a gross basis were $64Company had valuation allowances of $124 million and $52$158 million respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact ofon its deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.assets, respectively.
The effective tax rate for the third quarter of 20172020 was 28.321.4 percent, compared to 28.519.3 percent in the third quarter of 2016, a decrease2019, an increase of 0.22.1 percentage points. Primary factors that decreased the Company’s effective tax rate on a combined basis by 4.0 percentage points year-on-year included international taxes that were impacted by changesThe primary factor contributing to the geographic mix of income before taxes and prior year cash optimization actions, increased benefits from the R&D tax credit, and other items. This decreaseincrease was partially offset by a 3.8 percentage point year-on-year increase to the Company’s effective tax rate. Primary factors that increased the effective tax rate included remeasurements of 3M’s uncertain tax positions and a lower year-on-year excess tax benefitnonrepeating 2019 favorable adjustments related to employee share-based payments.international tax provisions of U.S. tax reform.
The effective tax rate for the first nine months of 20172020 was 26.120.0 percent, compared to 28.319.7 percent in the first nine months of 2016, a decrease2019, largely consistent year-on-year.
The Company previously disclosed as of 2.2 percentage points. Primary factorsDecember 31, 2019 that decreasedapproximately $14 billion of the Company’s effectiveundistributed earnings of its foreign subsidiaries were considered indefinitely reinvested. During the third quarter of 2020, 3M determined that approximately $5 billion of these earnings are no longer considered permanently reinvested. The incremental tax rate on a combined basis by 3.0 percentage points for the first nine months of 2017 when comparedcost to repatriate these earnings to the same period for 2016 included internationalUS is immaterial. The Company has not provided deferred taxes on approximately $9 billion of undistributed earnings from non-U.S. subsidiaries as of September 30, 2020 which are indefinitely reinvested in operations. Because of the multiple avenues by which to repatriate the earnings to minimize tax cost, and because a large portion of these earnings are not liquid, it is not practical to determine the income tax liability that would be payable if such earnings were impacted by changesnot reinvested indefinitely.
In March 2020, in response to the geographic miximpact of the COVID-19 pandemic in the U.S. and across the globe, the United States Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. The enactment period impacts to 3M were immaterial to income before taxes and prior year cash optimization actions, tax benefits resulting from the held-for-sale status of certain legal entities, increased benefits from the R&D tax credit, and other items. This decrease was partially offset by a 0.8 percentage point year-on-yearexpense.
23
increase, which included remeasurements of 3M’s uncertain tax positionsNOTE 9. Marketable Securities and a lower year-on-year excess tax benefit related to employee share-based payments.Held-to-Maturity Debt Securities
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 exits. As of September 30, 2017 and December 31, 2016, the Company had valuation allowances of $62 million and $47 million on its deferred tax assets, respectively.
The Company invests in asset-backed securities, certificates of deposit/time deposits, commercial paper, and other securities. The following is a summary of the types of investments and amounts recorded on the Consolidated Balance Sheet for marketable securities (current and non-current).
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|
|
| |||||||
|
| September 30, |
| December 31, |
| |||||||||
| | | | | | | | |||||||
(Millions) |
| 2017 |
| 2016 |
| | September 30, 2020 | | December 31, 2019 |
| ||||
|
|
|
|
|
|
|
| |||||||
Corporate debt securities |
| $ | 10 |
| $ | 10 |
| | $ | 7 | | $ | — | |
Commercial paper |
|
| 446 |
|
| 14 |
| | | 233 | | | 85 | |
Certificates of deposit/time deposits |
|
| 84 |
|
| 197 |
| |
| 47 | |
| 10 | |
U.S. treasury securities | | | 150 | | | — | | |||||||
U.S. municipal securities |
|
| 3 |
|
| 3 |
| |
| 3 | |
| 3 | |
Asset-backed securities: |
|
|
|
|
|
|
| |||||||
Automobile loan related |
|
| 14 |
|
| 31 |
| |||||||
Credit card related |
|
| 29 |
|
| 18 |
| |||||||
Other |
|
| — |
|
| 7 |
| |||||||
Asset-backed securities total |
|
| 43 |
|
| 56 |
| |||||||
|
|
|
|
|
|
|
| |||||||
Current marketable securities |
| $ | 586 |
| $ | 280 |
| | $ | 440 | ��� | $ | 98 | |
|
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|
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|
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| |||||||
| | | | | | | | |||||||
U.S. municipal securities |
| $ | 17 |
| $ | 17 |
| | $ | 34 | | $ | 43 | |
|
|
|
|
|
|
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| |||||||
Non-current marketable securities |
| $ | 17 |
| $ | 17 |
| | $ | 34 | | $ | 43 | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Total marketable securities |
| $ | 603 |
| $ | 297 |
| | $ | 474 | | $ | 141 | |
Classification of marketable securities as current or non-current is based on the nature of the securities and availability for use in current operations. At September 30, 20172020 and December 31, 2016,2019, gross unrealized, gross realized, and net realized gains and/or losses (pre-tax) were not material. The gross amounts of the realized gains or losses were not material. Cost of securities sold use the first in, first out (FIFO) method. Since these marketable securities are classified as available-for-sale securities, changes in fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into earnings upon sale or “other-than-temporary” impairment.
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 the other comprehensive income component of shareholders’ equity. Such an unrealized loss does not reduce net income attributable to 3M 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.
24
The balances at September 30, 20172020 for marketable securities by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
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|
| ||||
| | | | | ||||
(Millions) |
| September 30, 2017 |
|
| September 30, 2020 |
| ||
|
|
|
|
| ||||
Due in one year or less |
| $ | 582 |
| | $ | 440 | |
Due after one year through five years |
|
| 17 |
| |
| 14 | |
Due after five years through ten years |
|
| 4 |
| |
| 20 | |
Total marketable securities |
| $ | 603 |
| | $ | 474 | |
3M has a diversified marketable securities portfolio. Within this portfolio, asset-backed securities primarily include interests in automobile loans, credit cards and other asset-backed securities. 3M’s investment policy allows investments in asset-backed securitiesHeld-to-Maturity Debt Securities
In connection with minimum credit ratings of Aa2 by Moody’s Investors Service or AA by Standard & Poor’s or Fitch Ratings or DBRS. Asset-backed securities must be rated by at least twothe in-substance debt defeasance of the aforementioned rating agencies, oneThird Lien Notes described in Note 10, the Company purchased a $0.5 billion U.S. Treasury security in the fourth quarter of which must be Moody’s Investors Service or Standard & Poor’s. At September 30, 2017, all asset-backed2019 and transferred it to a trust with irrevocable instructions to use the proceeds from its maturity to satisfy the redemption of the Third Lien Notes that occurred in May 2020. This debt security investments were in compliance with this policy. Approximately 79.9 percent of all asset-backed security investments were rated AAA or A-1+ by Standard & Poor’s and/or Aaa or P-1 by Moody’s Investors Service and/or AAA or F1+ by Fitch Ratings. Interest rate risk and credit risk relatedwas considered held-to-maturity due to the underlying collateral may impactrestrictions in satisfying and discharging the value of investmentsThird Lien Notes, was carried at amortized cost, and was reflected in asset-backed securities, while factors such as general conditions inother current assets on the overall credit market andCompany’s consolidated balance sheet. Upon the naturematurity of the underlying collateral may affectdebt security in May 2020, the liquidity of investments in asset-backedCompany has 0 held-to-maturity debt securities. 3M does not currently expect risk related to its holding in asset-backed securities to materially impact its financial condition or liquidity.
NOTE 8.10. Long-Term Debt and Short-Term Borrowings
In June 2017,March 2020, 3M repaid $650 millionissued $1.75 billion aggregate principal amount of fixed rate medium-term notes that matured.
In October 2017, 3M issued $650registered notes. These were comprised of $500 million aggregate principal amount of 5.5-year fixed rate medium-term5-year notes due 20232025 with a coupon rate of 2.25%2.65%, $850$600 million aggregate principal amount of 10-year fixed rate medium-term notes due 20272030 with a coupon rate of 2.875%3.05%, and $650 million of 30-year notes due 2050 with a coupon rate of 3.70%.
As of September 30, 2020, the Company had 0 commercial paper outstanding, compared to $150 million in commercial paper outstanding as of December 31, 2019.
In July 2020, 3M extended a credit facility initially expiring in July 2020 to August 2021 in the amount of 80 billion Japanese yen. In November 2019, 3M entered into a credit facility expiring in November 2020 in the amount of 150 million euros. During the third quarter of 2020, the Company paid the outstanding balances and closed these credit facilities.
24
In conjunction with the October 2019 acquisition of Acelity (see Note 3), 3M assumed outstanding debt of the business, of which $445 million in principal amount of third lien senior secured notes (Third Lien Notes) maturing in 2021 with a coupon rate of 12.5% was not immediately redeemed at closing. Instead, at closing, 3M satisfied and discharged the Third Lien Notes via an in-substance defeasance, whereby 3M transferred cash equivalents and marketable securities to a trust with irrevocable instructions to redeem the Third Lien Notes on May 1, 2020. The trust assets were restricted from use in 3M’s operations and were only used for the redemption of the Third Lien Notes that occurred in May 2020. These actions, however, did not represent a legal defeasance. Therefore, this debt was included in current portion of long-term debt and the related trust assets were included in current assets on the Company’s consolidated balance sheet as of December 31, 2019.
In May 2020, 3M repaid the aggregate $445 million principal amount of Third Lien Notes subject to the in-substance defeasance above and repaid 650 million euros aggregate principal amount of floating-rate medium-term notes that matured. In August 2020, 3M repaid $500 million aggregate principal amount of 30-year fixedfloating rate medium-term notes due 2047 with a coupon ratethat matured.
Future Maturities of 3.625%.Long-term Debt
In October 2017, 3M, via cash tender offers, repurchased $305 million aggregate principal amountMaturities of its outstanding notes. This included $110 million of its $330 million principal amount of 6.375% notes due 2028 and $195 million of its $750 million principal amount of 5.70% notes due 2037. The Company will reflect an earlylong-term debt extinguishment charge of approximately $95 million in the fourth quartertable below reflect the impact of 2017 within interest expenseput provisions associated with certain debt instruments and are net of the differential betweenunaccreted debt issue costs such that total maturities equal the carrying value andof long-term debt as of September 30, 2020. The maturities of long-term debt for the amount paidperiods subsequent to acquire the tendered notes and related expenses.September 30, 2020 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
Remainder of |
| | |
| | |
| | |
| | |
| | |
| After |
| | |
| ||
2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2025 | | Total |
| ||||||||
$ | 149 | | $ | 1,710 | | $ | 1,629 | | $ | 1,842 | | $ | 1,101 | | $ | 1,789 | | $ | 11,362 | | $ | 19,582 | |
25
NOTE 9.11. Pension and Postretirement Benefit Plans
NetThe service cost component of defined benefit net periodic benefit cost is recorded in cost of sales; selling, general and administrative expenses; and research, development and related expenses. The other components of net periodic benefit cost are reflected in other expense (income), net. Components of net periodic benefit cost and other supplemental information for the three and nine months ended September 30, 20172020 and 20162019 follow:
Benefit Plan Information
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| Three months ended September 30, |
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| Qualified and Non-qualified |
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| Pension Benefits |
| Postretirement |
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| United States | International |
| Benefits |
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| | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
| | Three months ended September 30, |
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| | Qualified and Non-qualified | | | | | | |
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| | Pension Benefits | | Postretirement |
| |||||||||||||||||||||||||||||||||
| | United States | International | | Benefits |
| ||||||||||||||||||||||||||||||||
(Millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||||||||
Net periodic benefit cost (benefit) |
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| | | | | | | | | | | | | | | | | | | |
Operating expense | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Service cost |
| $ | 67 |
| $ | 64 |
| $ | 33 |
| $ | 35 |
| $ | 13 |
| $ | 13 |
| | $ | 66 | | $ | 63 | | $ | 39 | | $ | 32 | | $ | 11 | | $ | 10 | |
Non-operating expense | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Interest cost |
|
| 141 |
|
| 144 |
|
| 38 |
|
| 45 |
|
| 20 |
|
| 20 |
| | $ | 124 | | $ | 155 | | $ | 31 | | $ | 40 | | $ | 16 | | $ | 20 | |
Expected return on plan assets |
|
| (259) |
|
| (261) |
|
| (69) |
|
| (78) |
|
| (21) |
|
| (23) |
| |
| (255) | |
| (260) | |
| (77) | |
| (75) | |
| (20) | |
| (20) | |
Amortization of transition (asset) obligation |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| |||||||||||||||||||
Amortization of prior service cost (benefit) |
|
| (5) |
|
| (6) |
|
| (3) |
|
| (3) |
|
| (13) |
|
| (13) |
| |||||||||||||||||||
Amortization of net actuarial (gain) loss |
|
| 97 |
|
| 89 |
|
| 29 |
|
| 21 |
|
| 14 |
|
| 15 |
| |||||||||||||||||||
Amortization of transition asset | |
| — | |
| — | |
| 1 | |
| — | |
| — | |
| — | | |||||||||||||||||||
Amortization of prior service benefit | |
| (6) | |
| (6) | |
| (1) | |
| (3) | |
| (8) | |
| (9) | | |||||||||||||||||||
Amortization of net actuarial loss | | | 134 | | | 91 | | | 30 | | | 20 | | | 12 | | | 8 | | |||||||||||||||||||
Settlements, curtailments, special termination benefits and other |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| |
| — | |
| — | |
| — | |
| — | |
| 1 | |
| — | |
Net periodic benefit cost (benefit) after settlements, curtailments, special termination benefits and other |
| $ | 41 |
| $ | 30 |
| $ | 28 |
| $ | 20 |
| $ | 13 |
| $ | 12 |
| |||||||||||||||||||
Total non-operating expense (benefit) | | | (3) | | | (20) | | | (16) | | | (18) | | | 1 | | | (1) | | |||||||||||||||||||
Total net periodic benefit cost (benefit) | | $ | 63 | | $ | 43 | | $ | 23 | | $ | 14 | | $ | 12 | | $ | 9 | | |||||||||||||||||||
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| Nine months ended September 30, |
| ||||||||||||||||
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| Qualified and Non-qualified |
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| Pension Benefits |
| Postretirement |
| ||||||||||||||
|
| United States | International |
| Benefits |
| |||||||||||||
(Millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||||
Net periodic benefit cost (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | 201 |
| $ | 194 |
| $ | 100 |
| $ | 102 |
| $ | 38 |
| $ | 40 |
|
Interest cost |
|
| 425 |
|
| 431 |
|
| 112 |
|
| 131 |
|
| 59 |
|
| 59 |
|
Expected return on plan assets |
|
| (777) |
|
| (782) |
|
| (208) |
|
| (234) |
|
| (63) |
|
| (68) |
|
Amortization of transition (asset) obligation |
|
| — |
|
| — |
|
| — |
|
| (1) |
|
| — |
|
| — |
|
Amortization of prior service cost (benefit) |
|
| (17) |
|
| (18) |
|
| (9) |
|
| (10) |
|
| (39) |
|
| (41) |
|
Amortization of net actuarial (gain) loss |
|
| 291 |
|
| 265 |
|
| 89 |
|
| 66 |
|
| 42 |
|
| 46 |
|
Settlements, curtailments, special termination benefits and other |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Net periodic benefit cost (benefit) after settlements, curtailments, special termination benefits and other |
| $ | 123 |
| $ | 90 |
| $ | 84 |
| $ | 54 |
| $ | 37 |
| $ | 36 |
|
25
| | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| ||||||||||||||||
| | Qualified and Non-qualified | | | | | | |
| ||||||||||
| | Pension Benefits | | Postretirement |
| ||||||||||||||
| | United States | International | | Benefits |
| |||||||||||||
(Millions) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||
Net periodic benefit cost (benefit) | | | | | | | | | | | | | | | | | | | |
Operating expense | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 197 | | $ | 188 | | $ | 115 | | $ | 98 | | $ | 33 | | $ | 32 | |
Non-operating expense | | | | | | | | | | | | | | | | | | | |
Interest cost | | $ | 374 | | $ | 466 | | $ | 95 | | $ | 118 | | $ | 48 | | $ | 62 | |
Expected return on plan assets | |
| (765) | |
| (780) | |
| (231) | |
| (225) | |
| (60) | |
| (61) | |
Amortization of transition asset | |
| — | |
| — | |
| 2 | |
| — | |
| — | |
| — | |
Amortization of prior service benefit | |
| (18) | |
| (18) | |
| (4) | |
| (9) | |
| (24) | |
| (23) | |
Amortization of net actuarial loss | | | 402 | | | 274 | | | 92 | | | 59 | | | 36 | | | 25 | |
Settlements, curtailments, special termination benefits and other | |
| — | |
| 35 | |
| — | |
| 1 | |
| 3 | |
| — | |
Total non-operating expense (benefit) | | | (7) | | | (23) | | | (46) | | | (56) | | | 3 | | | 3 | |
Total net periodic benefit cost (benefit) | | $ | 190 | | $ | 165 | | $ | 69 | | $ | 42 | | $ | 36 | | $ | 35 | |
For the nine months ended September 30, 2017,2020 contributions totaling $311$119 million were made to the Company’s U.S. and international pension plans and $3 million to its postretirement plans. For total year 2017,2020, the Company expects to contribute approximately $300 million to $500$200 million of cash to its global defined benefit pension and postretirement plans. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2017.2020. Future contributions will depend on market conditions, interest rates and other factors. 3M’s annual measurement date for pension and postretirement assets and liabilities is December 31 each year, which is also the date used for the related annual measurement assumptions.
3M was informed in 2009, that the general partners of WG Trading Company, in which 3M’s benefit plans hold limited partnership interests, are the subject of a criminal investigation as well as civil proceedings by the SEC and CFTC (Commodity Futures Trading Commission). In March 2011, over the objections of 3M and six other limited partners of WG Trading Company, the district court judge ruled in favorMay 2019 (as part of the court appointed receiver’s proposed distribution2019 restructuring actions discussed in Note 5), the Company began offering a voluntary early retirement incentive program to certain eligible participants of its U.S. pension plans who meet age and years of pension service requirements. The eligible participants who accepted the offer and retired by July 1, 2019 received an enhanced pension benefit. Pension benefits were enhanced by adding 1 additional year of pension service and 1 additional year of age for certain benefit calculations. Approximately 800 participants accepted the offer and retired before July 1, 2019. As a result, the Company incurred a $35 million charge related to these special termination benefits in the second quarter of 2019.
In May 2019, 3M modified the 3M Retiree Life Insurance Plan postretirement benefit to close it to new participants effective August 1, 2019 (which results in employees who retire on or after August 1, 2019 not being eligible to participate in the plan) and reducing the maximum life insurance and death benefit to $8,000 for deaths on or after August 1, 2019. Due to these changes, the plan (andwas re-measured in April 2013, the second quarter of 2019, resulting in a decrease to the accumulated projected benefit obligation liability of approximately $150 million and a related increase to shareholders’ equity, specifically accumulated other comprehensive income in addition to an immaterial income statement benefit prospectively.
In the second quarter of 2020, as a result of the divestiture of the drug delivery business, the Company recognized a curtailment in its United States CourtKingdom Pension Plan. The resulting re-measurement of Appealsthe pension plan funded status reduced long-term prepaid pension and post retirement assets (located within “other assets” of the Company’s balance sheet) by approximately $80 million, which was offset within accumulated other comprehensive income (located within the equity section of the Company’s balance sheet). The expense impact of this re-measurement was immaterial for the Second Circuit affirmed the district court’s ruling). The benefit plan trustee holdings of WG Trading Company interests were adjusted to reflect the decreased estimated fair market value, inclusive of estimated insurance proceeds, as of the annual measurement dates. In the firstsecond quarter of 2014, 3M2020 and certain 3M benefit plans filed a lawsuit that was removed by the insurers to the U.S. District Court for the District of Minnesota against five insurers seeking insurance coverage for the WG Trading Company claim. In September 2015, the court ruled in favor of the defendant insurance companies on a motion for summary judgment andsubsequent periods.
26
dismissed the lawsuit. In October 2015, 3M and the 3M benefit plans filed a notice of appeal to the United States Court of Appeals for the Eighth Circuit. In May 2017, the appellate court affirmed the lower court’s decision. The decision will reduce U.S. pension and postretirement plan assets by $73 million at the December 31, 2017 measurement date and will not have a material adverse effect on the consolidated financial position of the Company.NOTE 12. Derivatives
As part of a diversified investment strategy, the U.S. pension and postretirement benefit plans made investments in the natural gas fired power generation industry during the period 2011 through 2013. In April 2017, one of these entities, Panda Temple Power, LLC, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware. This investment represented less than one percent of the fair value of the U.S. pension and postretirement plans’ assets as of their 2016 measurement date.
The Company uses interest rate swaps, currency swaps, commodity price swaps, and forward and option contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. The information that follows explains the various types of derivatives and financial instruments used by 3M, how and why 3M uses such instruments, how such instruments are accounted for, and how such instruments impact 3M’s financial position and performance.
Additional information with respect to the impacts on other comprehensive income of nonderivative hedging and derivative instrumentsderivatives is included in Note 5. Additional information with respect to the fair value of derivative instruments is included in Note 11. References to information regarding derivatives and/or hedging instruments associated with the Company’s long-term debt are also made in Note 10 in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K).elsewhere as follows:
| ● | Impact on other comprehensive income of nonderivative hedging and derivative instruments is included in Note 7. |
| ● | Fair value of derivative instruments is included in Note 13. |
| ● | Derivatives and/or hedging instruments associated with the Company’s long-term debt are described in Note 12 in 3M’s 2019 Annual Report on Form 10-K. |
Types of Derivatives/Hedging Instruments and Inclusion in Income/Other Comprehensive Income
Cash Flow Hedges:
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
Cash Flow Hedging - Foreign Currency Forward and Option Contracts: The Company enters into foreign exchange forward and option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies. These transactions are designated as cash flow hedges. The settlement or extension of these derivatives will result in reclassifications (from accumulated other comprehensive income) to earnings in the period during which the hedged transactions affect earnings. 3M may dedesignate these cash flow hedge relationships in advance of the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously included in accumulated in other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction occurs or becomes probable of not occurring. Changes in the value of derivative instruments after dedesignation are recorded in earnings and are included in the Derivatives Not Designated as Hedging Instruments section below. The maximum length of time over which 3M hedges its exposure to the variability in future cash flows of the forecasted transactions is 36 months.
Cash Flow Hedging —- Interest Rate Contracts: The Company may use forward starting interest rate swap or treasury rate lock contracts to hedge exposure to variability in cash flows from interest payments on forecasted debt issuances. The amortization of gains and losses on forward starting interest rate swaps is included in the tables below as part of the gain/(loss) recognized in income on the effective portion of derivatives as a result of reclassification from accumulated other comprehensive income. Additional information regarding previously issued andbut terminated interest rate contracts, which have related balances within accumulated other comprehensive income being amortized over the underlying life of related debt, can be found in Note 1214 in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 20162019 Annual Report on Form 10-K).10-K.
27
In the first nine months of 2016,March 2020, the Company entered into forward starting interesttreasury rate swaps that expired in December 2016lock contracts with an aggregatea notional amount of $300$500 million as a hedge against interest rate volatility associatedthat were terminated concurrently with a forecastedthe March 2020 issuance of fixed rate debt. Upon issuance of medium-termregistered notes as discussed in September 2016, 3M terminated these interest rate swaps.Note 10. The termination resulted in an immaterial net loss within accumulated other comprehensive income that will be amortized over the respective lives of the debt.debt.
In the fourth quarterThe amortization of 2016, the Company entered intogains and losses on forward starting interest rate swaps with a notional amountswap and treasury rate lock contracts is included in the tables below as part of $200 million as a hedge against interest rate volatility associated with a forecasted issuance of fixed rate debt. In the first, second, and third quarters of 2017, the Company entered into additional forward starting interest rate swaps with notional amounts of $200 million in each quarter as hedges against interest rate volatility associated with a forecasted issuance of fixed rate debt. Prior to the issuance of medium-term notes in October 2017, 3M terminated these interest rate swaps. The termination resulted in an immaterial loss withingain/(loss) reclassified from accumulated other comprehensive income that will be amortized over the respective lives of the debt.into income.
As of September 30, 2017,2020, the Company had a balance of $85$91 million associated with the after-tax net unrealized loss associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This includes a remaining balance of $8$109 million (after tax(after-tax loss) related to the forward starting interest rate swaps,swap and treasury rate lock contracts, which will be amortized over the respective lives of the debt.notes. Based on exchange rates as of September 30, 2017,2020, 3M expects to reclassify approximately $9$7 million, $3 million, and $4 million of the after-tax net unrealized foreign exchange cash flow hedging lossesgains to earnings over the next 12 months, over the remainder of 2017,2020, and in 2021, respectively, in addition to reclassifying approximately $44$98 million of the after-tax net unrealized foreign exchange cash flow hedging losses to earnings in 2018, and approximately $32 million of the after-tax net unrealized foreign exchange cash flow hedging losses to earnings after 20182021 (with the impact offset by earnings/losses from underlying hedged items). 3M expects to reclassify approximately $50 million
27
The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to derivative instruments designated as cash flow hedges are provided in the following table. Reclassifications of amounts from accumulated other comprehensive income into income include accumulated gains (losses) on dedesignated hedges at the time earnings are impacted by the forecasted transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pretax Gain (Loss) Recognized in |
|
|
| |||||||
|
| Pretax Gain (Loss) |
| Income on Effective Portion of |
| Ineffective Portion of Gain |
| |||||||
|
| Recognized in Other |
| Derivative as a Result of |
| (Loss) on Derivative and |
| |||||||
|
| Comprehensive |
| Reclassification from |
| Amount Excluded from |
| |||||||
|
| Income on Effective |
| Accumulated Other |
| Effectiveness Testing |
| |||||||
Three months ended September 30, 2017 |
| Portion of Derivative |
| Comprehensive Income |
| Recognized in Income |
| |||||||
(Millions) |
| Amount |
| Location |
| Amount |
| Location |
| Amount |
| |||
Foreign currency forward/option contracts |
| $ | (77) |
| Cost of sales |
| $ | (2) |
| Cost of sales |
| $ | — |
|
Interest rate swap contracts |
|
| (3) |
| Interest expense |
|
| — |
| Interest expense |
|
| — |
|
Total |
| $ | (80) |
|
|
| $ | (2) |
|
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2017 |
| Portion of Derivative |
| Comprehensive Income |
| Recognized in Income |
| |||||||
(Millions) |
| Amount |
| Location |
| Amount |
| Location |
| Amount |
| |||
Foreign currency forward/option contracts |
| $ | (249) |
| Cost of sales |
| $ | 21 |
| Cost of sales |
| $ | — |
|
Interest rate swap contracts |
|
| (6) |
| Interest expense |
|
| — |
| Interest expense |
|
| — |
|
Total |
| $ | (255) |
|
|
| $ | 21 |
|
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2016 |
| Portion of Derivative |
| Comprehensive Income |
| Recognized in Income |
| |||||||
(Millions) |
| Amount |
| Location |
| Amount |
| Location |
| Amount |
| |||
Foreign currency forward/option contracts |
| $ | (47) |
| Cost of sales |
| $ | 24 |
| Cost of sales |
| $ | — |
|
Interest rate swap contracts |
|
| 3 |
| Interest expense |
|
| — |
| Interest expense |
|
| — |
|
Total |
| $ | (44) |
|
|
| $ | 24 |
|
|
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2016 |
| Portion of Derivative |
| Comprehensive Income |
| Recognized in Income |
| |||||||
(Millions) |
| Amount |
| Location |
| Amount |
| Location |
| Amount |
| |||
Foreign currency forward/option contracts |
| $ | (178) |
| Cost of sales |
| $ | 105 |
| Cost of sales |
| $ | — |
|
Interest rate swap contracts |
|
| (2) |
| Interest expense |
|
| (1) |
| Interest expense |
|
| — |
|
Total |
| $ | (180) |
|
|
| $ | 104 |
|
|
| $ | — |
|
| | | | | | | | | |
| | Pretax Gain (Loss) | | | | | |
| |
| | Recognized in Other | | Pretax Gain (Loss) Reclassified |
| ||||
| | Comprehensive | | from Accumulated Other |
| ||||
| | Income on Derivative | | Comprehensive Income into Income |
| ||||
Three months ended September 30, 2020 (Millions) |
| Amount |
| Location |
| Amount |
| ||
Foreign currency forward/option contracts | | $ | (72) |
| Cost of sales | | $ | 23 | |
Interest rate contracts | |
| — |
| Interest expense | |
| (2) | |
Total | | $ | (72) | | | | $ | 21 | |
| | | | | | | | | |
Nine months ended September 30, 2020 (Millions) |
| Amount |
| Location |
| Amount |
| ||
Foreign currency forward/option contracts | | $ | (8) |
| Cost of sales | | $ | 74 | |
Interest rate contracts | |
| (2) |
| Interest expense | |
| (6) | |
Total | | $ | (10) | | | | $ | 68 | |
| | | | | | | | | |
Three months ended September 30, 2019 (Millions) |
| Amount |
| Location |
| Amount |
| ||
Foreign currency forward/option contracts | | $ | 105 |
| Cost of sales | | $ | 22 | |
Interest rate contracts | |
| (74) |
| Interest expense | |
| (1) | |
Total | | $ | 31 | | | | $ | 21 | |
| | | | | | | | | |
Nine months ended September 30, 2019 (Millions) |
| Amount |
| Location |
| Amount |
| ||
Foreign currency forward/option contracts | | $ | 137 |
| Cost of sales | | $ | 50 | |
Interest rate contracts | |
| (123) |
| Interest expense | |
| (2) | |
Total | | $ | 14 | | | | $ | 48 | |
28
Fair Value Hedges:
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.
Fair Value Hedging - Interest Rate Swaps: The Company manages interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains or losses in interest expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest expense. These fair value hedges are highly effective and, thus, there is no impact on earnings due to hedge ineffectiveness. Additional information regarding designated interest rate swaps can be found in Note 1214 in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 20162019 Annual Report on Form 10-K).10-K.
TheRefer to the section below titled Statement of Income Location and Impact of Cash Flow and Fair Value Derivative Instruments for details on the location inwithin the consolidated statements of income andfor amounts of gains and losses related to derivative instruments designated as fair value hedges and similar information relative to the hedged items are as follows:for the three and nine months ended September 30, 2020.
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Nine months ended September 30, 2017 |
|
|
|
|
| ||||||
(Millions) |
| Location |
| Amount |
| Location |
| Amount |
| ||
Interest rate swap contracts |
| Interest expense |
| $ | (4) |
| Interest expense |
| $ | 4 |
|
Total |
|
|
| $ | (4) |
|
|
| $ | 4 |
|
|
|
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|
|
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|
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|
|
Three months ended September 30, 2016 |
|
|
|
|
| ||||||
(Millions) |
| Location |
| Amount |
| Location |
| Amount |
| ||
Interest rate swap contracts |
| Interest expense |
| $ | (10) |
| Interest expense |
| $ | 10 |
|
Total |
|
|
| $ | (10) |
|
|
| $ | 10 |
|
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|
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|
Nine months ended September 30, 2016 |
|
|
|
|
| ||||||
(Millions) |
| Location |
| Amount |
| Location |
| Amount |
| ||
Interest rate swap contracts |
| Interest expense |
| $ | 24 |
| Interest expense |
| $ | (24) |
|
Total |
|
|
| $ | 24 |
|
|
| $ | (24) |
|
28
The following amounts were recorded on the consolidated balance sheet related to cumulative basis adjustments for fair value hedges:
| | | | | | | | | | | | | |
| | | | Cumulative Amount of Fair Value Hedging |
| ||||||||
| | Carrying Value of the | | Adjustment Included in the Carrying Value |
| ||||||||
| | Hedged Liabilities (in millions) | | of the Hedged Liabilities (in millions) |
| ||||||||
Location on the Consolidated Balance Sheet |
| September 30, 2020 |
| December 31, 2019 |
| September 30, 2020 |
| December 31, 2019 |
| ||||
Short-term borrowings and current portion of long-term debt |
| $ | 205 | | $ | 499 |
| $ | 5 | | $ | — | |
Long-term debt | | | 581 | | | 775 | | | 13 | | | 22 | |
Total | | $ | 786 | | $ | 1,274 | | $ | 18 | | $ | 22 | |
Net Investment Hedges:
The Company may use non-derivative (foreign currency denominated debt) and derivative (foreign exchange forward contracts) instruments to hedge portions of the Company’s investment in foreign subsidiaries and manage foreign exchange risk. For instruments that are designated and qualify as hedges of net investments in foreign operations and that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in cumulative translation within other comprehensive income. The remainderAmounts excluded from the assessment of hedge effectiveness, including the time value of the forward contract at the inception of the hedge, are recognized in earnings using an amortization approach over the life of the hedging instrument on a straight-line basis. Any difference between the change in the fair value of such instrumentsthe excluded component and the amount amortized into earnings during the period is recorded in earnings.cumulative translation within other comprehensive income. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. To the extent foreign currency denominated debt is not designated in or is dedesignated from a net investment hedge relationship, changes in value of that portion of foreign currency denominated debt due to exchange rate changes are recorded in earnings through their maturity date.
3M’s use of foreign exchange forward contracts designated in hedges of the Company’s net investment in foreign subsidiaries can vary by time period depending on when foreign currency denominated debt balances designated in such relationships are dedesignated, matured, or are newly issued and designated. Additionally, variation can occur in connection with the extent of the Company’s desired foreign exchange risk coverage.
29
At September 30, 2017,2020, the total notional amount of foreign exchange forward contracts designated in net investment hedges was approximately 25050 million Euros and approximately 248 billion South Korean Won,euros, along with a principal amount of long-term debt instruments designated in net investment hedges totaling 4.43.5 billion Euros.euros. The maturity dates of these derivative and nonderivative instruments designated in net investment hedges range from 20172021 to 2031.
The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to derivative and nonderivative instruments designated as net investment hedges are as follows. There were no0 reclassifications of the effective portion of net investment hedges out of accumulated other comprehensive income into income for the periods presented in the table below.
|
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|
|
|
|
|
|
|
|
|
| Pretax Gain (Loss) |
|
|
|
|
|
| |
|
| Recognized as |
|
|
|
|
|
| |
|
| Cumulative Translation |
|
|
| ||||
|
| within Other |
| Ineffective Portion of Gain (Loss) on |
| ||||
|
| Comprehensive Income |
| Instrument and Amount Excluded |
| ||||
|
| on Effective Portion of |
| from Effectiveness Testing |
| ||||
Three months ended September 30, 2017 |
| Instrument |
| Recognized in Income |
| ||||
(Millions) |
| Amount |
| Location |
| Amount |
| ||
Foreign currency denominated debt |
| $ | (179) |
| N/A |
| $ | — |
|
Foreign currency forward contracts |
|
| (9) |
| Cost of sales |
|
| 1 |
|
Total |
| $ | (188) |
|
|
| $ | 1 |
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2017 |
| Comprehensive Income |
| Instrument and Amount Excluded |
| ||||
(Millions) |
| Amount |
| Location |
| Amount |
| ||
Foreign currency denominated debt |
| $ | (570) |
| N/A |
| $ | — |
|
Foreign currency forward contracts |
|
| (36) |
| Cost of sales |
|
| 6 |
|
Total |
| $ | (606) |
|
|
| $ | 6 |
|
| | | | | | | | | | |
| | Pretax Gain (Loss) | | | | | | |||
| | Recognized as | | | | | | |||
| | Cumulative Translation | | Amount of Gain (Loss) Excluded | ||||||
| | within Other | | from Effectiveness Testing | ||||||
| | Comprehensive Income | | Recognized in Income | ||||||
Three months ended September 30, |
|
| ||||||||
| Amount |
|
|
| ||||||
Foreign currency denominated debt | | $ |
|
|
|
| ||||
|
|
| Cost of sales | | $ | — | | |||
Foreign currency forward contracts | |
| (3) | Cost of sales | | — | | |||
Total | | $ |
| | | | $ | — | | |
| | | | | | | | | |
Nine months ended September 30, 2020 (Millions) |
| Amount |
| Location |
| Amount |
| ||
Foreign currency denominated debt | | $ | (150) |
| Cost of sales | | $ | — | |
Foreign currency forward contracts | |
| 2 |
| Cost of sales | |
| 5 | |
Total | | $ | (148) | | | | $ | 5 | |
29
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2016 |
| Comprehensive Income |
| Instrument and Amount Excluded |
| ||||
(Millions) |
| Amount |
| Location |
| Amount |
| ||
Foreign currency denominated debt |
| $ | (105) |
| N/A |
| $ | — |
|
Foreign currency forward contracts |
|
| (41) |
| Cost of sales |
|
| 1 |
|
Total |
| $ | (146) |
|
|
| $ | 1 |
|
| | | | | | | | | |
Three months ended September 30, 2019 (Millions) |
| Amount |
| Location |
| Amount |
| ||
Foreign currency denominated debt | | $ | 177 |
| Cost of sales | | $ | — | |
Foreign currency forward contracts | | | 38 | | Cost of sales | | | 6 | |
Total | | $ | 215 | | | | $ | 6 | |
| | | | | | | | | |
Nine months ended September 30, 2019 (Millions) |
| Amount |
| Location |
| Amount |
| ||
Foreign currency denominated debt | | $ | 205 |
| Cost of sales | | $ | — | |
Foreign currency forward contracts | | | 43 | | Cost of sales | | | 18 | |
Total | | $ | 248 | | | | $ | 18 | |
Derivatives Not Designated as Hedging Instruments:
Derivatives not designated as hedging instruments include dedesignated foreign currency forward and option contracts that formerly were designated in cash flow hedging relationships (as referenced in the Cash Flow Hedges section above). In addition, 3M enters into foreign exchangecurrency forward contracts that are not designated in hedge relationships to offset, in part, the impacts of certain intercompany transactionsactivities and to further mitigate short-term currency impacts. In addition, the Company enters into commodity price swaps to offset, in part, fluctuations in costs associated with the use of certain commodities and precious metals. These derivative instruments are not designated in hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings. The Company does not hold or issue derivative financial instruments for trading purposes.
The Company revised amounts previously presented in the table below for the gain (loss) on derivatives recognized in income for the three and nine months ended September 30, 2016 relative to foreign currency forward contracts. This immaterial correction decreased the previously presented amount of the gain recognized in income in the disclosure table below by $4 million and $22 million for the three and nine months ended September 30, 2016, respectively. This revision had no impact on the Company’s consolidated results of operations, financial condition, or cash flows.
30
The location in the consolidated statementsstatement of income and amounts of gains and losses related to derivative instruments not designated as hedging instruments are as follows:
|
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|
| ||||||||||||
|
| Three months ended September 30, 2017 |
|
| Nine months ended September 30, 2017 |
| ||||||||||||||||||
|
| Gain (Loss) on Derivative Recognized in |
|
| Gain (Loss) on Derivative Recognized in |
| ||||||||||||||||||
|
| Income |
|
| Income |
| ||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||
| | Three months ended September 30, 2020 | | | Nine months ended September 30, 2020 |
| ||||||||||||||||||
| | Gain (Loss) on Derivative Recognized in | | | Gain (Loss) on Derivative Recognized in |
| ||||||||||||||||||
| | Income | | | Income |
| ||||||||||||||||||
(Millions) |
| Location |
| Amount |
|
| Location |
| Amount |
|
| Location |
| Amount |
| | Location |
| Amount |
| ||||
Foreign currency forward/option contracts |
| Cost of sales |
| $ | 3 |
|
| Cost of sales |
| $ | 8 |
|
| Cost of sales | | $ | 1 |
| | Cost of sales | | $ | 3 | |
Foreign currency forward contracts |
| Interest expense |
|
| (67) |
|
| Interest expense |
|
| (163) |
|
| Interest expense | |
| 29 |
| | Interest expense | |
| 2 | |
Total |
|
|
| $ | (64) |
|
|
|
| $ | (155) |
| | | | $ | 30 | | | | | $ | 5 | |
| | | | | | | | | | | | |
| | Three months ended September 30, 2019 | | | Nine months ended September 30, 2019 | | ||||||
| | Gain (Loss) on Derivative Recognized in | | | Gain (Loss) on Derivative Recognized in | | ||||||
| | Income | | | Income | | ||||||
(Millions) |
| Location |
| Amount |
| | Location |
| Amount | | ||
Foreign currency forward/option contracts |
| Cost of sales | | $ | 6 |
| | Cost of sales | | $ | 4 | |
Foreign currency forward contracts |
| Interest expense | |
| (8) |
| | Interest expense | |
| (26) | |
Total | | | | $ | (2) | | | | | $ | (22) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, 2016 |
|
| Nine months ended September 30, 2016 |
| ||||||
|
| Gain (Loss) on Derivative Recognized in |
|
| Gain (Loss) on Derivative Recognized in |
| ||||||
|
| Income |
|
| Income |
| ||||||
(Millions) |
| Location |
| Amount |
|
| Location |
| Amount |
| ||
Foreign currency forward/option contracts |
| Cost of sales |
| $ | (1) |
|
| Cost of sales |
| $ | (7) |
|
Foreign currency forward contracts |
| Interest expense |
|
| 17 |
|
| Interest expense |
|
| 41 |
|
Total |
|
|
| $ | 16 |
|
|
|
| $ | 34 |
|
30
Statement of Income Location and Impact of Cash Flow and Fair Value Derivative Instruments
The location in the consolidated statement of income and pre-tax amounts recognized in income related to derivative instruments designated in a cash flow or fair value hedging relationship are as follows:
| | | | | | | | | | | | | |
| | Location and Amount of Gain (Loss) Recognized in Income | | Location and Amount of Gain (Loss) Recognized in Income | | ||||||||
| | Three months ended September 30, 2020 | | Nine months ended September 30, 2020 | | ||||||||
(Millions) | | Cost of sales | | Other expense | | Cost of sales | | Other expense | | ||||
Total amounts of income and expense line items presented in the consolidated statement of income in which the effects of cash flow or fair value hedges are recorded | | $ | 4,303 | | $ | 104 | | $ | 12,217 | | $ | 311 | |
| | | | | | | | | | | | | |
The effects of cash flow and fair value hedging: | | | | | | | | | | | | | |
Gain or (loss) on cash flow hedging relationships: | | | | | | | | | | | | | |
Foreign currency forward/option contracts: | | | | | | | | | | | | | |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | | $ | 23 | | $ | — | | $ | 74 | | $ | — | |
Interest rate contracts: | | | | | | | | | | | | | |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | | | — | | | (2) | | | — | | | (6) | |
| | | | | | | | | | | | | |
Gain or (loss) on fair value hedging relationships: | | | | | | | | | | | | | |
Interest rate contracts: | | | | | | | | | | | | | |
Hedged items | | $ | — | | $ | 3 | | $ | — | | $ | 3 | |
Derivatives designated as hedging instruments | | | — | | | (3) | | | — | | | (3) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Location and Amount of Gain (Loss) Recognized in Income | | Location and Amount of Gain (Loss) Recognized in Income | | ||||||||
| | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 | | ||||||||
(Millions) | | Cost of sales | | Other expense | | Cost of sales | | Other expense | | ||||
Total amounts of income and expense line items presented in the consolidated statement of income in which the effects of cash flow or fair value hedges are recorded | | $ | 4,188 | | $ | 45 | | $ | 12,811 | | $ | 349 | |
| | | | | | | | | | | | | |
The effects of cash flow and fair value hedging: | | | | | | | | | | | | | |
Gain or (loss) on cash flow hedging relationships: | | | | | | | | | | | | | |
Foreign currency forward/option contracts: | | | | | | | | | | | | | |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | | $ | 22 | | $ | — | | $ | 50 | | $ | — | |
Interest rate contracts: | | | | | | | | | | | | | |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | | | — | | | (1) | | | — | | | (2) | |
| | | | | | | | | | | | | |
Gain or (loss) on fair value hedging relationships: | | | | | | | | | | | | | |
Interest rate contracts: | | | | | | | | | | | | | |
Hedged items | | $ | — | | $ | 1 | | $ | — | | $ | (11) | |
Derivatives designated as hedging instruments | | | — | | | (1) | | | — | | | 11 | |
| | | | | | | | | | | | | |
31
Location and Fair Value Amount of Derivative Instruments
The following tables summarize the fair value of 3M’s derivative instruments, excluding nonderivative instruments used as hedging instruments, and their location in the consolidated balance sheet. Notional amounts below are presented at period end foreign exchange rates, except for certain interest rate swaps, which are presented using the contract inception date’s foreign exchange rate. Additional information with respect to the fair value of derivative instruments is included in Note 11.13.
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| ||||||||||||||
|
| Gross |
| Assets |
| Liabilities |
| |||||||||||||||||||||
September 30, 2017 |
| Notional |
|
|
| Fair |
|
|
| Fair |
| |||||||||||||||||
(Millions) |
| Amount |
| Location |
| Value Amount |
| Location |
| Value Amount |
| |||||||||||||||||
| | | | | | | | | | | | | | | ||||||||||||||
| | Gross |
| Assets |
| Liabilities |
| |||||||||||||||||||||
| | Notional | | | | Fair | | | | Fair |
| |||||||||||||||||
September 30, 2020 (Millions) | | Amount | | Location | | Value Amount | | Location | | Value Amount |
| |||||||||||||||||
Derivatives designated as |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | |
hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | |
Foreign currency forward/option contracts |
| $ | 2,215 |
| Other current assets |
| $ | 12 |
| Other current liabilities |
| $ | 80 |
| | $ | 1,675 |
| Other current assets | | $ | 40 |
| Other current liabilities | | $ | 24 | |
Foreign currency forward/option contracts |
|
| 1,431 |
| Other assets |
|
| 24 |
| Other liabilities |
|
| 52 |
| |
| 722 |
| Other assets | |
| 23 |
| Other liabilities | |
| 7 | |
Interest rate swap contracts |
|
| 450 |
| Other current assets |
|
| — |
| Other current liabilities |
|
| 1 |
| ||||||||||||||
Interest rate swap contracts |
|
| 1,303 |
| Other assets |
|
| 22 |
| Other liabilities |
|
| 2 |
| ||||||||||||||
Interest rate contracts | |
| 200 |
| Other current assets | |
| 5 |
| Other current liabilities | |
| — | | ||||||||||||||
Interest rate contracts | |
| 403 | | Other assets | |
| 8 |
| Other liabilities | |
| — | | ||||||||||||||
Total derivatives designated as hedging instruments |
|
|
|
|
|
| $ | 58 |
|
|
| $ | 135 |
| | | | | | | $ | 76 | | | | $ | 31 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
| | | | | | | | | | | | | | | ||||||||||||||
Derivatives not designated as |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | |
hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | |
Foreign currency forward/option contracts |
| $ | 6,414 |
| Other current assets |
| $ | 19 |
| Other current liabilities |
| $ | 47 |
| | $ | 3,697 |
| Other current assets | | $ | 19 |
| Other current liabilities | | $ | 15 | |
Total derivatives not designated as hedging instruments |
|
|
|
|
|
| $ | 19 |
|
|
| $ | 47 |
| | | | | | | $ | 19 | | | | $ | 15 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
| | | | | | | | | | | | | | | ||||||||||||||
Total derivative instruments |
|
|
|
|
|
| $ | 77 |
|
|
| $ | 182 |
| | | | | | | $ | 95 | | | | $ | 46 | |
| | | | | | | | | | | | | | |
| | Gross |
| Assets |
| Liabilities |
| |||||||
| | Notional | | | | Fair | | | | Fair |
| |||
December 31, 2019 (Millions) | | Amount | | Location | | Value Amount | | Location | | Value Amount |
| |||
Derivatives designated as | | | | | | | | | | | | | | |
hedging instruments | | | | | | | | | | | | | | |
Foreign currency forward/option contracts | | $ | 1,995 |
| Other current assets | | $ | 64 |
| Other current liabilities | | $ | 9 | |
Foreign currency forward/option contracts | | | 1,041 | | Other assets | | | 50 | | Other liabilities | | | 3 | |
Interest rate contracts | |
| 500 |
| Other current assets | |
| — |
| Other current liabilities | |
| — | |
Interest rate contracts | |
| 603 |
| Other assets | |
| 17 |
| Other liabilities | |
| — | |
Total derivatives designated as hedging instruments | | | | | | | $ | 131 | | | | $ | 12 | |
| | | | | | | | | | | | | | |
Derivatives not designated as | | | | | | | | | | | | | | |
hedging instruments | | | | | | | | | | | | | | |
Foreign currency forward/option contracts | | $ | 2,684 |
| Other current assets | | $ | 11 |
| Other current liabilities | | $ | 8 | |
Total derivatives not designated as hedging instruments | | | | | | | $ | 11 | | | | $ | 8 | |
| | | | | | | | | | | | | | |
Total derivative instruments | | | | | | | $ | 142 | | | | $ | 20 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross |
| Assets |
| Liabilities |
| |||||||
December 31, 2016 |
| Notional |
|
|
| Fair |
|
|
| Fair |
| |||
(Millions) |
| Amount |
| Location |
| Value Amount |
| Location |
| Value Amount |
| |||
Derivatives designated as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward/option contracts |
| $ | 2,160 |
| Other current assets |
| $ | 107 |
| Other current liabilities |
| $ | 9 |
|
Foreign currency forward/option contracts |
|
| 1,459 |
| Other assets |
|
| 86 |
| Other liabilities |
|
| 3 |
|
Interest rate swap contracts |
|
| 1,953 |
| Other assets |
|
| 25 |
| Other current liabilities |
|
| 1 |
|
Total derivatives designated as hedging instruments |
|
|
|
|
|
| $ | 218 |
|
|
| $ | 13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward/option contracts |
| $ | 5,655 |
| Other current assets |
| $ | 41 |
| Other current liabilities |
| $ | 82 |
|
Total derivatives not designated as hedging instruments |
|
|
|
|
|
| $ | 41 |
|
|
| $ | 82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments |
|
|
|
|
|
| $ | 259 |
|
|
| $ | 95 |
|
Credit Risk and Offsetting of Assets and Liabilities of Derivative Instruments
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. As of September 30, 2017,2020, 3M has International Swaps and Derivatives Association (ISDA) agreements with 17 applicable banks and financial institutions which contain netting provisions. In addition to a master agreement with 3M supported by a primary counterparty’s parent guarantee, 3M also has associated credit support agreements in place with 16 of its primary derivative counterparties which, among other things, provide the circumstances under which either party is required to post eligible collateral (when the market value of transactions
32
covered by these agreements exceeds specified thresholds or if a counterparty’s credit rating has been
32
downgraded to a predetermined rating). 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. However, the following tables provide information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default or termination as stipulated by the terms of netting arrangements with each of the counterparties. For each counterparty, if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period based on the 3M entity that is a party to the transactions. Derivatives not subject to master netting agreements are not eligible for net presentation. As of the applicable dates presented below, no0 cash collateral had been received or pledged related to these derivative instruments.
Offsetting of Financial Assets under Master Netting Agreements with Derivative Counterparties
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
|
| Gross Amounts not Offset in the |
|
|
|
| ||||||||||||||||||
|
|
|
| Consolidated Balance Sheet that are Subject |
|
|
|
| ||||||||||||||||||
|
| Gross Amount of |
| to Master Netting Agreements |
|
|
|
| ||||||||||||||||||
|
| Derivative Assets |
| Gross Amount of |
|
|
|
|
| |||||||||||||||||
|
| Presented in the |
| Eligible Offsetting |
|
|
|
|
| |||||||||||||||||
September 30, 2017 |
| Consolidated |
| Recognized |
| Cash Collateral |
| Net Amount of |
| |||||||||||||||||
(Millions) |
| Balance Sheet |
| Derivative Liabilities |
| Received |
| Derivative Assets |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | | | Gross Amounts not Offset in the | | | |
| ||||||||||||||||||
|
| |
| Consolidated Balance Sheet that are Subject |
| | |
| ||||||||||||||||||
| | Gross Amount of | | to Master Netting Agreements | | | |
| ||||||||||||||||||
| | Derivative Assets | | Gross Amount of | | | | |
| |||||||||||||||||
| | Presented in the | | Eligible Offsetting | | Cash | | |
| |||||||||||||||||
| | Consolidated | | Recognized | | Collateral | | Net Amount of |
| |||||||||||||||||
September 30, 2020 (Millions) | | Balance Sheet | | Derivative Liabilities | | Received | | Derivative Assets |
| |||||||||||||||||
Derivatives subject to master netting agreements |
| $ | 77 |
| $ | 34 |
| $ | — |
| $ | 43 |
| | $ | 95 | | $ | 27 | | $ | — | | $ | 68 | |
Derivatives not subject to master netting agreements |
|
| — |
|
|
|
|
|
|
|
| — |
| |
| — | | | | | | | |
| — | |
Total |
| $ | 77 |
|
|
|
|
|
|
| $ | 43 |
| | $ | 95 | | | | | | | | $ | 68 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
December 31, 2016 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
(Millions) |
|
|
|
|
|
|
|
|
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
December 31, 2019 (Millions) | | | | | | | | | | |||||||||||||||||
Derivatives subject to master netting agreements |
| $ | 259 |
| $ | 39 |
| $ | — |
| $ | 220 |
| | $ | 142 | | $ | 14 | | $ | — | | $ | 128 | |
Derivatives not subject to master netting agreements |
|
| — |
|
|
|
|
|
|
|
| — |
| |
| — | | | | | | | |
| — | |
Total |
| $ | 259 |
|
|
|
|
|
|
| $ | 220 |
| | $ | 142 | | | | | | | | $ | 128 | |
Offsetting of Financial Liabilities under Master Netting Agreements with Derivative Counterparties
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
|
| Gross Amounts not Offset in the |
|
|
|
| ||||||||||||||||||
|
|
|
| Consolidated Balance Sheet that are Subject |
|
|
|
| ||||||||||||||||||
|
| Gross Amount of |
| to Master Netting Agreements |
|
|
|
| ||||||||||||||||||
|
| Derivative Liabilities |
| Gross Amount of |
|
|
|
|
| |||||||||||||||||
|
| Presented in the |
| Eligible Offsetting |
|
|
|
|
| |||||||||||||||||
September 30, 2017 |
| Consolidated |
| Recognized |
| Cash Collateral |
| Net Amount of |
| |||||||||||||||||
(Millions) |
| Balance Sheet |
| Derivative Assets |
| Pledged |
| Derivative Liabilities |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | | | Gross Amounts not Offset in the | | | |
| ||||||||||||||||||
|
| |
| Consolidated Balance Sheet that are Subject |
| | |
| ||||||||||||||||||
| | Gross Amount of | | to Master Netting Agreements | | | |
| ||||||||||||||||||
| | Derivative Liabilities | | Gross Amount of | | | | |
| |||||||||||||||||
| | Presented in the | | Eligible Offsetting | | Cash | | Net Amount of |
| |||||||||||||||||
| | Consolidated | | Recognized | | Collateral | | Derivative |
| |||||||||||||||||
September 30, 2020 (Millions) | | Balance Sheet | | Derivative Assets | | Pledged | | Liabilities |
| |||||||||||||||||
Derivatives subject to master netting agreements |
| $ | 182 |
| $ | 34 |
| $ | — |
| $ | 148 |
| | $ | 46 | | $ | 27 | | $ | — | | $ | 19 | |
Derivatives not subject to master netting agreements |
|
| — |
|
|
|
|
|
|
|
| — |
| |
| — | | | | | | | |
| — | |
Total |
| $ | 182 |
|
|
|
|
|
|
| $ | 148 |
| | $ | 46 | | | | | | | | $ | 19 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
December 31, 2016 |
|
|
|
|
|
|
|
|
| |||||||||||||||||
(Millions) |
|
|
|
|
|
|
|
|
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
December 31, 2019 (Millions) | | | | | | | | |
| |||||||||||||||||
Derivatives subject to master netting agreements |
| $ | 93 |
| $ | 39 |
| $ | — |
| $ | 54 |
| | $ | 20 | | $ | 14 | | $ | — | | $ | 6 | |
Derivatives not subject to master netting agreements |
|
| 2 |
|
|
|
|
|
|
|
| 2 |
| |
| — | | | | | | | |
| — | |
Total |
| $ | 95 |
|
|
|
|
|
|
| $ | 56 |
| | $ | 20 | | | | | | | | $ | 6 | |
33
Currency Effects
3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, decreased pre-tax income by approximately $34$15 million and $99$4 million for the three and nine months ended September 30, 2017,2020, respectively. These estimates include transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks and any impacts from swapping Venezuelan bolivars into U.S. dollars.risks.
33
NOTE 11.13. 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. UnderThe Company adopted ASU No. 2018-13, Changes to 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 participantsDisclosure Requirements for Fair Value Measurement, as of January 1, 2020. This ASU primarily amended the measurement date. The standard also establishesdisclosures around Level 3 investments, of which the Company had an immaterial amount for all periods presented. Refer to Note 1 for additional details.
In addition to the information above, refer to Note 15 in 3M’s 2019 Annual Report on Form 10-K for 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 independentqualitative discussion 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.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
For 3M, assets and liabilities that are measured at fair value on a recurring basis primarily relate to available-for-sale marketable securities and certain derivative instruments. Derivatives include cash flow hedges, interest rate swaps and net investment hedges. The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and liabilities. Separately, there were no material fair value measurements with respect to nonfinancial assets or liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurringnonrecurring basis, for the three and nine months ended September 30, 2017 and 2016.
3M uses various valuation techniques, which are primarily based upon the market and income approaches, with respect to financial assets and liabilities. Following is a description of the valuation methodologies used for the respective financial assetsby 3M, and liabilities measured at fair value.
Available-for-sale marketable securities — except certain U.S. municipal securities:
Marketable securities, except certain U.S. municipal securities, are valued utilizing multiple sources. A weighted average market price is used for these securities. Market prices are obtained for these securities from a variety of industry standard data providers, security master files from large financial institutions, and other third-party sources. These multiple prices are used as inputs into a distribution-curve-based algorithm to determine the daily fair value to be used. 3M classifies U.S. treasury securities as level 1, while all other marketable securities (excluding certain U.S. municipal securities) are classified as level 2. Marketable securities are discussed further in Note 7.
Available-for-sale marketable securities — certain U.S. municipal securities only:
In both 2016 and 2014, 3M obtained municipal bonds from the City of Nevada, Missouri, which represents 3M’s only U.S. municipal securities holding as of September 30, 2017 and December 31, 2016. Due to the nature of this security,categorization within the valuation method utilized will include the financial health of the City of Nevada, any recent municipal bond issuances by Nevada, and macroeconomic considerations related to the direction of interest rates and the health of the overall municipal bond market, and as such has been classified as a level 3 security.
34
Derivative instruments:
The Company’s derivative assets and liabilities within the scopeframework of ASC 815, Derivatives and Hedging, are required to be recorded at fair value. The Company’s derivatives that are recorded at fair value include foreign currency forward and option contracts, commodity price swaps, interest rate swaps, and net investment hedges where the hedging instrument is recorded at fair value. Net investment hedges that use foreign currency denominated debt to hedge 3M’s net investment are not impacted by the fair value measurement standard under ASC 820, as the debt used as the hedging instrument is marked to a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may impact fair value.820.
3M has determined that foreign currency forwards, commodity price swaps, currency swaps, foreign currency options, interest rate swaps and cross-currency swaps will be considered level 2 measurements. 3M uses inputs other than quoted prices that are observable for the asset. These inputs include foreign currency exchange rates, volatilities, and interest rates. Derivative positions are primarily valued using standard calculations or models that use, as their basis, readily observable market parameters. Industry standard data providers are 3M’s primary source for forward and spot rate information for both interest rates and currency rates, with resulting valuations periodically validated through third-party or counterparty quotes and a net present value stream of cash flows model.
The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
|
|
| Fair Value Measurements |
| ||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | | | | Fair Value Measurements |
| ||||||||||||||||||||
Description |
| Fair Value at |
| Using Inputs Considered as |
| | Fair Value at | | Using Inputs Considered as |
| ||||||||||||||||
(Millions) |
| September 30, 2017 |
| Level 1 |
| Level 2 |
| Level 3 |
|
| September 30, 2020 |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Corporate debt securities |
| $ | 10 |
| $ | — |
| $ | 10 |
| $ | — |
| | $ | 7 | | $ | — | | $ | 7 | | $ | — | |
Commercial paper |
|
| 446 |
|
| — |
|
| 446 |
|
| — |
| | | 233 | | | — | | | 233 | | | — | |
Certificates of deposit/time deposits |
|
| 84 |
|
| — |
|
| 84 |
|
| — |
| |
| 47 | |
| — | |
| 47 | |
| — | |
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Automobile loan related |
|
| 14 |
|
| — |
|
| 14 |
|
| — |
| |||||||||||||
Credit card related |
|
| 29 |
|
| — |
|
| 29 |
|
| — |
| |||||||||||||
U.S. treasury securities | |
| 150 | |
| 150 | |
| — | |
| — | | |||||||||||||
U.S. municipal securities |
|
| 20 |
|
| — |
|
| — |
|
| 20 |
| |
| 37 | |
| — | |
| — | |
| 37 | |
Investments | | | 5 | | | 5 | | | — | | | — | | |||||||||||||
Derivative instruments — assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Foreign currency forward/option contracts |
|
| 55 |
|
| — |
|
| 55 |
|
| — |
| |
| 82 | |
| — | |
| 82 | |
| — | |
Interest rate swap contracts |
|
| 22 |
|
| — |
|
| 22 |
|
| — |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Interest rate contracts | |
| 13 | |
| — | |
| 13 | |
| — | | |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Derivative instruments — liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Foreign currency forward/option contracts |
|
| 179 |
|
| — |
|
| 179 |
|
| — |
| |
| 46 | |
| — | |
| 46 | |
| — | |
Interest rate swap contracts |
|
| 3 |
|
| — |
|
| 3 |
|
| — |
| |||||||||||||
| | | | | | | | | | | | | |
| | | | | Fair Value Measurements |
| |||||||
Description | | Fair Value at | | Using Inputs Considered as |
| ||||||||
(Millions) |
| December 31, 2019 |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Assets: | | | | | | | | | | | | | |
Available-for-sale: | | | | | | | | | | | | | |
Marketable securities: | | | | | | | | | | | | | |
Commercial paper | | $ | 85 | | $ | — | | $ | 85 | | $ | — | |
Certificates of deposit/time deposits | |
| 10 | |
| — | |
| 10 | |
| — | |
U.S. municipal securities | |
| 46 | |
| — | |
| — | |
| 46 | |
Investments | | | 25 | | | 25 | | | — | | | — | |
Derivative instruments — assets: | | | | | | | | | | | | | |
Foreign currency forward/option contracts | |
| 125 | |
| — | |
| 125 | |
| — | |
Interest rate contracts | |
| 17 | |
| — | |
| 17 | |
| — | |
| | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | |
Derivative instruments — liabilities: | | | | | | | | | | | | | |
Foreign currency forward/option contracts | |
| 20 | |
| — | |
| 20 | |
| — | |
3534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements |
| |||||||
Description |
| Fair Value at |
| Using Inputs Considered as |
| ||||||||
(Millions) |
| December 31, 2016 |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
| $ | 10 |
| $ | — |
| $ | 10 |
| $ | — |
|
Commercial paper |
|
| 14 |
|
| — |
|
| 14 |
|
| — |
|
Certificates of deposit/time deposits |
|
| 197 |
|
| — |
|
| 197 |
|
| — |
|
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile loan related |
|
| 31 |
|
| — |
|
| 31 |
|
| — |
|
Credit card related |
|
| 18 |
|
| — |
|
| 18 |
|
| — |
|
Other |
|
| 7 |
|
| — |
|
| 7 |
|
| — |
|
U.S. municipal securities |
|
| 20 |
|
| — |
|
| — |
|
| 20 |
|
Derivative instruments — assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward/option contracts |
|
| 234 |
|
| — |
|
| 234 |
|
| — |
|
Interest rate swap contracts |
|
| 25 |
|
| — |
|
| 25 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments — liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward/option contracts |
|
| 94 |
|
| — |
|
| 94 |
|
| — |
|
Interest rate swap contracts |
|
| 1 |
|
| — |
|
| 1 |
|
| — |
|
The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level(level 3).
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three months ended |
| Nine months ended |
| |||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
|
| Three months ended |
| Nine months ended |
| |||||||||||||||||||||
Marketable securities — certain U.S. municipal securities only |
| September 30, |
| September 30, |
| | September 30, | | September 30, |
| ||||||||||||||||
(Millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| | 2020 |
| 2019 | | 2020 |
| 2019 |
| ||||||||
Beginning balance |
| $ | 20 |
| $ | 18 |
| $ | 20 |
| $ | 12 |
| | $ | 37 | | $ | 49 | | $ | 46 | | $ | 40 | |
Total gains or losses: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Included in earnings |
|
| — |
|
| — |
|
| — |
|
| — |
| |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
Included in other comprehensive income |
|
| — |
|
| — |
|
| — |
|
| — |
| |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
Purchases and issuances |
|
| — |
|
| — |
|
| — |
|
| 6 |
| |
| 0 | |
| 0 | |
| 10 | |
| 9 | |
Sales and settlements |
|
| — |
|
| — |
|
| — |
|
| — |
| |
| 0 | |
| 0 | |
| (19) | |
| 0 | |
Transfers in and/or out of level 3 |
|
| — |
|
| — |
|
| — |
|
| — |
| |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
Ending balance |
| $ | 20 |
| $ | 18 |
| $ | 20 |
| $ | 18 |
| | $ | 37 | | $ | 49 | | $ | 37 | | $ | 49 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Change in unrealized gains or losses for the period included in earnings for securities held at the end of the reporting period |
|
| — |
|
| — |
|
| — |
|
| — |
| |
| — | |
| — | |
| — | |
| — | |
In addition, the plan assets of 3M’s pension and postretirement benefit plans are measured at fair value on a recurring basis (at least annually). Refer to Note 1113 in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 20162019 Annual Report on Form 10-K).10-K.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:
Disclosures are required for certain assets and liabilities that are measured at fair value, including thosebut are recognized and disclosed at fair value on a nonrecurring basis in periods subsequent to initial recognition. For 3M, such measurements of fair value relate primarily to long-lived asset impairments. During the nine months ended September 30, 2017, the Company recognized approximately $40 million inindefinite-lived and long-lived asset impairments, goodwill impairments, and adjustment in carrying value of equity securities for which the measurement alternative of cost less impairment plus or minus observable price changes is used. 3M reflected an immaterial charge related to its Electronicsimpairment of certain indefinite-lived assets and Energy business segment, witha net charge of $22 million related to adjustment to the complete carrying amountvalue of such assets written off and included in operating income results.equity securities using the measurement alternative during the first quarter of 2020. There were no0 material long-lived asset impairments of assets or adjustments to equity securities using the measurement alternative for the three months ended September 30, 2017 and2020 in addition to the three and nine months ended September 30, 2016.2019.
36
Fair Value of Financial Instruments:
The Company’s financial instruments include cash and cash equivalents, marketable securities, held-to-maturity debt securities, accounts receivable, certain investments, accounts payable, borrowings, and derivative contracts. The fair values of cash equivalents, accounts receivable, held-to-maturity debt securities, accounts payable, and short-term borrowings and current portion of long-term debt approximated carrying values because of the short-term nature of these instruments. Available-for-sale marketable securities, in addition to certain derivative instruments, are recorded at fair values as indicated in the preceding disclosures. ForTo estimate fair values (classified as level 2) for its long-term debt, the Company utilized third-party quotes, to estimate fair values (classified as level 2).which are derived all or in part from model prices, external sources, market prices, or the third-party’s internal records. Information with respect to the carrying amounts and estimated fair values of these financial instruments follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| September 30, 2017 |
| December 31, 2016 |
| |||||||||||||||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | September 30, 2020 | | December 31, 2019 |
| |||||||||||||||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| |||||||||||||||||
(Millions) |
| Value |
| Value |
| Value |
| Value |
| | Value | | Value | | Value | | Value |
| ||||||||
Long-term debt, excluding current portion |
| $ | 10,828 |
| $ | 11,336 |
| $ | 10,678 |
| $ | 11,168 |
| | $ | 18,429 | | $ | 20,794 | | $ | 17,518 | | $ | 18,475 | |
The fair values reflected above consider the terms of the related debt absent the impacts of derivative and derivative/hedging activity. The carrying amount of long-term debt referenced above is impacted by certain fixed-to-floating interest rate swaps that are designated as fair value hedges and by the designation of certain fixed rate Eurobond securities issued by the Company as hedging instruments of the Company’s net investment in its European subsidiaries. ManyA number of 3M’s fixed-rate bonds were trading at a premium at September 30, 20172020 and December 31, 20162019 due to the lowlower interest rates and tighteningcompared to issuance levels.
35
NOTE 12.14. Commitments and Contingencies
Legal Proceedings:
The Company and some of its subsidiaries are involved in numerous claims and lawsuits, principally in the United States, and regulatory proceedings worldwide. These claims, lawsuits and proceedings include, variousbut are not limited to, products liability (involving products that the Company now or formerly manufactured and sold), intellectual property, commercial, antitrust, federal False Claims Act, securities, and commercial claimsstate and lawsuits, including those brought under the antitrust laws, andfederal environmental proceedings.laws. Unless otherwise stated, the Company is vigorously defending all such litigation.litigation and proceedings. From time to time, the Company also receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a cooperative, thorough and timely manner. These responses sometimes require time and effort and can result in considerable costs being incurred by the Company. Such subpoenas and requests can also lead to the assertion of claims or the commencement of administrative, civil or criminal legal proceedings against the Company and others, as well as to settlements. The outcomes of legal proceedings and regulatory matters are often difficult to predict. Any determination that the Company’s operations or activities are not, or were not, in compliance with applicable laws or regulations could result in the imposition of fines, civil or criminal penalties, and equitable remedies, including disgorgement, suspension or debarment or injunctive relief. Additional information about the Company’s process for disclosure and recording of liabilities and insurance receivables related to legal proceedings can be found in Note 1416 “Commitments and Contingencies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 as updated by the Company’s Current Report on Form 8-K dated May 4, 2017.2019.
The following sections first describe the significant legal proceedings in which the Company is involved, and then describe the liabilities and associated insurance receivables the Company has accrued relating to its significant legal proceedings.
Respirator Mask/Asbestos Litigation
As of September 30, 2017,2020, the Company is a named defendant, with multiple co-defendants, in numerous lawsuits in various courts that purport to represent approximately 2,3301,884 individual claimants, compared to approximately 2,6601,727 individual claimants with actions pending aton December 31, 2016.2019.
The vast majority of the lawsuits and claims resolved by and currently pending against the Company allege use of some of the Company’s mask and respirator products and seek damages from the Company and other defendants for alleged personal injury from workplace exposures to asbestos, silica, coal mine dust or other occupational dusts found in products manufactured by other defendants or generally in the workplace. A minority of the lawsuits and claims resolved by and currently pending against the Company generally allege personal injury from occupational exposure to asbestos from products previously manufactured by the Company, which are often unspecified, as well as products manufactured by other defendants, or occasionally at Company premises.
37
The Company’s current volume of new and pending matters is substantially lower than it experienced at the peak of filings in 2003. The Company expects that filing of claims by unimpaired claimants in the future will continue to be at much lower levels than in the past. Accordingly, the number of claims alleging more serious injuries, including mesothelioma, and other malignancies, and black lung disease, will represent a greater percentage of total claims than in the past. TheOver the past twenty plus years, the Company has prevailed in all twelve cases taken to trial, including ten14 of the eleven15 cases tried to verdict (such trials occurred in 1999, 2000, 2001, 2003, 2004, 2007, 2015, and the cases tried in 2016 and 2017–described below), and an appellate reversal in 2005 of the 2001 jury verdict adverse to the Company. The remaining case, tried in 2009, was dismissed by the court at the close of plaintiff’s evidence, based on the court’s legal finding that the plaintiff had not presented sufficient evidence to support a jury verdict.(including the lawsuits in 2018 described below). In August 2016,2018, 3M received a unanimous defensejury verdict fromin its favor in 2 lawsuits – 1 in California state court in February and the other in Massachusetts state court in December – both involving allegations that 3M respirators were defective and failed to protect the plaintiffs against asbestos fibers. In April 2018, a jury in state court in Kentucky infound 3M’s first respirator trial involving8710 respirators failed to protect 2 coal miners from coal mine dust. The estatedust and awarded compensatory damages and punitive damages. In August 2018, the trial court entered judgment and the Company appealed. During March and April 2019, the Company agreed in principle to settle a substantial majority of the plaintiff alleged that the 3M 8710 respirator is defective and caused his death because it did not protect him from harmful coal mine dust. Thedust lawsuits in Kentucky and West Virginia for $340 million, including the jury rejected plaintiff’s claim and returned a verdict finding no liability against 3M. The verdict is final as the plaintiff did not file an appeal. In September 2017, 3M received a unanimous verdict in its favor from a juryApril 2018 in state courtthe Kentucky case mentioned above. That settlement was completed in Kentucky in 3M’s second respirator trial involving coal mine dust. The jury ultimately determined that2019, and the plaintiff’s claims were barred by the statute of limitations. The plaintiff filed a motion for a new trial.appeal has been dismissed.
The Company has demonstrated in these past trial proceedings that its respiratory protection products are effective as claimed when used in the intended manner and in the intended circumstances. Consequently, the Company believes that claimants are unable to establish that their medical conditions, even if significant, are attributable to the Company’s respiratory protection products. Nonetheless, the Company’s litigation experience indicates that claims of persons with malignant conditionsalleging more serious injuries, including mesothelioma, other malignancies, and black lung disease, are costlier to resolve than the claims of unimpaired persons, and it
36
therefore believes the average cost of resolving pending and future claims on a per-claim basis will continue to be higher than it experienced in prior periods when the vast majority of claims were asserted by medically unimpaired claimants.
As previously reported, the State of West Virginia, through its Attorney General, filed a complaint in 2003 against the Company and two other manufacturers of respiratory protection products in the Circuit Court of Lincoln County, West Virginia, and amended its complaint in 2005. The amended complaint seeks substantial, but unspecified, compensatory damages primarily for reimbursement of the costs allegedly incurred by the State for worker’s compensation and healthcare benefits provided to all workers with occupational pneumoconiosis and unspecified punitive damages. The case was inactive fromIn October 2019, the fourth quarter of 2007 until late 2013, other than a case management conference in March 2011.court granted the State’s motion to sever its unfair trade practices claim. In November 2013,January 2020, the Statemanufacturers filed a motion to bifurcatepetition with the lawsuit into separate liability and damages proceedings. AtWest Virginia Supreme Court, challenging the hearing on the motion, the court declined to bifurcate the lawsuit. Notrial court’s rulings; that petition was heard in September 2020. NaN liability has been recorded for this matter because the Company believes that liability is not probable and estimable at this time. In addition, the Company is not able to estimate a possible loss or range of loss given the lack of any meaningful discovery responses by the State of West Virginia, the otherwise minimal activity in this case, and the fact that the complaint assertsassertions of claims against two other manufacturers where a defendant’s share of liability may turn on the law of joint and several liability and by the amount of fault, if any, a jury mightmay allocate to each defendant if the case iswere ultimately tried.
Respirator Mask/Asbestos Liabilities and Insurance Receivables:Receivables
The Company annuallyregularly conducts a comprehensive legal review of its respirator mask/asbestos liabilities in connection with finalizing and reporting its annual results of operations, unless significant changes in trends or new developments warrant an earlier review.liabilities. The Company reviews recent and historical claims data, including without limitation, (i) the number of pending claims filed against the Company, (ii) the nature and mix of those claims (i.e., the proportion of claims asserting usage of the Company’s mask or respirator products and alleging exposure to each of asbestos, silica, coal or other occupational dusts, and claims pleading use of asbestos-containing products allegedly manufactured by the Company), (iii) the costs to defend and resolve pending claims, and (iv) trends in filing rates and in costs to defend and resolve claims, (collectively, the “Claims Data”). As part of its comprehensive legal review, the Company regularly provides the Claims Data to a third party with expertise in determining the impact of Claims Data on future filing trends and costs. The third party assists the Company in estimating the costs to defend and resolve pending and future claims. The Company uses these estimates to develop its best estimate of probable liability.
Developments may occur that could affect the Company’s estimate of its liabilities. These developments include, but are not limited to, significant changes in (i) the key assumptions underlying the Company’s accrual, including, the number
38
of future claims, the nature and mix of those claims, the average cost of defending and resolving claims, and in maintaining trial readiness (ii) trial and appellate outcomes, (iii) the law and procedure applicable to these claims, and (iv) the financial viability of other co-defendants and insurers.
As a result of its review of its respirator mask/asbestos liabilities, of pending and expected lawsuits and of the cost of resolving claims of persons who claim more serious injuries, including mesothelioma, other malignancies, and black lung disease, the Company increased its accruals in the first nine months of 2020 for respirator mask/asbestos liabilities by $23 million. In the first nine months of 2017,2020, the Company made payments for legal feesdefense costs and settlements of $44$45 million related to the respirator mask/asbestos litigation, $10litigation. During the first quarter of 2019, the Company recorded a pre-tax charge of $313 million of which occurredin conjunction with an increase in the third quarteraccrual as a result of 2017.the March and April 2019 settlements-in-principle of the coal mine dust lawsuits mentioned above and the Company’s assessment of other current and expected coal mine dust lawsuits (including the costs to resolve all current and expected coal mine dust lawsuits in Kentucky and West Virginia). As of September 30, 2017,2020, the Company had an accrual for respirator mask/asbestos liabilities (excluding Aearo accruals) of $551$586 million. This accrual represents the Company’s best estimate of probable loss and reflects an estimation period for future claims that may be filed against the Company approaching the year 2050. The Company cannot estimate the amount or upper end of the range of amounts by which the liability may exceed the accrual the Company has established because of the (i) inherent difficulty in projecting the number of claims that have not yet been asserted or the time period in which future claims may be asserted, (ii) the complaints nearly always assert claims against multiple defendants where the damages alleged are typically not attributed to individual defendants so that a defendant’s share of liability may turn on the law of joint and several liability, which can vary by state, (iii) the multiple factors described above that the Company considers in estimating its liabilities, and (iv) the several possible developments described above that may occur that could affect the Company’s estimate of liabilities.
As of September 30, 2017,2020, the Company’s receivable for insurance recoveries related to the respirator mask/asbestos litigation was $4 million. The Company is seekingcontinues to seek coverage under the policies of certain insolvent and other insurers. Once those claims for coverage are resolved, the Company will have collected substantially all of its remaining insurance coverage for respirator mask/asbestos claims.
37
Respirator Mask/Asbestos Litigation — Aearo Technologies
On April 1, 2008, a subsidiary of the Company purchasedacquired the stock of Aearo Holding Corp., the parent of Aearo Technologies (“Aearo”). Aearo manufactured and sold various products, including personal protection equipment, such as eye, ear, head, face, fall and certain respiratory protection products.
As of September 30, 2017,2020, Aearo and/or other companies that previously owned and operated Aearo’s respirator business (American Optical Corporation, Warner-Lambert LLC, AO Corp. and Cabot Corporation (“Cabot”)) are named defendants, with multiple co-defendants, including the Company, in numerous lawsuits in various courts in which plaintiffs allege use of mask and respirator products and seek damages from Aearo and other defendants for alleged personal injury from workplace exposures to asbestos, silica-related, coal mine dust, or other occupational dusts found in products manufactured by other defendants or generally in the workplace.
As of September 30, 2017,2020, the Company, through its Aearo subsidiary, had accruals of $18$20 million for product liabilities and defense costs related to current and future Aearo-related asbestos and silica-related claims. This accrual represents the Company’s best estimate of Aearo��s probable loss and reflects an estimation period for future claims that may be filed against Aearo approaching the year 2050. The accrual was reduced by $37 million during the second quarter of 2020 after paying Aearo’s share of certain settlements under the informal arrangement described below. The accrual reflects the Company’s assessment of pending and expected lawsuits, its review of its respirator mask/asbestos liabilities, and the cost of resolving claims of persons who claim more serious injuries. Responsibility for legal costs, as well as for settlements and judgments, is currently shared in an informal arrangement among Aearo, Cabot, American Optical Corporation and a subsidiary of Warner Lambert and their respective insurers (the “Payor Group”). Liability is allocated among the parties based on the number of years each company sold respiratory products under the “AO Safety” brand and/or owned the AO Safety Division of American Optical Corporation and the alleged years of exposure of the individual plaintiff.
Aearo’s share of the contingent liability is further limited by an agreement entered into between Aearo and Cabot on July 11, 1995. This agreement provides that, so long as Aearo pays to Cabot a quarterly fee of $100,000, Cabot will retain responsibility and liability for, and indemnify Aearo against, any product liability claims involving exposure to asbestos, silica, or silica products for respirators sold prior to July 11, 1995. Because of the difficulty in determining how long a particular respirator remains in the stream of commerce after being sold, Aearo and Cabot have applied the agreement to claims arising out of the alleged use of respirators involving exposure to asbestos, silica or silica products prior to January 1, 1997. With these arrangements in place, Aearo’s potential liability is limited to exposures alleged to have arisen from the use of respirators involving exposure to asbestos, silica, or silica products on or after January 1, 1997. To date, Aearo has elected to pay the quarterly fee. Aearo could potentially be exposed to additional claims for some part of the pre-July 11, 1995 period covered by its agreement with Cabot if Aearo elects to discontinue its participation in this arrangement, or if Cabot is no longer able to meet its obligations in these matters.
39
In March 2012, Cabot CSC Corporation and Cabot Corporation filed a lawsuit against Aearo in the Superior Court of Suffolk County, Massachusetts seeking declaratory relief as to the scope of Cabot’s indemnity obligations under the July 11, 1995 agreement, including whether Cabot has retained liability for coal workers’ pneumoconiosis claims, and seeking damages for breach of contract. In 2014, the court granted Aearo’s motion for summary judgment on two claims, but declined to rule on two issues: the specific liability for certain known coal mine dust lawsuits; and Cabot’s claim for allocation of liability between injuries allegedly caused by exposure to coal mine dust and injuries allegedly caused by exposure to silica dust. Following additional discovery, the parties filed new motions for summary judgment. In February 2016, the court ruled in favor of Aearo on these two remaining issues, and ordered that Cabot, and not Aearo, is solely responsible for all liability for the coal mine dust lawsuits under the 1995 agreement. In May 2017, the Massachusetts Court of Appeals affirmed the trial court order in favor of Aearo.
Developments may occur that could affect the estimate of Aearo’s liabilities. These developments include, but are not limited to: (i) significant changes in the number of future claims, (ii) significant changes in the average cost of resolving claims, (iii) significant changes in the legal costs of defending these claims, (iv) significant changes in the mix and nature of claims received, (v) trial and appellate outcomes, (vi) significant changes in the law and procedure applicable to these claims, (vii) significant changes in the liability allocation among the co-defendants, (viii) the financial viability of members of the Payor Group including exhaustion of available insurance coverage limits, and/or (ix) a determination that the interpretation of the contractual obligations on which Aearo has estimated its share of liability is inaccurate. The Company cannot determine the impact of these potential developments on its current estimate of Aearo’s share of liability for these existing and future claims. If any of the developments described above were to occur, the actual amount of these liabilities for existing and future claims could be significantly larger than the amount accrued.
Because of the inherent difficulty in projecting the number of claims that have not yet been asserted, the complexity of allocating responsibility for future claims among the Payor Group, and the several possible developments that may occur that could affect the estimate of Aearo’s liabilities, the Company cannot estimate the amount or range of amounts by which Aearo’s liability may exceed the accrual the Company has established.
Environmental Matters and Litigation
The Company’s operations are subject to environmental laws and regulations including those pertaining to air emissions, wastewater discharges, toxic substances, and the handling and disposal of solid and hazardous wastes enforceable by national, state, and local
38
authorities around the world, and private parties in the United States and abroad. These laws and regulations provide, under certain circumstances, a basis for the remediation of contamination, for capital investment in pollution control equipment, for restoration of or compensation for damages to natural resources, and for personal injury and property damage claims. The Company has incurred, and will continue to incur, costs and capital expenditures in complying with these laws and regulations, defending personal injury and property damage claims, and modifying its business operations in light of its environmental responsibilities. In its effort to satisfy its environmental responsibilities and comply with environmental laws and regulations, the Company has established, and periodically updates, policies relating to environmental standards of performance for its operations worldwide.
Under certain environmental laws, including the United States Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and similar state laws, the Company may be jointly and severally liable, typically with other companies, for the costs of remediation of environmental contamination at current or former facilities and at off-site locations. The Company has identified numerous locations, most of which are in the United States, at which it may have some liability. Please refer to the section entitled “Environmental Liabilities and Insurance Receivables” that follows for information on the amount of the accrual.accrual for such liabilities.
Environmental Matters
As previously reported, the Company has been voluntarily cooperating with ongoing reviews by local, state, federal (primarily the U.S. Environmental Protection Agency (EPA)), and international agencies of possible environmental and health effects of various perfluorinated compounds, including perfluorooctanyl compounds such as perfluorooctanoate (“PFOA”)(PFOA), perfluorooctane sulfonate (“PFOS”)(PFOS), perfluorohexane sulfonate (PFHxS), or similar compounds (“PFCs”)other per- and polyfluoroalkyl substances (collectively PFAS). As a result of its phase-out decision in May 2000, the Company no longer manufactures perfluorooctanylcertain PFAS compounds including PFOA, PFOS, PFHxS, and their pre-cursor compounds. The companyCompany ceased manufacturing and
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using the vast majority of these compounds within approximately two years of the phase-out announcement and ceased all manufacturing and the last significant use of this chemistry by the end of 2008. The Company continues to manufacture a variety of shorter chain length PFAS compounds, including, but not limited to, pre-cursor compounds to perfluorobutane sulfonate (PFBS). These compounds are used as input materials to a variety of products, including engineered fluorinated fluids, fluoropolymers and fluorelastomers, as well as surfactants, additives, and coatings. Through its ongoing life cycle management and its raw material composition identification processes associated with the Company’s policies covering the use of all persistent and bio-accumulative materials, the Company continues to review, control or eliminate the presence of certain PFCsPFAS in purchased materials or as byproducts in some of 3M’s current fluorochemical manufacturing processes, products, and waste streams.
Regulatory activities concerning PFOA and/or PFOSPFAS continue in the United States, Europe and elsewhere, and before certain international bodies. These activities include gathering of exposure and use information, risk assessment, and consideration of regulatory approaches. As the database of studies of both PFOA and PFOS has expanded, the EPA has developed human health effects documents summarizing the available data from these studies. In February 2014, the EPA initiated external peer review of its draft human health effects documents for PFOA and PFOS. The peer review panel met in August 2014. In May 2016, the EPA announced lifetime health advisory levels for PFOA and PFOS at 70 parts per trillion (ppt) (superseding the provisional levels established by the EPA in 2009 of 400 ppt for PFOA and 200 ppt for PFOS). Where PFOA and PFOS are found together, EPA recommends that the concentrations be added together, and the lifetime health advisory for PFOA and PFOS combined is also 70 ppt. Lifetime health advisories, while not enforceable, serve as guidancewhich are non-enforceable and are benchmarks for determining ifnon-regulatory, provide information about concentrations of chemicals in tapdrinking water from public utilitiescontaminants at which adverse health effects are safe for public consumption. In an effortnot expected to occur over the specified exposure duration. To collect exposure information under the Safe Drinking Water Act, the EPA published on May 2, 2012 a list of unregulated substances, including six PFCs,6 PFAS chemicals, required to be monitored during the period 2013-2015 by public water system suppliers to determine the extent of their occurrence. Through January 2017, the EPA reported results for 4,920 public water supplies nationwide. Based on the 2016 lifetime health advisory, 13 public water supplies exceed the level for PFOA and 46 exceed the level for PFOS (unchanged from the July 2016 EPA summary). A technical advisory issued by EPA in September 2016 on laboratory analysis of drinking water samples stated that 65 public water supplies had exceeded the combined level for PFOA and PFOS. These results are based on one1 or more samples collected during the period 2012-2015 and do not necessarily reflect current conditions of these public water supplies. EPA reporting does not identify the sources of the PFOA and PFOS in the public water supplies.
The Company is continuing to make progress in its work, under the supervision of state regulators, to address itsremediate historic disposal of PFC-containingPFAS-containing waste associated with manufacturing operations at theits Decatur, Alabama,Alabama; Cottage Grove, Minnesota,Minnesota; and Cordova, Illinois plants.
As previously reported, the Company entered into a voluntary remedial action agreement with the Alabama Department of Environmental Management (ADEM) to addressremediate the presence of PFCsPFAS in the soil and groundwater at the Company’s
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manufacturing facility in Decatur, Alabama. Pursuant to a permit issued by ADEM, for approximately twenty years,Alabama associated with the Company incorporated itshistoric (1978-1998) incorporation of wastewater treatment plant sludge containing PFCs in fields at its Decatur facility. After a reviewsludge. With ADEM’s agreement, 3M substantially completed installation of the available options to address the presence of PFCs in the soil, ADEM agreed that the preferred remediation option is to use a multilayer cap overon the former sludge incorporation areas onareas. Further remediation activities, including certain on-site and off-site investigations and studies, will be conducted in accordance with the manufacturing site with subsequent groundwater migration controls and treatment. Implementation of that plan continues and is expected to be completedJuly 2020 Interim Consent Order described below in 2018.the “Other PFAS-related Matters” section.
The Company continues to work with the Minnesota Pollution Control Agency (MPCA) pursuant to the terms of the previously disclosed May 2007 Settlement Agreement and Consent Order to address the presence of certain PFCsPFAS in the soil and groundwater at former disposal sites in Washington County, Minnesota (Oakdale and Woodbury) and at the Company’s manufacturing facility at Cottage Grove, Minnesota. Under this agreement, the Company’s principal obligations include (i) evaluating releases of certain PFCsPFAS from these sites and proposing response actions; (ii) providing treatment or alternative drinking water upon identifying any level exceeding a Health Based Value (“HBV”)(HBV) or Health Risk Limit (“HRL”)(HRL) (i.e., the amount of a chemical in drinking water determined by the Minnesota Department of Health (MDH) to be safe for human consumption over a lifetime) for certain PFCsPFAS for which a HBV and/or HRL exists as a result of contamination from these sites; (iii) remediating identified sources of other PFCsPFAS at these sites that are not controlled by actions to remediate PFOA and PFOS; and (iv) sharing information with the MPCA about certain perfluorinated compounds. During 2008, the MPCA issued formal decisions adopting remedial options for the former disposal sites in Washington County, Minnesota (Oakdale and Woodbury). In August 2009, the MPCA issued a formal decision adopting remedial options for the Company’s Cottage Grove manufacturing facility. During the spring and summer of 2010, 3M began implementing the agreed upon remedial options at the Cottage Grove and Woodbury sites.
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3M commenced the remedial option at the Oakdale site in late 2010. At each location the remedial options were recommended by the Company and approved by the MPCA. Remediation work has been completed at the Oakdale and Woodbury sites, and they are in an operational maintenance mode. Remediation will continuework has been substantially completed at the Cottage Grove site, during 2017.with operational and maintenance activities ongoing.
In August 2014, the Illinois EPA approved a request by the Company to establish a groundwater management zone at its manufacturing facility in Cordova, Illinois, which includes ongoing pumping of impacted site groundwater, groundwater monitoring and routine reporting of results.
In May 2017, the MDH issued new HBVs for PFOSPFOA and PFOA.PFOS. The new HBVs are 35 ppt for PFOA and 27 ppt for PFOS. In connection with its announcement the MDH stated that “Drinking water with PFOA and PFOS, even at the levels above the updated values, does not represent an immediate health risk. These values are designed to reduce long-term health risks across the population and are based on multiple safety factors to protect the most vulnerable citizens, which makes them overprotective for most of the residents in our state.” In December 2017, the MDH issued a new HBV for perfluorobutane sulfonate (PFBS) of 2 parts per billion (ppb). In February 2018, the MDH published reports finding no unusual rates of certain cancers or adverse birth outcomes (low birth rates or premature births) among residents of Washington and Dakota Counties in Minnesota. In April 2019, the MDH issued a new HBV for PFOS of 15 ppt and a new HBV for PFHxS of 47 ppt.
In May 2018, the EPA announced a four-step PFAS action plan, which includes evaluating the need to set Safe Drinking Water Act maximum contaminant levels (MCLs) for PFOA and PFOS and beginning the steps necessary to designate PFOA and PFOS as “hazardous substances” under CERCLA. In November 2018, the EPA asked for public comment on draft toxicity assessments for 2 PFAS compounds, including PFBS. In February 2019, the EPA issued a PFAS Action Plan that outlines short- and long-term actions the EPA is taking to address PFAS – actions that include developing a national drinking water determination for PFOA and PFOS, strengthening enforcement authorities and evaluating cleanup approaches, nationwide drinking water monitoring for PFAS, expanding scientific knowledge for understanding and managing risk from PFAS, and developing consistent risk communication tools for communicating with other agencies and the public. With respect to groundwater contaminated with PFOA and PFOS, the EPA issued interim recommendations in December 2019, providing guidance for screening levels and preliminary remediation goals for groundwater that is a current or potential drinking water source, to inform final clean-up levels of contaminated sites. In February 2020, the EPA provided notice and requested public comment on certain preliminary determinations to regulate PFOA and PFOS under the Safe Drinking Water Act (SDWA). In June 2020, 3M submitted comments on EPA’s preliminary determinations to regulate PFOA and PFOS under the SDWA.
EPA announced in its Spring 2020 Regulatory Agenda, released in June 2020, that it intended to publish a notice of proposed rulemaking to designate PFOA and PFOS as hazardous substances under CERCLA in August 2020. EPA has not published this notice of proposed rulemaking.
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The U.S.Agency for Toxic Substances and Disease Registry (ATSDR) within the Department of Health and Human Services released a draft Toxicological Profile for PFAS for public review and comment in June 2018. In the draft report, ATSDR proposed draft minimal risk levels (MRLs) for PFOS, PFOA and several other PFAS. An MRL is an estimate of the daily human exposure to a hazardous substance that is likely to be without appreciable risk of adverse non-cancer health effects over a specified duration of exposure. MRLs are not intended to define cleanup or action levels for ATSDR or other agencies. In August 2018, 3M submitted comments on the ATSDR proposal, noting that there are major shortcomings with the current draft, especially with the MRLs, and that the ATSDR’s profile must reflect the best science and full weight of evidence known about these chemicals.
Several state legislatures and state agencies have been evaluating or have taken actions related to cleanup standards, groundwater values or drinking water values for PFOS, PFOA, and other PFAS, and 3M has submitted various responsive comments. In September 2019, 3M and several other parties filed a lawsuit in New Hampshire state court to enjoin PFAS regulations in New Hampshire. In November 2019, the court issued a preliminary injunction preventing the regulations from being enforced. In April 2020, the New Hampshire Supreme Court agreed to review several issues related to the preliminary injunctive order. In July 2020, the governor signed a bill passed by the New Hampshire legislature setting the same drinking water standards that had been enjoined by the court.
Vermont finalized drinking water standards for a combination of PFOA, PFOS and 3 other PFAS in March 2020. New Jersey finalized drinking water standards and designated PFOA and PFOS as hazardous substances in June 2020. New York established drinking water standards for PFOA and PFOS in July 2020. Michigan implemented final drinking water standards for certain PFAS, including PFOS and PFOA, in August 2020. Massachusetts published final regulations establishing a drinking water standard relating to 6 combined PFAS in October 2020. Some other states have also been evaluating or have taken actions relating to PFOA, PFOS and other PFAS in products such as food packaging, carpets and other products.
In October 2020, 3M and several other parties filed notices of appeal in the appellate division of the Superior Court of New Jersey to challenge the validity of the New Jersey PFOS and PFOA regulations.
The Company cannot predict what additional regulatory actions arising from the foregoing or other proceedings and activities, if any, may be taken regarding such compounds or the consequences of any such actions.
Environmental Litigation Related to Historical PFAS Manufacturing Operations in Alabama
As previously reported, a former employee filed a purportedputative class action lawsuit in 2002against 3M, BFI Waste Management Systems of Alabama, and others in the Circuit Court of Morgan County, Alabama (the St. John“St. John” case), seeking unstated damages and alleging that the plaintiffs suffered fear, increased risk, subclinical injuries, and property damage from exposure to certain perfluorochemicals at or near the Company’s Decatur, Alabama, manufacturing facility. The parties have agreed to continue to stay the St. John case through December 2020, pending ongoing mediation between the parties involved in this case and another case discussed below. NaN additional putative class actions filed in the same court in 2005 granted the Company’s motion to dismiss the named plaintiff’s personal injury-related claims on the basis that such claims are barred by the exclusivity provisions of the state’s Workers Compensation Act. The plaintiffs’ counsel filed an amended complaint in November 2006, limiting the case to property damage claims on behalf of a purported class ofcertain residents and property owners in the vicinity of the Decatur plant. In June 2015, the plaintiffs filed an amended complaint adding additional defendants, including BFI Waste Management Systems of Alabama, LLC; BFI Waste Management of North America, LLC; the City of Decatur, Alabama; Morgan County, Alabama; Municipal Utilities Board of Decatur; and Morgan County, Alabama, d/b/a Decatur Utilities.
In 2005, the judge in a second purported class action lawsuit filed by three residents of Morgan County, Alabama,plant seeking unstated compensatory and punitive damages involving alleged damage to their property from emissions of certain perfluorochemical compounds from the Company’s Decatur, Alabama, manufacturing facility that formerly manufactured those compoundsrelief on similar grounds (the Chandler case) grantedcase and the Company’s motion to abate theStover case, effectively putting the case on holdrespectively) are stayed pending the resolution of class certification issues in the St. John case. Despite the stay, plaintiffs filed an amended complaint seeking damages for alleged personal injuries and property damage on behalf of the named plaintiffs and the members of a purported class. No further action in the case is expected unless and until the stay is lifted.
In February 2009, a resident of Franklin County, Alabama, filed a purported class action lawsuit in the Circuit Court of Franklin County (the Stover case) seeking compensatory damages and injunctive relief based on the application by the Decatur utility’s wastewater treatment plant of wastewater treatment sludge to farmland and grasslands in the state that allegedly contain PFOA, PFOS and other perfluorochemicals. The named plaintiff seeks to represent a class of all persons within the State of Alabama who have had PFOA, PFOS, and other perfluorochemicals released or deposited on their property. In March 2010, the Alabama Supreme Court ordered the case transferred from Franklin County to Morgan County. In May 2010, consistent with its handling of the other matters, the Morgan County Circuit Court abated this case, putting it on hold pending the resolution of the class certification issues in the St. John case.
In October 2015, West Morgan-East Lawrence Water & Sewer Authority (Water Authority) filed an individual complaint against 3M Company, Dyneon, L.L.C, and Daikin America, Inc., in the U.S. District Court for the Northern District of Alabama. The complaint also includes representative plaintiffs who brought the complaint on behalf of themselves, and a class of all owners and possessors of property who use water provided by the Water Authority and five
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5 local water works to which the Water Authority supplies water (collectively, the “Water Utilities”). The complaint seeks compensatory and punitive damages and injunctive relief based on allegations that the defendants’ chemicals, including PFOA and PFOS from their manufacturing processes in Decatur, have contaminated the water in the Tennessee River at the water intake, and that the chemicals cannot be removed by the water treatment processes utilized by the Water Authority. In September 2016,April 2019, 3M and the court granted 3M’s motionWater Authority settled the lawsuit for $35 million, which will fund a new water filtration system, with 3M indemnifying the Water Authority from liability resulting from the resolution of the currently pending and future lawsuits against the Water Authority alleging liability or damages related to dismiss plaintiffs’ trespass3M PFAS. The putative class claims with prejudice, negligence claims for personal injuries,brought by the representative plaintiffs who were supplied drinking water by the Water Authority (the “Lindsey” case) remain. The parties are in active discussions regarding a negotiated resolution, and private nuisance claims, and denied the motion to dismiss the plaintiffs’ negligence claims for property damage, public nuisance, abatement of nuisance, battery and wantonness.case is currently stayed.
In June 2016, the Tennessee Riverkeeper, Inc. (Riverkeeper), a non-profit corporation, filed a lawsuit in the U.S. District Court for the Northern District of Alabama against 3M; BFI Waste Systems of Alabama; the City of Decatur, Alabama; and the Municipal Utilities Board of Decatur, Morgan County, Alabama. The complaint alleges that the defendants violated the Resource Conservation and
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Recovery Act in connection with the disposal of certain PFCsPFAS through their ownership and operation of their respective sites. The complaint further alleges such practices may present an imminent and substantial endangerment to health and/or the environment and that Riverkeeper has suffered and will continue to suffer irreparable harm caused by defendants’ failure to abate the endangerment unless the court grants the requested relief, including declaratory and injunctive relief. The Company believes thatThis case has been stayed through December 2020, pending ongoing mediation between the complaint lacks merit.parties in conjunction with the St. John case.
In JulyAugust 2016, a group of over 200 plaintiffs filed a putative class action against West Morgan-East Lawrence Water and Sewer Authority (Water Authority), 3M, Dyneon, Daikin, BFI, and the City of Lake Elmo filed a lawsuitDecatur in state court in Lawrence County, Alabama (the “Billings” case). Plaintiffs are residents of Lawrence, Morgan and other counties who are or have been customers of the U.S. District Court forWater Authority. They contend defendants have released PFAS that contaminate the District of Minnesota against 3M alleging that the City suffered damages fromTennessee River and, in turn, their drinking water, supplies contaminated with PFCs, including costscausing damage to construct alternative sources of drinking water. Trial is scheduled to begin in January 2019.
In September 2016, the Water Workstheir health and Sewer Board of the City of Gadsden, Alabama filed a lawsuit in the Circuit Court of Etowah County Alabama against 3M and various carpet manufacturers. The complaint alleges that PFCs from the defendants’ facilities contaminated the Coosa River as its raw water source for drinking water and seeks unstated damages for the installation and operation of a filtration system, expenses to monitor PFC levels, and lost profits and sales.
In November 2016, the Town of Barnstable, Massachusetts filed an individual action in the U.S. District Court for the District of Massachusetts seeking unstated compensatory and punitive damages and other relief against 3M and other suppliers of AFFF for alleged contamination of the aquifer supplying drinking water to the Hyannis water system. The town seeks to recover costs associated with the investigation, treatment, remediation, and monitoring of drinking water supplies allegedly contaminated with certain PFCs used in AFFF.properties. In January 2017, the County of Barnstable, Massachusetts, filed an individual actioncourt in the U.S. District Court for the District of Massachusetts seeking unstated compensatory and punitive damages and other relief (including indemnification and contribution in connection with claims asserted against the County by the Town of Barnstable) against 3M and other suppliers of AFFF for alleged contaminationSt. John case, discussed above, stayed this litigation pending resolution of the aquifer supplying drinking water to the Hyannis water system.St. John case.
In January 2017, several hundred plaintiffs sued 3M, its subsidiary Dyneon and Daikin AmericanAmerica in Lawrence and Morgan Counties, Alabama.Alabama (the “Owens” case). The plaintiffs are owners of property, residents, and holders of property interests who receive their water from the West Morgan-East Lawrence Water and Sewer Authority (Authority)(Water Authority). They assert common law claims for negligence, nuisance, trespass, wantonness and battery, and they seek injunctive relief and punitive damages. The plaintiffs contend that the defendants own and operate manufacturing and disposal facilities in Decatur that have released and continue to release PFOA, PFOS and related chemicals into the groundwater and surface water of their sites, resulting in discharge into the Tennessee River. The plaintiffs also contend that the defendants have discharged into Bakers Creek and the Decatur Utilities Dry Creek Wastewater Treatment Plant, which, in turn, discharges wastewater containing these chemicals into the Tennessee River. The plaintiffs contend that, as a result of the alleged discharges, the water supplied by the Water Authority to the plaintiffs was, and is, contaminated with PFOA, PFOS and related chemicals at a level dangerous to humans. The court denied a motion by co-defendant Daikin to stay this case pending resolution of the St. John case, and the case is progressing through discovery.
In MayNovember 2017, a putative class action (the “King” case) was filed against 3M, Dyneon, Daikin America and the West Morgan-East Lawrence Water and Sewer Authority (Water Authority) in the U.S. District Court for the Northern District of Alabama. The plaintiffs are residents of Lawrence and Morgan County, Alabama who receive their water from the Water Authority and seek injunctive relief, attorneys’ fees, compensatory and punitive damages for their alleged personal injuries. The plaintiffs contend that the defendants own and operate manufacturing and disposal facilities in Decatur, Alabama that have released and continue to release PFOA, PFOS and related chemicals into the groundwater and surface water of their sites, resulting in discharges into the Tennessee River. The plaintiffs contend that, as a result of the alleged discharges, the water supplied by the Water Authority to the plaintiffs was, and is, contaminated with PFOA, PFOS and related chemicals at a level dangerous to humans. In November 2019, the King plaintiffs amended their complaint to withdraw all class allegations, dismiss the Water Authority as a defendant and add 24 new individual plaintiffs (for a total of 59 plaintiffs). Discovery in this case is proceeding.
In July 2019, 3M announced that it had initiated an investigation into the possible presence of PFAS in 3 closed municipal landfills in Decatur that accepted waste from 3M’s Decatur plant and other companies in the 1960s through the 1980s. 3M is working with local and state entities as it conducts its investigation and will report the results and recommended remedial action, if any, to those entities and the public. 3M is also defending or has received notice of potential lawsuits in state and federal court brought by individual property owners who claim damages related to historical PFAS disposal at former area landfills near their properties. 3M has resolved for an immaterial amount some of the claims brought by property owners.
In September 2020, the City of Guin Water Works and Sewer Board (Guin WWSB) brought a lawsuit against 3M in Alabama state court, alleging that PFAS contamination in the Guin water system stems from manufacturing operations at 3M’s Guin facility and disposal activity at a nearby landfill. In this same month, Guin WWSB dismissed its lawsuit without prejudice and is working with 3M to further investigate the presence of chemicals in the Townarea.
Litigation Related to Historical PFAS Manufacturing Operations in Minnesota
In July 2016, the City of Centre, AlabamaLake Elmo filed a lawsuit in the CircuitU.S. District Court for the District of Cherokee County AlabamaMinnesota against 3M DuPont, and various carpet and textile manufacturers. The complaint alleges that PFCs from the defendants’ facilities contaminated the town’s raw water source for drinking water and seeks unstated damages for the installation and operation of a filtration system, expenses to monitor PFC levels, lost profits and sales, and injunctive relief.
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As of September 30, 2017, eleven purported class actions have been filed against 3M and other defendants in federal or state courts - three in federal court in Colorado, four in federal court in Pennsylvania, and four in state court in New York. An individual complaint also has been filed in the federal court in Pennsylvania. The complaints seek unstated damages and other remedies, such as medical monitoring, and allegealleging that the plaintiffsCity suffered personal injury and property damagedamages from drinking water supplies contaminated with certain PFCs used in Aqueous Film Forming Foam (AFFF) at current or former airportsPFAS, including costs to construct alternative sources of drinking water. In April 2019, 3M and air force military bases located in Colorado, Pennsylvania, and New York.the City of Lake Elmo agreed to settle the lawsuit for less than $5 million.
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State Attorneys General Litigation related to PFAS
Minnesota.In December 2010, the State of Minnesota, by its Attorney General, Lori Swanson, acting in its capacity as trustee of the natural resources of the State of Minnesota, filed a lawsuit in Hennepin County District Court against 3M to recoverseeking damages (including unspecified assessment costs and reasonable attorney’s fees) for alleged injury to, destruction of, and loss of use of certain of the State’s natural resources under the Minnesota Environmental Response and Liability Act (MERLA) and the Minnesota Water Pollution Control Act (MWPCA), as well as statutory nuisance and common law claims of trespass, nuisance, and negligenceinjunctive relief with respect to the presence of PFCsPFAS in the groundwater, surface water, fish or other aquatic life, and sediments in the state of Minnesota (the “NRD Lawsuit”). In February 2018, 3M and the State of Minnesota reached a resolution of the NRD Lawsuit. Under the terms of the settlement, 3M agreed to provide an $850 million grant to the State for a special “3M Water Quality and Sustainability Fund.” This Fund, which is administered by the State, will enable projects that support water sustainability in the Twin Cities East Metro region, such as continued delivery of water to residents and enhancing groundwater recharge to support sustainable growth. Other purposes of the grant include habitat and recreation improvements, such as fishing piers, trails, and open space preservation. 3M recorded a pre-tax charge of $897 million, inclusive of legal fees and other related obligations, in the first quarter of 2018 associated with the resolution of this matter.
In connection with the above referenced settlement, the Minnesota Pollution Control Agency and the Department of Natural Resources, as co-trustees of the Fund, released in September 2020 a conceptual drinking water supply plan for the communities in the East Metro area, seeking public comment on 3 recommended options for utilizing the Fund.
New York.The State also seeks declarations under MERLA thatof New York, by its Attorney General, has filed 4 lawsuits (in June 2018, February 2019, July 2019, and November 2019) against 3M and other defendants seeking to recover the costs incurred in responding to PFAS contamination allegedly caused by Aqueous Film Forming Foam (AFFF) manufactured by 3M and others. Each of the 4 suits was filed in Albany County Supreme Court before being removed to federal court, and each has been transferred to the multi-district litigation (MDL) proceeding for AFFF cases, which is responsiblediscussed further below. The state is seeking compensatory and punitive damages, and injunctive and equitable relief in the form of a monetary fund for allthe State’s reasonably expected future damages, and/or requiring defendants to perform investigative and remedial work.
Ohio. In December 2018, the State may sufferof Ohio, by its Attorney General, filed a lawsuit in the futureCommon Pleas Court of Lucas County, Ohio against 3M, Tyco Fire Products LP, Chemguard, Inc., Buckeye Fire Equipment Co., National Foam, Inc., and Angus Fire Armour Corp., seeking injunctive relief and compensatory and punitive damages for injuriesremediation costs and alleged injury to Ohio natural resources from releasesAFFF manufacturers. This case was removed to federal court and transferred to the MDL.
New Jersey. In March 2019, the New Jersey Attorney General filed 2 actions against 3M, DuPont, and Chemours on behalf of PFCsthe New Jersey Department of Environmental Protection (NJDEP), the NJDEP’s commissioner, and the New Jersey Spill Compensation Fund regarding alleged discharges at 2 DuPont facilities in Pennsville, New Jersey (Salem County) and Parlin, New Jersey (Middlesex County). 3M is included as a defendant in both cases because it allegedly supplied PFOA to DuPont for use at the facilities at issue. Both cases expressly seek to have the defendants pay all costs necessary to investigate, remediate, assess, and restore the affected natural resources of New Jersey.DuPont removed these cases to federal court. In August 2019, the court stayed all proceedings in these actions pending a ruling on NJDEP’s motions to remand the cases to state court. In April 2020, the federal court denied the state’s motion to remand. In June 2020, the court entered a consent order lifting the stay and consolidating the 2 actions, along with 2 others brought by the NJDEP relating to the DuPont facilities, for case management and pretrial purposes. The case is in early stages of litigation.
In May 2019, the New Jersey Attorney General and NJDEP filed a lawsuit against 3M, DuPont, and six other companies, alleging natural resource damages from AFFF products and seeking damages, including punitive damages, and associated fees. This case was removed to federal court and transferred to the AFFF MDL.
New Hampshire. In May 2019, the New Hampshire Attorney General filed 2 lawsuits alleging contamination of the state’s drinking water supplies and other natural resources by PFAS chemicals. The first lawsuit was filed against 3M and seven co-defendants, alleging PFAS contamination resulting from the use of AFFF products at several sites around the state. This case was removed to federal court and transferred to the AFFF MDL. The second suit asserts PFAS contamination from non-AFFF sources and names 3M, DuPont, and Chemours as defendants. This suit remains in state court in early stages of litigation. In its June 2020 ruling on defendants’ motions to dismiss, the court dismissed the state’s trespass claim, but allowed several claims to proceed. In October 2020, the court allowed the state to file an amended complaint.
Vermont. In June 2019, the Vermont Attorney General filed 2 lawsuits alleging contamination of the state’s drinking water supplies and other natural resources by PFAS chemicals. The first lawsuit was filed against 3M and ten co-defendants, alleging PFAS
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contamination resulting from the use of AFFF products at several sites around the state. This case was removed to federal court and transferred to the AFFF MDL. The second suit asserts PFAS contamination from non-AFFF sources and names 3M and several entities related to DuPont and Chemours as defendants. This suit is proceeding in state court. In May 2020, the court denied the defendants’ motion to dismiss, but dismissed the state’s trespass claim as to property the state does not own. The parties are now engaged in discovery.
Michigan. In May 2019, the Michigan Attorney General issued a request for proposal seeking outside legal expertise in pursuing claims against manufacturers, distributors, and other parties related to PFAS. In January 2020, the Michigan Attorney General filed a lawsuit in state court against 3M, Dyneon, DuPont, Chemours and others seeking injunctive and equitable relief and damages for alleged injury to Michigan public natural resources and its residents relating to PFAS. The defendants filed motions to dismiss, and 3M’s motion was denied in August 2020. In August 2020, the Michigan Attorney General filed 2 lawsuits against numerous AFFF manufacturers and distributors, and suppliers of PFAS to AFFF manufacturers. 3M is named a defendant in 1 of the lawsuits, filed in federal court, and the case has been transferred to the AFFF MDL, where it remains in early stages of litigation.
Guam. In September 2019, the Attorney General of Guam filed a lawsuit against 3M and other defendants relating to contamination of the territory’s drinking water supplies and other natural resources by PFAS, allegedly resulting from the use of AFFF products at several sites around the island. This lawsuit has been removed to federal court and transferred to the AFFF MDL.
Commonwealth of Northern Mariana Islands. In December 2019, the Attorney General of the Commonwealth of Northern Mariana Islands, a U.S. territory, filed a lawsuit against 3M and other defendants relating to contamination of the territory’s drinking water supplies and other natural resources by PFAS, allegedly resulting from the use of AFFF products. This lawsuit has been removed to federal court and transferred to the AFFF MDL.
In addition to the above state attorneys general actions, the Company is in discussions with several state attorneys general and agencies, responding to information and other requests relating to PFAS matters and exploring potential resolution of some of the matters raised.
Aqueous Film Forming Foam (AFFF) Environmental Litigation
3M manufactured and marketed AFFF for use in firefighting at airports and military bases from approximately 1963 to 2002. As of September 30, 2020, 784 lawsuits (including 26 putative class actions) have been filed against 3M (along with other defendants) in various state and federal courts where current or former airports, military bases, or fire training facilities are or were located. As previously noted, some of these cases have been brought by state or territory attorneys general. In most of these cases, plaintiffs typically allege that certain PFAS used in AFFF contaminated the soil and groundwater where AFFF was used and seek damages for alleged injuries such as loss of use and enjoyment of properties, diminished property values, investigation costs, remediation costs, personal injury and/or funds for medical monitoring. 278 cases filed since October 2019 have been brought by current or former firefighters who claim to have suffered personal injury as a result of exposure to AFFF while using the product. The United States, the U.S. Department of Defense and several companies have been sued along with 3M, including but not limited to Ansul Co. (acquired by Tyco, Inc.), Angus Fire, Buckeye Fire Protection Co., Chemguard, Chemours, DuPont, National Foam, Inc., and United Technologies Corp.
In December 2018, the U.S. Judicial Panel on Multidistrict Litigation (JPML) granted motions to transfer and consolidate all AFFF cases pending in federal courts to the U.S. District Court for the District of South Carolina to be managed in an MDL proceeding to centralize pre-trial proceedings. Additional AFFF cases continue to be transferred into the MDL as they are filed or removed to federal court. As of September 30, 2020, there were 783 cases in the MDL, 770 of which name 3M as a defendant. The parties in the MDL are currently in the process of conducting discovery.
In June 2019, several subsidiaries of Valero Energy Corporation, an independent petroleum refiner, filed 8 AFFF cases against 3M and other defendants, including DuPont/Chemours, National Foam, Buckeye Fire Equipment, and Kidde-Fenwal, in various state courts. Plaintiffs seek damages that allegedly have been or will be incurred in investigating and remediating PFAS contamination at their properties and replacing or disposing of AFFF products containing long-chain PFAS. NaN of these cases have been removed to federal court and transferred to the AFFF MDL. NaN cases remain pending in state courts where they are in early stages of litigation, after Valero dismissed its Ohio state court action without prejudice in October 2019. The parties in the state court cases have agreed to stay all 5 cases through November 2020.
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NaN subsidiaries of Husky Energy filed suit in April 2020 against 3M and other AFFF manufacturers in Wisconsin state court relating to alleged PFAS contamination from AFFF use at Husky facilities in Superior, Wisconsin and Lima, Ohio. The parties have entered into a tolling agreement deferring further action on the plaintiffs’ claims. The plaintiffs filed a notice of dismissal without prejudice in September 2020.
As of September 30, 2020, the Company was named in 9 other AFFF lawsuits filed by plaintiffs in state courts against the Company and other defendants, including 3 cases in which the Company was served (1 in each of Arizona, California and Missouri).
Other PFAS-related Product and Environmental Litigation
3M manufactured and sold products containing various PFOA and PFOS, including Scotchgard, for several decades. Starting in 2017, 3M has been served with individual and putative class action complaints in various state and federal courts alleging, among other things, that 3M’s customers’ improper disposal of PFOA and PFOS resulted in the contamination of groundwater or surface water. The plaintiffs in these cases generally allege that 3M failed to warn its customers about the hazards of improper disposal of the product. They also generally allege that contaminated groundwater has caused various injuries, including personal injury, loss of use and enjoyment of their properties, diminished property values, investigation costs, and remediation costs. Several companies have been sued along with 3M, including Saint-Gobain Performance Plastics Corp., Honeywell International Inc. f/k/a Allied-Signal Inc. and/or AlliedSignal Laminate Systems, Inc., Wolverine World Wide Inc., Georgia-Pacific LLC, E.I. DuPont De Nemours and Co., Chemours Co., and various carpet manufacturers.
In New York, 3M is defending 41 individual cases and 1 putative class action filed in the U.S. District Court for the Northern District of New York and 4 additional cases filed in New York state court against 3M, Saint-Gobain Performance Plastics Corp. (Saint-Gobain), Honeywell International Inc. and E.I. DuPont De Nemours and Co. (DuPont). The plaintiffs allege that 3M manufactured and sold PFOA that was used for manufacturing purposes at Saint-Gobain’s and Honeywell’s facilities located in the Village of Hoosick Falls and the Town of Hoosick. The plaintiffs claim that the drinking water around Hoosick Falls became contaminated with unsafe levels of PFOA due to the activities of the defendants and allege that they suffered bodily injury due to the ingestion and inhalation of PFOA. The plaintiffs seek unstated compensatory, consequential, and punitive damages, as well as attorneys’ fees and costs. 3M has answered the complaints in these cases, which are now proceeding through discovery. The plaintiffs in the putative class action have moved for class certification. 3M is also defending 8 additional cases in New York filed by Nassau County drinking water providers in the U.S. District Court for the Eastern District of New York. The plaintiffs in these cases allege that 3M, DuPont, and additional unnamed defendants are responsible for the contamination of plaintiffs’ water supply sources with various PFAS compounds. DuPont’s motion to transfer these cases to the AFFF MDL was denied in March 2020. These cases are in the preliminary stages of litigation.
In Michigan, 1 consolidated putative class action is pending in the U.S. District Court for the Western District of Michigan against 3M and Wolverine World Wide (Wolverine) and other defendants. The action arises from Wolverine’s allegedly improper disposal of materials and wastes, including 3M Scotchgard, related to Wolverine’s shoe manufacturing operations. Plaintiffs allege Wolverine used 3M Scotchgard in its manufacturing process and that chemicals from 3M’s product contaminated the environment and under MWPCA thatdrinking water sources after disposal. In addition to the consolidated federal court putative class action, as of September 30, 2020, 3M is responsiblehas been named as a defendant in approximately 270 private individual actions in Michigan state court based on similar allegations. These cases are coordinated for compensationpre-trial purposes. NaN of these cases were selected for bellwether trials in 2020. In January 2020, the court issued the first round of dispositive motion rulings related to the first 2 bellwether cases, including dismissing the second bellwether case entirely and dismissing certain plaintiffs’ medical monitoring and risk of future loss or destruction of fish, aquatic life,disease claims, and other damages.
granting summary judgment to the defendants on 1 plaintiff’s cholesterol injury claims. The parties settled the first bellwether case in early 2020. In November 2011,June 2020, the Metropolitan Council filed acourt denied the plaintiffs’ motion to intervenereconsider the dismissal of the second bellwether case, and a complaint in the NRD Lawsuit seeking compensatory damages and other legal, declaratory and equitable relief, including reasonable attorneys’ fees, for costs and fees thatplaintiffs have appealed the Metropolitan Council alleges it will be required to assess at some time in the future if the MPCA imposes restrictions on Metropolitan Council’s PFOS dischargesdecision to the Mississippi River, includingstate appellate court. The court has since allowed the installation and maintenanceaddition of a water treatment system.another bellwether case. The Metropolitan Council’s intervention motion was based on several theories, including common law negligence, and statutory claims under MERLA for response costs, and under the Minnesota Environmental Rights Act (MERA) for declaratory and equitable relief against 3M for PFOS and other PFC pollutionfirst of the waters and sediments of the Mississippi River. 3M did not object to the motion to intervene. In January 2012, 3M answered the Metropolitan Council’s complaint and filed a counterclaim alleging that the Metropolitan Council discharges PFCs to the Mississippi River and discharges PFC-containing sludge and bio solids from one or more of its wastewater treatment plants onto agricultural lands and local area landfills. Accordingly, 3M’s complaint against the Metropolitan Council asked that if the court finds that the State is entitled to any of the damages it sought, 3M be awarded contribution and apportionment from the Metropolitan Council, including attorneys’ fees, under MERLA, and contribution from and liability for the Metropolitan Council’s proportional share of damages awarded to the State under the MWPCA, as well as under statutory nuisance and common law theories of trespass, nuisance, and negligence. 3M also sought declaratory relief under MERA. In May 2017, the Metropolitan Council paid 3M approximately $1 million and agreed to dismiss its claims against 3M. As part of the settlement agreement, 3M agreed to dismiss its claims against the Metropolitan Council.
In April 2012, 3M filed a motion to disqualify the State of Minnesota’s counsel, Covington & Burling, LLP (Covington). In October 2012, the court granted 3M’s motion to disqualify Covington as counsel to the State, and the State and Covington appealed the court’s disqualification to the Minnesota Court of Appeals. In July 2013, the Minnesota Court of Appeals affirmed the district court’s disqualification order. In October 2013, the Minnesota Supreme Court granted both the State’s and Covington’s petition for review of the decision of the Minnesota Court of Appeals. In April 2014, the Minnesota Supreme Court affirmed in part, reversed in part, and remanded the case to the district court for further proceedings. The district court took evidence on the disqualification issues at a hearing in October 2015. In February 2016, the district court ruled that Covington violated the professional ethics rule against representing a client (here the State of Minnesota) in the same or substantially related matter where that person’s interests are materially adverse to the interests of a former client (3M). The district court, however, denied 3M’s motion to disqualify Covington because it further found that 3M impliedly waived by delaying to assert the conflict. Other activity in the case, which had been stayed pending the outcome of the disqualification issue, has resumed. Trial of the NRD Lawsuit3 bellwether trials is scheduled to begin in February 2018. InMarch 2021. The parties have engaged in mediation discussions in both the putative class action and the state court mass action cases.
Wolverine also filed a separate but related action, the Company filedthird-party complaint against 3M in a suit in the Ramsey County District Court against Covington for breach of its fiduciary duties to the Company and for breach of contract arising out of Covington’s representation ofby the State of MinnesotaMichigan and intervenor townships that seeks to compel Wolverine to investigate and address contamination associated with its historic disposal activity. 3M filed an answer and counterclaims to Wolverine’s third-party complaint in June 2019. In September and October 2019, the parties (including 3M as third-
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party defendant) engaged in mediation. In December 2019, the State of Michigan, the intervening townships, and Wolverine announced that they had tentatively resolved the State and townships’ claims against Wolverine in exchange for a $70 million payment and certain future remediation measures by Wolverine. In February 2020, the court approved a Consent Decree that memorializes Wolverine’s ongoing remediation obligations and the State’s and intervening townships’ covenants not to bring further lawsuits as to the remediated area. 3M has been formally designated as a “Contributing Party,” and as such, the State’s and townships’ covenants will also apply to 3M. In February 2020, 3M and Wolverine executed an agreement to resolve the legal claims between the 2 companies. Pursuant to the agreement, 3M made a one-time financial contribution of $55 million in March 2020 to support Wolverine’s past and ongoing efforts to address PFAS remediation under Wolverine’s Consent Decree with the State and the townships. This amount was part of 3M’s charge taken in the NRD Lawsuit.fourth quarter of 2019 as discussed below in the “Environmental Liabilities and Insurance Receivables” section.
3M is also a defendant, together with Georgia-Pacific as co-defendant, in a putative class action in federal court in Michigan brought by residents of Parchment, who allege that the municipal drinking water is contaminated from waste generated by a paper mill owned by Georgia-Pacific’s corporate predecessor. The defendants have moved to dismiss certain claims in the complaint, and the parties have begun discovery on the remaining claims. As a result of discussions among Georgia-Pacific, 3M and municipalities near Parchment, Georgia-Pacific and 3M have agreed to contribute to a fund of approximately $5 million to provide expanded municipal water service in the area.
In Alabama and Georgia, 3M, together with multiple co-defendants, is defending 4 state court cases, including 3 brought by municipal water utilities, relating to 3M’s sale of PFAS-containing products to carpet manufacturers in Georgia. The plaintiffs in these cases allege that the carpet manufacturers improperly discharged PFAS into the surface water and groundwater, contaminating drinking water supplies of cities located downstream along the Coosa River, including Rome, Georgia and Centre and Gadsden, Alabama. The 3 water utility cases remain in the early stages of litigation. NaN state court case was brought by individuals asserting PFAS contamination by the Georgia carpet manufacturers and seeking economic damages and injunctive relief on behalf of a putative class of Rome and Floyd County water subscribers. This case has been removed to federal court where it remains in the early stages of litigation.
In California, 3M and other defendants are defending an action brought in federal court by Golden State Water Company, alleging PFAS contamination of certain wells located in its water systems. The case is in early stages of litigation.
In Delaware, 3M, together with several co-defendants, is defending 1 putative class action brought by individuals alleging PFAS contamination of their water supply resulting from the operations of local metal plating facilities. Plaintiffs allege that 3M supplied PFAS to the metal plating facilities. DuPont, Chemours, and the metal platers have also been named as defendants. This case has been removed from state court to federal court, and plaintiffs have withdrawn its motion to remand to state court and filed an amended complaint. 3M has filed a motion to dismiss the amended complaint.
In New Jersey, 3M is a co-defendant in an action brought in federal court by Middlesex Water Company, alleging PFAS contamination of its water wells. 3M’s motion to transfer the case to the AFFF MDL was denied. 3M has moved to dismiss the complaint, and the case is currently in discovery. In addition, 3M, together with several co-defendants, is defending a case brought in state court by multiple individuals with private drinking water wells near DuPont and Solvay facilities that were allegedly supplied with PFAS by 3M. Plaintiffs seek medical monitoring and damages. This case has been removed to federal court, and 3M has filed a motion to dismiss. 3M and other defendants are also defending 2 federal court cases brought by individuals who live near the DuPont and Solvay facilities, alleging personal injury caused by PFAS exposure. Those cases are in early stages of litigation. In September 2016,2020, a federal court case was filed against 3M and other defendants on behalf of the Borough of Hopatcong, alleging general PFAS contamination of its public water supply.
In October 2018, 3M and other defendants, including DuPont and Chemours, were named in a putative class action in the U.S. District Court for the Southern District of Ohio brought by the named plaintiff, a firefighter allegedly exposed to PFAS chemicals through his use of firefighting foam, purporting to represent a putative class of all U.S. individuals with detectable levels of PFAS in their blood. The plaintiff brings claims for negligence, battery, and conspiracy and seeks injunctive relief, including an order “establishing an independent panel of scientists” to evaluate PFAS. 3M and other entities jointly filed a motion to dismiss in February 2019. In September 2019, the court granteddenied the defendants’ motion to dismiss. In February 2020, the court denied 3M’s motion forto transfer the case to the AFFF MDL.
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leaveIn West Virginia, 3M and other defendants are defending a state court action brought by Weirton Area Water Board that alleges PFAS contamination of local water supplies. This case has been removed to amendfederal court, where 3M has moved to dismiss the complaintcase, which remains in early stages of litigation.
Other PFAS-related Matters
In July 2019, the Company received a written request from the Subcommittee on Environment of the Committee on Oversight and Reform, U.S. House of Representatives, seeking certain documents and information relating to plead punitive damages.the Company’s manufacturing and distribution of PFAS products. In February 2017, Covington settled this lawsuitSeptember 2019, a 3M representative testified before and responded to questions from the Subcommittee on Environment with respect to PFAS and the Company’s environmental stewardship initiatives. The Company continues to cooperate with the Subcommittee.
The Company operates under a payment2009 consent order issued under the federal Toxic Substances Control Act (TSCA) (the “2009 TSCA consent order”) for the manufacture and use of 2 perfluorinated materials (FBSA and FBSEE) at its Decatur, Alabama site that does not permit release of these materials into “the waters of the United States.” In March 2019, the Company halted the manufacture, processing, and use of these materials at the site upon learning that these materials may have been released from certain specified processes at the Decatur site into the Tennessee River. In April 2019, the Company voluntarily disclosed the releases to the U.S. Environmental Protection Agency (EPA) and the Alabama Department of Environmental Management (ADEM). During June and July 2019, the Company took steps to fully control the aforementioned processes by Covington or its insurercapturing all wastewater produced by the processes and by treating all air emissions. These processes have been back on-line and in operation since July 2019. The Company continues to 3M that is not materialcooperate with the EPA and ADEM in their investigations and will work with the regulatory authorities to 3M’s results of operations or financial condition.demonstrate compliance with the release restrictions.
For environmental litigation matters described in this section for whichThe Company is authorized to discharge wastewater from its Decatur plant pursuant to the terms of a liability, if any, has been recorded,Clean Water Act National Pollutant Discharge Elimination System (NPDES) permit issued by ADEM. The NPDES permit requires the Company believesto report on a monthly and quarterly basis the amount recorded, as well asquality and quantity of pollutants discharged to the possible loss or rangeTennessee River. In June 2019, the Company voluntarily disclosed to the EPA and ADEM that it had included incorrect values in certain of lossits monthly and quarterly reports. The Company has submitted the corrected values to both the EPA and ADEM.
As part of ongoing work with the EPA and ADEM to address compliance matters at the Decatur facility, the Company discovered it had not fully characterized its PFAS discharge in excessits NPDES permit. In September 2019, the Company disclosed the matter to the EPA and ADEM and announced that it had elected to temporarily idle certain other manufacturing processes at 3M Decatur. The Company is reviewing its operations at the plant, has installed wastewater treatment controls and has restarted idled processes.
As a result of the established accrual is not materialCompany’s discussions with ADEM to address these and other related matters in the state of Alabama, 3M and ADEM have agreed to the terms of an interim Consent Order in July 2020 to cover all PFAS-related wastewater discharges and air emissions from the Company’s Decatur facility. Under the interim Consent Order, the Company’s principal obligations include commitments related to (i) future ongoing site operations such as (a) providing certain notices or reports and performing various analytical and characterization studies and (b) future capital improvements; and (ii) remediation activities, including certain on-site and off-site investigations and studies. Obligations related to ongoing future site operations under the Consent Order will involve additional operating costs and capital expenditures over multiple years. The Company does not expect them to have a material impact on its consolidated results of operations or financial condition. position. With respect to remediation activities, financial obligations related to certain activities under the Consent Order are probable and estimable, and are included in the Company’s accruals for “other environmental liabilities” as described in the “Environmental Liabilities and Insurance Receivables” section below. As offsite investigation activities continue, additional remediation amounts may become probable and estimable in the future.
In December 2019, the Company received a grand jury subpoena from the U.S. Attorney’s Office for the Northern District of Alabama for documents related to, among other matters, the Company’s compliance with the 2009 TSCA consent order and unpermitted discharges to the Tennessee River. The Company is cooperating with this inquiry and is producing documents in response to the subpoena.
In addition, as part of its ongoing evaluation of regulatory compliance at its Cordova, Illinois facility, the Company discovered it had not fully characterized its PFAS discharge in its NPDES permit for the Cordova facility. In November 2019, the Company disclosed
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this matter to the EPA, and in January 2020 disclosed this matter to the Illinois Environmental Protection Agency (IEPA). The Company continues to work with the EPA and IEPA to address these issues from the Cordova facility.
The Company is also reviewing operations at its other plants with similar manufacturing processes, such as the plant in Cottage Grove, Minnesota, to ensure those operations are in compliance with applicable environmental regulatory requirements and Company policies and procedures. As a result of these reviews, the Company discovered it had not fully characterized its PFAS discharge in its NPDES permit for the Cottage Grove facility. In March 2020, the Company disclosed this matter to the Minnesota Pollution Control Agency (MPCA) and the EPA. In July 2020, the Company received an information request from MPCA for documents and information related to, among other matters, the Company’s compliance with the Clean Water Act at its Cottage Grove facility. The Company is cooperating with this inquiry and is producing documents and information in response to the request for information. The Company continues to work with the MPCA and EPA to address the discharges from the Cottage Grove facility.
Separately, in June 2020, the Company reported to EPA and MPCA that it had not fully complied with elements of the inspection, characterization and waste stream profile verification process of the Waste and Feedstream Analysis Plan (WAP/FAP) of its Resource Conservation and Recovery Act (RCRA) permit for its Cottage Grove incinerator. In July 2020, the Company received an information request from MPCA related to the June 2020 disclosure, to which the Company responded in September 2020. The Company continues to work with the MPCA to address WAP/FAP implementation issues disclosed in June 2020.
In February 2020, the Company received an information request from EPA for documents and information related to, among other matters, the Company’s compliance with the Clean Water Act at its facilities that manufacture, process and use PFAS, including the Decatur, Cordova and Cottage Grove facilities. The Company is cooperating with this inquiry and is producing documents and information in response to the request for information.
The Company will continue to work with relevant state and federal agencies as it conducts these reviews. The Company cannot predict at this time the outcomes of resolving these compliance matters or what potential actions may be taken by the regulatory agencies.
Other Environmental Litigation
In July 2018, the Company, along with more than 120 other companies, was served with a complaint seeking cost recovery and contribution towards the cleaning up of approximately 8 miles of the Lower Passaic River in New Jersey. The plaintiff, Occidental Chemical Corporation, alleges that it agreed to design and pay the estimated $165 million cost to remove and cap sediment containing 8 chemicals of concern, including PCBs and dioxins. The complaint seeks to spread those costs among the defendants, including the Company. The Company’s involvement in the case relates to its past use of 2 commercial drum conditioning facilities in New Jersey. Whether, and to what extent, the Company may be required to contribute to the costs at issue in the case remains to be determined.
For thoseenvironmental matters for which aand litigation described above, unless otherwise stated, 0 liability has not been recorded as the Company believes any such liability in those matters is not probable and estimable and the Company is not able to estimate a possible loss or range of loss at this time. The Company’s environmental liabilities and insurance receivables are described below.
Environmental Liabilities and Insurance Receivables
The Company periodically examines whether the contingent liabilities related to the environmental matters and litigation described above are probable and estimable based on experience and developments in those matters. During the nine months ended September 30, 2020, the Company increased its accrual for PFAS-related other environmental liabilities by $41 million and made related payments of $111 million. During the first quarter of 2019, the EPA issued its PFAS Action Plan and the Company settled the litigation with the Water Authority (both matters are described in more detail above). The Company completed a comprehensive review with the assistance of environmental consultants and other experts regarding environmental matters and litigation related to historical PFAS manufacturing operations in Minnesota; Alabama; Gendorf Germany; and at 4 former landfills in Alabama. As a result of these developments and of that review, the Company increased its accrual for “other environmental liabilities” by $235 million pre-tax (including the settlement with the Water Authority) in the first quarter of 2019. During the fourth quarter of 2019, 3M updated its evaluation of certain customer-related litigation based on continued, productive settlement discussions with multiple parties. As previously disclosed, 3M has been engaged in mediation and resolution negotiations in multiple cases. In addition, during
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the fourth quarter, the Company updated its assessment of environmental matters and litigation related to its historical PFAS manufacturing operations and expanded its evaluation of other 3M sites that may have used certain PFAS-containing materials and locations at which they were disposed. As a result of these actions during the fourth quarter the Company recorded a pre-tax charge of $214 million. As of September 30, 2017,2020, the Company had recorded liabilities of $38$375 million for “other environmental liabilities.” The accruals represent the Company’s best estimate of the probable loss. The Company is not able to estimate a possible loss or range of loss in excess of the established accruals at this time.
As of September 30, 2020, the Company had recorded liabilities of $23 million for estimated non-PFAS related “environmental remediation” costs based upon an evaluation of currentlyto clean up, treat, or remove hazardous substances at current or former 3M manufacturing or third-party sites. The Company evaluates available facts with respect to each individual site each quarter and also recorded related insurance receivables of $8 million. The Company records liabilities for remediation costs on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of feasibility studies or the Company’s commitment to a plan of action. Liabilities for estimated costs of environmental remediation, depending on the site, are based primarily upon internal or third-party environmental studies, and estimates as to the number, participation level and financial viability of any other potentially responsible parties, the extent of the contamination and the nature of required remedial actions. The Company adjusts recorded liabilities as further information develops or circumstances change. The Company expects that it will pay the amounts recorded over the periods of remediation for the applicable sites, currently ranging up to 20 years.
As of September 30, 2017, the Company had recorded liabilities of $27 million for “other environmental liabilities” based upon an evaluation of currently available facts to implement the Settlement Agreement and Consent Order with the MPCA, the remedial action agreement with ADEM, and to address trace amounts of perfluorinated compounds in drinking water sources in the City of Oakdale, Minnesota, as well as presence in the soil and groundwater at the Company’s manufacturing facilities in Decatur, Alabama, and Cottage Grove, Minnesota, and at two former disposal sites in Washington County, Minnesota (Oakdale and Woodbury). The Company expects that most of the spending will occur over the next four years. During the first quarter of 2017, the Company collected from its insurer the outstanding receivable of $15 million related to “other environmental liabilities.”
It is difficult to estimate the cost of environmental compliance and remediation given the uncertainties regarding the interpretation and enforcement of applicable environmental laws and regulations, the extent of environmental contamination and the existence of alternative cleanup methods. Developments may occur that could affect the Company’s current assessment, including, but not limited to: (i) changes in the information available regarding the environmental impact of the Company’s operations and products; (ii) changes in environmental regulations, changes in permissible levels of specific compounds in drinking water sources, or changes in enforcement theories and policies, including efforts to recover natural resource damages; (iii) new and evolving analytical and remediation techniques; (iv) success in allocating liability to other potentially responsible parties; and (v) the financial viability of other potentially responsible parties and third-party indemnitors. For sites included in both “environmental remediation liabilities” and “other environmental liabilities,” at which remediation activity is largely complete and remaining activity relates primarily to operation and maintenance of the remedy, including required post-remediation monitoring, the Company believes the exposure to loss in excess of the amount accrued would not be material to the Company’s consolidated results of operations or financial condition. However, for locations at which remediation activity is largely ongoing, the Company cannot estimate a possible loss or range of loss in excess of the associated established accruals for the reasons described above.
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Other Matters
Department of Labor Investigation
The U.S. DepartmentCompany has both pre-1986 general and product liability occurrence coverage and post-1985 occurrence reported product liability and other environmental coverage for environmental matters and litigation. As of Labor (DOL) notified 3M in April 2015 that it had commenced an investigation of 3M’s pension plan pursuantSeptember 30, 2020, the Company’s receivable for insurance recoveries related to the federal Employee Retirement Income Security Actenvironmental matters and litigation was $8 million. Various factors could affect the timing and amount of 1974, as amended (ERISA). The DOL has stated its investigation relates to certain private equity investments, plan expenses, securities lending,recovery of this and distributions of plan benefits. In response to certain DOL requests, 3M produced documents and made employees available for interviews. In December 2016, the DOL issued certain subpoenas to 3M and 3M Investment Management Corp. relating to this investigation. 3M has produced additional responsive documents and is cooperating with the DOL in its investigation. 3M anticipates that the DOL will conclude its investigationfuture expected increases in the first halfreceivable, including (i) delays in or avoidance of 2018.payment by insurers; (ii) the extent to which insurers may become insolvent in the future, (iii) the outcome of negotiations with insurers, and (iv) the scope of the insurers’ purported defenses and exclusions to avoid coverage.
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Product Liability Litigation
One customer obtained an order in the French courts against 3M Purification SAS (a French subsidiary) in October 2011 appointing an expert to determine the amount of commercial loss and property damage allegedly caused by allegedly defective 3M filters used in the customer’s manufacturing process. An Austrian subsidiary of this same customer also filed a claim against 3M Austria GmbH (an Austrian subsidiary) and 3M Purification SAS in the Austrian courts in September 2012 seeking damages for the same issue. The Company reached an agreement in principle to settle those two cases and finalized the settlement during the second quarter of 2017. The amounts agreed to in each of these settlements were not material to the Company’s consolidated results of operations or financial condition.
As of September 30, 2017,2020, the Company iswas a named defendant in 22 lawsuits in the United States involving 25 plaintiffs and 1 Canadian putative class action with a single named plaintiff, alleging that the Bair Hugger™ patient warming system caused a surgical site infection.
As previously disclosed, 3M had been a named defendant in lawsuits involving approximately 3,850 plaintiffs (compared to approximately 1,260 plaintiffs at December 31, 2016), most of which are pending in federal or state court in Minnesota, in which thecourts involving over 5,000 plaintiffs. The plaintiffs claim they underwent various joint arthroplasty, cardiovascular, and other surgeries and later developed surgical site infections due to the use of the Bair Hugger™ patient warming system. The complaintsplaintiffs seek damages and other relief based on theories of strict liability, negligence, breach of express and implied warranties, failure to warn, design and manufacturing defect, fraudulent and/or negligent misrepresentation/concealment, unjust enrichment, and violations of various state consumer fraud, deceptive or unlawful trade practices and/or false advertising acts. One case, from the U.S. District Court for the Western District of Tennessee is a putative nationwide class action.
The U.S. Judicial Panel on Multidistrict Litigation (MDL) granted the plaintiffs’ motion to transfer and consolidate(JPML) consolidated all cases pending in federal courts to the U.S. District Court for the District of Minnesota to be managed in a multi-district proceeding duringlitigation (MDL) proceeding. In July 2019, the pre-trial phasecourt excluded several of the litigation.plaintiffs’ causation experts, and granted summary judgment for 3M in all cases pending at that time in the MDL. Plaintiffs have
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appealed that decision to the U.S. Court of Appeals for the Eighth Circuit. Plaintiffs have also appealed a 2018 jury verdict in favor of 3M in the first bellwether trial in the MDL and appealed the dismissal of another bellwether case.
Among the 22 remaining lawsuits in the United States, 19 are in the MDL court and 3 are in state court. The federalMDL court declined to remand 1 case to Oklahoma state court and has stayed all 19 remaining lawsuits pending the appeal of the summary judgment decision. In February 2020, the MDL court remanded 2 cases to state court in Jackson County, Missouri that combined Bair Hugger product liability claims with medical malpractice claims. There is also 1 case in Hidalgo County, Texas that combines Bair Hugger product liability claims with medical malpractice claims. In August 2019, the MDL court enjoined the individual plaintiff from pursuing his claims in Texas state court because he had previously filed and dismissed a claim in the MDL. That plaintiff has appealed the order to the U.S. Court of Appeals for the Eighth Circuit. The Texas state court has setstayed the entire case while the appeal is pending.
As previously disclosed, 3M had been named a trial-ready datedefendant in 61 cases in Minnesota state court. In January 2018, the second quarter of 2018 for the two federal court bellwether cases. The parties are negotiating a trial date for the remainingMinnesota state court bellwether candidate. excluded plaintiffs’ experts and granted 3M’s motion for summary judgment on general causation. Plaintiffs appealed that ruling and the state court’s punitive damages ruling. The Minnesota Court of Appeals affirmed the Minnesota state court orders in their entirety and the Minnesota Supreme Court denied plaintiffs’ petition for review. Final dismissal was entered in April 2019, effectively ending the Minnesota state court cases.
In June 2016, the Company was served with a putative class action filed in the Ontario Superior Court of Justice for all Canadian residents who underwent various joint arthroplasty, cardiovascular, and other surgeries and later developed surgical site infections due to the use of the Bair Hugger™ patient warming system. The representative plaintiff seeks relief (including punitive damages) under Canadian law based on theories similar to those asserted in the MDL. The Bair Hugger™ product line was acquired by 3M as part of the 2010 acquisition of Arizant, Inc., a leading manufacturer of patient warming solutions designed to prevent hypothermia and maintain normal body temperature in surgical settings. No
NaN liability has been recorded for this matterthe Bair Hugger™ litigation because the Company believes that any such liability is not probable and estimable at this time.
In September 2011,Aearo Technologies sold Dual-Ended Combat Arms – Version 2 earplugs starting in about 2003. 3M Oral Care launched Lava Ultimate CAD/CAM dental restorative material. Theacquired Aearo Technologies in 2008 and sold these earplugs from 2008 through 2015, when the product was originally indicated for inlay, onlay, veneer,discontinued. In December 2018, a military veteran filed an individual lawsuit against 3M in the San Bernardino Superior Court in California alleging that he sustained personal injuries while serving in the military caused by 3M’s Dual-Ended Combat Arms earplugs – Version 2. The plaintiff asserts claims of product liability and crown applications. In June 2015, 3M Oral Care voluntarily removed crown applications from the product’s instructions for use, following reports from dentistsfraudulent misrepresentation and concealment. The plaintiff seeks various damages, including medical and related expenses, loss of patients’ crowns debonding, requiring additional treatment. The product remains on the market for other applications. 3M communicated with the U.S. Foodincome, and Drug Administration, as well as regulators outside the United States. 3M also informed customers and distributors of its action, offered to accept return of unused materials and provide refunds.punitive damages. As of September 30, 2017, there are two2020, the Company is a named defendant in approximately 3,000 lawsuits pending(including 14 putative class actions) in various state and federal courts that were brought by dentistspurport to represent approximately 12,000 individual claimants making similar allegations. In April 2019, the U.S. Judicial Panel on Multidistrict Litigation granted motions to transfer and dental practices against 3M. The complaints allege 3M marketed and sold defective Lava Ultimate material used for dental crowns to dentists and, under various theories, seek monetary damages (replacement costs and business reputation loss), punitive damages, disgorgement of profits, injunction from marketing and selling Lava Ultimate for use in dental crowns, statutory penalties, and attorneys’ fees and costs. One lawsuit,consolidate all cases pending in federal courts to the U.S. District Court for the Northern District of Minnesota,Florida to be managed in a multi-district litigation (MDL) proceeding to centralize pre-trial proceedings. Discovery is a
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class action that names 39underway. The plaintiffs and seeks certification3M filed preliminary summary judgment motions on the government contractor defense. In July 2020, based on the current record, the court granted the plaintiffs’ summary judgment motion and denied the defendants’ summary judgment motion, ruling that plaintiffs’ claims are not barred by the government contractor defense. The court denied the Company’s request to immediately certify the summary judgment ruling for appeal to the U.S. Court of a class of dentists inAppeals for the United StatesEleventh Circuit. The first bellwether case is scheduled for April 2021. NaN liability has been recorded for these matters because the Company believes that any such liability is not probable and its territories, and alternatively seeks subclasses in 13 states. The other lawsuit is an individual complaint against 3M in Madison County, Illinois.estimable at this time.
For product liability litigation matters described in this section for which a liability has been recorded, the Company believes the amount recorded is not material to the Company’s consolidated results of operations or financial condition. In addition, the Company is not able to estimate a possible loss or range of loss in excess of the established accruals at this time.
Securities Litigation
In July 2019, Heavy & General Laborers’ Locals 472 & 172 Welfare Fund filed a putative securities class action against 3M Company, its former Chairman and CEO, current Chairman and CEO, and current CFO in the U.S. District Court for the District of New Jersey. In August 2019, an individual plaintiff filed a similar putative securities class action in the same district. Plaintiffs allege that defendants made false and misleading statements regarding 3M's exposure to liability associated with PFAS, and bring claims for damages under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 against all defendants, and under Section
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20(a) of the Securities and Exchange Act of 1934 against the individual defendants. In October 2019, the court consolidated the securities class actions and appointed a group of lead plaintiffs.In January 2020, the defendants filed a motion to transfer venue to the U.S. District Court for the District of Minnesota. In August 2020, the court denied the motion to transfer venue, and in September 2020, the defendants filed a petition for writ of mandamus to the U.S. Court of Appeals for the Third Circuit. The suit is in the early stages of litigation.
In October 2019, a follow-on derivative lawsuit was filed in the U.S. District Court for the District of New Jersey against 3M and several of its current and former executives and directors. In November and December 2019, 2 additional derivative lawsuits were filed in a Minnesota state court. The derivative lawsuits rely on similar factual allegations as the putative securities class action discussed above. The plaintiffs have agreed to stay these cases pending a ruling on a motion to dismiss the securities class action. In October 2020, the derivative action pending in the U.S. District Court for the District of New Jersey was dismissed, without prejudice, for failure to serve the complaint within the required time period.
In August 2020, an individual shareholder who had previously submitted a books and records demand filed an additional follow-on derivative lawsuit in the U.S. District Court for the District of New Jersey against 3M and several of its current and former executives and directors. This derivative lawsuit also relies on similar factual allegations as the putative securities class action discussed above.
Federal False Claims Act / Qui Tam Litigation
In October 2019, 3M acquired Acelity, Inc. and its KCI subsidiaries, including Kinetic Concepts, Inc. and KCI USA, Inc. As previously disclosed in the SEC filings by the KCI entities, in 2009, Kinetic Concepts, Inc. received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General. In 2011, following the completion of the government’s review and its decision declining to intervene in 2 qui tam actions described further below, the qui tam relator-plaintiffs’ pleadings were unsealed.
The government inquiry followed 2 qui tam actions filed in 2008 by 2 former employees against Kinetic Concepts, Inc. and KCI USA, Inc. (collectively, the “KCI defendants”) under seal in the U.S. District Court for the Central District of California. The complaints contain allegations that the KCI Defendants violated the federal False Claims Act by submitting false or fraudulent claims to federal healthcare programs by billing for V.A.C.® Therapy in a manner that was not consistent with the Local Coverage Determinations issued by the Durable Medical Equipment Medicare Administrative Contractors and seek monetary damages. NaN complaint (the “Godecke case”) also contains allegations that the KCI Defendants retaliated against the relator-plaintiff for alleged whistle-blowing behavior.
In October 2016, the KCI Defendants filed counterclaims in the Godecke case, asserting breach of contract and conversion. In August 2017, the relator-plaintiff’s fraud claim in the Godecke case was dismissed in favor of the KCI defendants. In January 2018, the district court stayed the retaliation claim and the KCI Defendants' counterclaims pending the relator-plaintiff’s appeal. In September 2019, the U.S. Court of Appeals for the Ninth Circuit reversed and remanded the case to the district court for further proceedings. The district court has ordered a stay of the proceedings pending a further status conference in November 2020. Separately, in June 2019, following discovery, the district court in the second case (the “Hartpence case”) entered summary judgment in the KCI Defendants’ favor on all of the relator-plaintiff’s claims. The plaintiff then filed an appeal in the U.S. Court of Appeals for the Ninth Circuit. Oral argument in the Hartpence case was held in July 2020. The appellate court’s opinion remains pending.
For the matters described in this section for which a liability has been recorded, the amount recorded is not material to the Company’s consolidated results of operations or financial condition.
Compliance Matter
The Company, through its internal processes, discovered certain travel activities and related funding and record keeping issues raising concerns, arising from marketing efforts by certain business groups based in China. The Company initiated an internal investigation to determine whether the expenditures may have violated the U.S. Foreign Corrupt Practices Act (FCPA) or other potentially applicable anti-corruption laws.The Company has retained outside counsel and a forensic accounting firm to assist with the investigation. In July 2019, the Company voluntarily disclosed this investigation to both the Department of Justice and Securities and Exchange Commission and is cooperating with both agencies. The Company cannot predict at this time the outcome of its investigation or what potential actions may be taken by the Department of Justice or Securities and Exchange Commission.
51
NOTE 13.15. Stock-Based Compensation
The 3M 2016 Long-Term Incentive Plan (LTIP), as discussed in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K), provides for the issuance or delivery of up to 123,965,000 shares of 3M common stock pursuant to awards granted under the plan. Awards may be issued in the form of incentive stock options, nonqualified stock options, progressive stock options, stock appreciation rights, restricted stock, restricted stock units, other stock awards, and performance units and performance shares.The As of September 30, 2020, the remaining total shares available for grant under the LTIP Program are 30,232,906 as of September 30, 2017.16 million.
The Company’s annual stock option and restricted stock unit grant is made in February to provide a strong and immediate link between the performance of individuals during the preceding year and the size of their annual stock compensation grants. The grant to eligible employees uses the closing stock price on the grant date. Accounting rules require recognition of expense under a non-substantive vesting period approach, requiring the full recognition of compensation expense by the daterecognition when an employee is eligible to retire if awards become fully vested upon retirement. Under the LTIP, 3M employeesretire. Employees are considered eligible to retire at age 55 and after having completed ten years of service. This retiree-eligible population represents 35 percent of the 2017 annual grant stock-based compensation award expense dollars;expense; therefore, higher stock-based compensation expense is recognized in the first quarter of each fiscal year.quarter.
In addition to the annual grants, the Company makes other minor grants of stock options, restricted stock units and other stock-based grants. The Company issues cash settled restricted stock units and stock appreciation rights in certain countries. These grants do not result in the issuance of common stock and are considered immaterial by the Company.
Amounts recognized in the financial statements with respect to stock-based compensation programs, which include stock options, restricted stock, restricted stock units, performance shares and the General Employees’ Stock Purchase Plan (GESPP), are provided in the following table. Capitalized stock-based compensation amounts were not material for the three and nine months ended September 30, 20172020 and 2016.2019.
Stock-Based Compensation Expense
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
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Cost of sales |
| $ | 9 |
| $ | 8 |
| $ | 41 |
| $ | 39 |
| | $ | 9 | | $ | 8 | | $ | 41 | | $ | 39 | |
Selling, general and administrative expenses |
|
| 45 |
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| 36 |
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| 186 |
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| 166 |
| |
| 30 | |
| 33 | |
| 138 | |
| 151 | |
Research, development and related expenses |
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| 6 |
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| 7 |
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| 39 |
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| 39 |
| |
| 5 | |
| 7 | |
| 37 | |
| 40 | |
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Stock-based compensation expenses |
| $ | 60 |
| $ | 51 |
| $ | 266 |
| $ | 244 |
| | $ | 44 | | $ | 48 | | $ | 216 | | $ | 230 | |
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Income tax benefits |
| $ | (35) |
| $ | (49) |
| $ | (257) |
| $ | (248) |
| | | (13) | | | (12) | | | (67) | | | (120) | |
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Stock-based compensation expenses (benefits), net of tax |
| $ | 25 |
| $ | 2 |
| $ | 9 |
| $ | (4) |
| | $ | 31 | | $ | 36 | | $ | 149 | | $ | 110 | |
4752
Stock Option Program
The following table summarizes stock option activity during the nine months ended September 30, 2017:2020:
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| Weighted |
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| Average |
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| |||||||||||
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| Weighted |
| Remaining |
| Aggregate |
| |||||||||||||
|
| Number of |
| Average |
| Contractual |
| Intrinsic Value |
| |||||||||||||
|
| Options |
| Exercise Price |
| Life (months) |
| (millions) |
| |||||||||||||
| | | | | | | | | | | | |||||||||||
| | | | Weighted | | | | | ||||||||||||||
| | | | | | | Average | | | | | |||||||||||
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| |
| Weighted |
| Remaining |
| Aggregate | | |||||||||||||
| | Number of | | Average | | Contractual | | Intrinsic Value | | |||||||||||||
(Options in thousands) | | Options | | Exercise Price | | Life (months) | | (millions) | | |||||||||||||
Under option — |
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| | | | | | | | | | | |
January 1 |
| 36,196,232 |
| $ | 112.07 |
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|
| 33,675 | | $ | 151.15 |
| | | | |
|
Granted: |
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|
|
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|
| | | | | | | | | | | |
Annual |
| 5,409,628 |
|
| 175.93 |
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|
| 4,741 | |
| 157.26 |
| | |
| |
|
Other |
| 36 | |
| 155.43 |
| | |
| |
| |||||||||||
Exercised |
| (5,203,405) |
|
| 90.05 |
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|
|
|
|
| (2,132) | |
| 91.51 |
| | |
| |
|
Canceled |
| (137,827) |
|
| 161.38 |
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|
|
| |||||||||||
Forfeited |
| (250) | |
| 179.87 |
| | |
| |
| |||||||||||
September 30 |
| 36,264,628 |
| $ | 124.57 |
| 72 |
| $ | 3,095 |
|
| 36,070 | | $ | 155.28 |
| 65 | | $ | 643 |
|
Options exercisable |
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| | | | | | | | | | | |
September 30 |
| 25,532,812 |
| $ | 107.67 |
| 59 |
| $ | 2,610 |
|
| 28,189 | | $ | 148.59 |
| 54 | | $ | 629 |
|
Stock options vest over a period from one year to three years with the expiration date at 10 years from date of grant. As of September 30, 2017,2020, there was $85$71 million of compensation expense that has yet to be recognized related to non-vested stock option based awards. This expense is expected to be recognized over the remaining weighted-average vesting period of 2221 months. The total intrinsic values of stock options exercised were $526$160 million and $573$368 million during the nine months ended September 30, 20172020 and 2016,2019, respectively. Cash received from options exercised was $468$193 million and $630$304 million for the nine months ended September 30, 20172020 and 2016,2019, respectively. The Company’s actual tax benefits realized for the tax deductions related to the exercise of employee stock options were $179$34 million and $212$77 million for the nine months ended September 30, 20172020 and 2016,2019, respectively.
For the primary 20172020 annual stock option grant, the weighted average fair value at the date of grant was calculated using the Black-Scholes option-pricing model and the assumptions that follow.
Stock Option Assumptions
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| Annual |
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| 2017 |
| |||||
| | | | | ||||
| | Annual | | |||||
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| 2020 | | |||||
Exercise price |
| $ | 175.76 |
| | $ | 157.24 | |
Risk-free interest rate |
|
| 2.1 | % | |
| 1.5 | % |
Dividend yield |
|
| 2.5 | % | |
| 2.7 | % |
Expected volatility |
|
| 17.3 | % | |
| 19.7 | % |
Expected life (months) |
|
| 78 |
| |
| 78 | |
Black-Scholes fair value |
| $ | 23.51 |
| | $ | 21.58 | |
Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. For the 20172020 annual grant date, the Company estimated the expected volatility based upon the averagefollowing three volatilities of the most recent one year volatility,3M stock: the median of the term of the expected life rolling volatility,volatility; the median of the most recent term of the expected life volatility of 3M stock,volatility; and the implied volatility on the grant date. The expected lifeterm assumption is based on the weighted average of historical grants.
4853
Restricted Stock and Restricted Stock Units
The following table summarizes restricted stock and restricted stock unit activity during the nine months ended September 30, 2017:2020:
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| Weighted |
| |
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|
| Average |
| |
|
| Number of |
| Grant Date |
| |
|
| Awards |
| Fair Value |
| |
Nonvested balance — |
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|
|
As of January 1 |
| 2,185,046 |
| $ | 145.64 |
|
Granted |
|
|
|
|
|
|
Annual |
| 604,256 |
|
| 176.10 |
|
Other |
| 2,986 |
|
| 179.64 |
|
Vested |
| (761,484) |
|
| 126.78 |
|
Forfeited |
| (39,352) |
|
| 157.63 |
|
As of September 30 |
| 1,991,452 |
| $ | 161.90 |
|
| | | | | | |
| | |
| |||
|
|
|
| Weighted |
| |
| | | | Average |
| |
| | Number of | | Grant Date |
| |
(Shares in thousands) | | Shares | | Fair Value |
| |
Nonvested balance — | | | | | | |
As of January 1 |
| 1,573 | | $ | 201.11 | |
Granted | | | | | | |
Annual |
| 733 | |
| 157.29 | |
Other |
| 41 | |
| 158.91 | |
Vested |
| (560) | |
| 176.21 | |
Forfeited |
| (52) | |
| 198.48 | |
As of September 30 |
| 1,735 | | $ | 189.72 | |
As of September 30, 2017,2020, there was $93$96 million of compensation expense that has yet to be recognized related to non-vested restricted stock units and restricted stock.stock units. This expense is expected to be recognized over the remaining weighted-average vesting period of 2224 months. The total fair value of restricted stock units and restricted stock units that vested during the nine months ended September 30, 20172020 and 20162019 was $135$89 million and $145$136 million, respectively. The Company’s actual tax benefits realized for the tax deductions related to the vesting of restricted stock units and restricted stock units was $44$17 million and $54$26 million for the nine months ended September 30, 20172020 and 2016,2019, respectively.
Restricted stock units granted generally vest three years following the grant date assuming continued employment. Dividend equivalents equal to the dividends payable on the same number of shares of 3M common stock accrue on these restricted stock units during the vesting period, although no0 dividend equivalents are paid on any of these restricted stock units that are forfeited prior to the vesting date. Dividends are paid out in cash at the vest date on restricted stock units. Since the rights to dividends are forfeitable, there is no0 impact on basic earnings per share calculations. Weighted average restricted stock unit shares outstanding are included in the computation of diluted earnings per share.
Performance Shares
Instead of restricted stock units, the Company makes annual grants of performance shares to members of its executive management. The 20172020 performance criteria for these performance shares (organic volume growth, return on invested capital, free cash flow conversion, and earningearnings per share growth) were selected because the Company believes that they are important drivers of long-term stockholder value. The number of shares of 3M common stock that could actually be delivered at the end of the three-year performance period may be anywhere from 0% to 200% of each performance share granted, depending on the performance of the Company during such performance period. When granted, these performance shares are awarded at 100% of the estimated number of shares at the end of the three-year performance period and are reflected under “Granted” in the table below. Non-substantive vesting requires that expense for the performance shares be recognized over one or three years depending on when each individual became a 3M executive. The 2017 performance share grant accrues dividends,grants accrue dividends; therefore, the grant date fair value is equal to the closing stock price on the date of grant. Since the rights to dividends are forfeitable, there is no impact on basic earnings per share calculations. Weighted average performance shares whose performance period is complete are included in computation of diluted earnings per share.
4954
The following table summarizes performance share activity during the nine months ended September 30, 2017:2020:
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|
|
|
|
| ||||||
|
|
|
| Weighted |
| |||||||
|
|
|
| Average |
| |||||||
|
| Number of |
| Grant Date |
| |||||||
|
| Awards |
| Fair Value |
| |||||||
| | | | | | | ||||||
| | |
| |||||||||
|
|
|
| Weighted |
| |||||||
| | | | Average |
| |||||||
| | Number of | | Grant Date |
| |||||||
(Shares in thousands) | | Shares | | Fair Value |
| |||||||
Undistributed balance — |
|
|
|
|
|
| | | | | | |
As of January 1 |
| 656,278 |
| $ | 142.98 |
|
| 444 | | $ | 205.58 | |
Granted |
| 198,910 |
|
| 190.84 |
|
| 203 | |
| 153.16 | |
Distributed |
| (313,942) |
|
| 124.88 |
|
| (206) | |
| 190.84 | |
Performance change |
| 107,034 |
|
| 173.58 |
|
| 25 | |
| 166.49 | |
Forfeited |
| (10,769) |
|
| 169.38 |
|
| (43) | |
| 172.92 | |
As of September 30 |
| 637,511 |
| $ | 171.52 |
|
| 423 | | $ | 188.61 | |
As of September 30, 2017,2020, there was $36$24 million of compensation expense that has yet to be recognized related to performance shares. This expense is expected to be recognized over the remaining weighted-average earnings period of 1020 months. The total fair valuesvalue of performance shares that were distributed were $55$35 million and $54$45 million for the nine months ended September 30, 20172020 and 2016,2019, respectively. The Company’s actual tax benefits realized for the tax deductions related to the distribution of performance shares were $15$7 million and $9 million for both the nine months ended September 30, 20172020 and 2016.2019, respectively.
50
3M’s businesses are organized, managed and internally grouped into segments based on differences in markets, products, technologies and services. 3M manages its operations in five4 business segments: Industrial; Safety and Graphics;Industrial; Transportation and Electronics; Health Care; Electronics and Energy; and Consumer. 3M’s five4 business segments bring together common or related 3M technologies, enhancing the development of innovative products and services and providing for efficient sharing of business resources. Transactions among reportable segments are recorded at cost. 3M is an integrated enterprise characterized by substantial intersegment cooperation, cost allocations and inventory transfers. Therefore, management does not represent that these segments, if operated independently, would report the business segment operating income information shown.
Effective in the second quarter of 2020, the measure of segment operating performance used by 3M’s chief operating decision maker (CODM) changed and, as a result, 3M’s disclosed measure of segment profit/loss (business segment operating income) has been updated for all periods presented. The difference betweenchange to business segment operating income aligns with the update to how the CODM assesses performance and allocates resources for the Company’s business segments.
3M discloses business segment operating income as its measure of segment profit/loss, reconciled to both total 3M operating income and pre-tax income relates to interestbefore taxes. Business segment operating income includes dual credit for certain related operating income (as described below in “Elimination of Dual Credit”). Business segment operating income excludes certain expenses and interest expense, whichincome that are not allocated to business segments.segments (as described below in “Corporate and Unallocated”). Additionally, the following special items are excluded from business segment operating income and, instead, are included within Corporate and Unallocated: significant litigation-related charges/benefits, gain/loss on sale of businesses (see Note 3), and divestiture-related restructuring actions (see Note 5).
EffectiveIn addition, effective in the first quarter of 2017, as part of 3M’s2020, in a continuing effort to improve the alignment of its businesses around marketscustomers and customersmarkets, the Company made the following changes:
Continued alignment of customer account activity
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|
|
Integration of former Renewable Energy Division
|
|
Creation of Automotive and Aerospace Solutions Division
|
|
Consolidation of U.S. customer account activity - impacting dual credit reporting
|
|
55
| business segment net sales and operating income for the total year |
Additional actions impacting product line alignments
| ● | The remaining retail auto care product lines formerly in the Automotive Aftermarket Division (within the Safety and Industrial business segment), were realigned to the Construction and Home Improvement Division (within the Consumer business segment). This change resulted in a decrease of previously reported net sales and operating income for total year 2019 of $35 million and $11 million, respectively, in the Safety and Industrial business segment, offset by a corresponding increase in net sales and operating income within the Consumer business segment. |
| ● | In addition, certain product lines were realigned within business segments. The transdermal drug delivery components business, formerly included in the Drug Delivery Systems Division, was realigned to the Medical Solutions Division (both of which are within the Health Care business segment) and the paint protection film business, formerly included in the Automotive and Aerospace Division, was realigned to the Commercial Solutions Division (both of which are within the Transportation and Electronics business segment). |
The financial information presented herein reflects the impact of the preceding business segment reporting changes for all periods presented.
Business Segment Information
| | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| ||||||||
| | September 30, | | September 30, |
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Net Sales (Millions) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Safety and Industrial |
| $ | 3,024 |
| $ | 2,829 |
| $ | 8,627 |
| $ | 8,729 | |
Transportation and Electronics | |
| 2,314 | |
| 2,500 | |
| 6,489 | |
| 7,305 | |
Health Care | |
| 2,160 | |
| 1,721 | |
| 6,088 | |
| 5,290 | |
Consumer | |
| 1,417 | |
| 1,342 | |
| 3,911 | |
| 3,862 | |
Corporate and Unallocated | |
| — | |
| 28 | |
| (1) | |
| 98 | |
Elimination of Dual Credit | |
| (565) | |
| (429) | |
| (1,513) | |
| (1,259) | |
Total Company |
| $ | 8,350 |
| $ | 7,991 |
| $ | 23,601 |
| $ | 24,025 | |
| | | | | | | | | | | | | |
Operating Performance (Millions) | | | | | | | | | | | | | |
Safety and Industrial |
| $ | 823 |
| $ | 647 |
| $ | 2,185 |
| $ | 1,931 | |
Transportation and Electronics | |
| 552 | |
| 637 | |
| 1,416 | |
| 1,747 | |
Health Care | |
| 508 | |
| 459 | |
| 1,270 | |
| 1,401 | |
Consumer | |
| 358 | |
| 313 | |
| 914 | |
| 821 | |
Elimination of Dual Credit | |
| (145) | |
| (111) | |
| (384) | |
| (308) | |
Total business segment operating income |
| $ | 2,096 |
| $ | 1,945 |
| $ | 5,401 |
| $ | 5,592 | |
Corporate and Unallocated | | | | | | | | | | | | | |
Special items: | | | | | | | | | | | | | |
Significant litigation-related (charges)/benefits | | | — | | | — | | | (17) | | | (548) | |
Gain/(loss) on sale of businesses | | | — | | | 106 | | | 389 | | | 114 | |
Divestiture-related restructuring actions | | | — | | | — | | | (55) | | | — | |
Other corporate expense - net | |
| (187) | |
| (40) | |
| (406) | |
| (309) | |
Total Corporate and Unallocated | | | (187) | | | 66 | | | (89) | | | (743) | |
Total Company operating income | | $ | 1,909 | | $ | 2,011 | | $ | 5,312 | | $ | 4,849 | |
| | | | | | | | | | | | | |
Other expense/(income), net | | $ | 104 | | $ | 45 | | $ | 311 | | $ | 349 | |
Income before income taxes | | $ | 1,805 | | $ | 1,966 | | $ | 5,001 | | $ | 4,500 | |
5156
Business Segment Information
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|
| Three months ended |
| Nine months ended |
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| September 30, |
| September 30, |
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(Millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial |
| $ | 2,764 |
| $ | 2,603 |
| $ | 8,193 |
| $ | 7,856 |
|
Safety and Graphics |
|
| 1,529 |
|
| 1,500 |
|
| 4,603 |
|
| 4,538 |
|
Health Care |
|
| 1,476 |
|
| 1,371 |
|
| 4,339 |
|
| 4,176 |
|
Electronics and Energy |
|
| 1,414 |
|
| 1,250 |
|
| 3,838 |
|
| 3,468 |
|
Consumer |
|
| 1,236 |
|
| 1,210 |
|
| 3,415 |
|
| 3,390 |
|
Corporate and Unallocated |
|
| 1 |
|
| 2 |
|
| 5 |
|
| 5 |
|
Elimination of Dual Credit |
|
| (248) |
|
| (227) |
|
| (726) |
|
| (653) |
|
Total Company |
| $ | 8,172 |
| $ | 7,709 |
| $ | 23,667 |
| $ | 22,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial |
| $ | 614 |
| $ | 595 |
| $ | 1,762 |
| $ | 1,837 |
|
Safety and Graphics |
|
| 410 |
|
| 372 |
|
| 1,661 |
|
| 1,152 |
|
Health Care |
|
| 471 |
|
| 431 |
|
| 1,317 |
|
| 1,350 |
|
Electronics and Energy |
|
| 394 |
|
| 304 |
|
| 920 |
|
| 716 |
|
Consumer |
|
| 307 |
|
| 317 |
|
| 724 |
|
| 836 |
|
Corporate and Unallocated |
|
| (100) |
|
| (65) |
|
| (225) |
|
| (189) |
|
Elimination of Dual Credit |
|
| (55) |
|
| (50) |
|
| (160) |
|
| (144) |
|
Total Company |
| $ | 2,041 |
| $ | 1,904 |
| $ | 5,999 |
| $ | 5,558 |
|
Corporate and Unallocated
Corporate and unallocated operating income includes a variety of miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the Company may choose not to allocate directly to its business segments.segments and is disclosed as “other corporate expense-net”. Additionally, Corporate and Unallocated includes special items such as significant litigation-related charges/benefits, gain/loss on sale of businesses (see Note 3), and divestiture-related restructuring costs (see Note 5). Corporate and Unallocated also includes sales, costs, and income from contract manufacturing, transition services and other arrangements with the acquirer of the Communication Markets Division following its 2018 divestiture through 2019 and the acquirer of the former drug delivery business following its 2020 divestiture. Because this category includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.
Elimination of Dual Credit
3M business segment reporting measures include dual credit to business segments for certain U.S. sales and related operating income. Management evaluates each of its five4 business segments based on net sales and operating income performance, including dual credit U.S. reporting to further incentivize U.S. sales growth. As a result, 3M reflects additional (“dual”) credit to another business segment when the customer account activity (“sales district”) with respect to the particular product sold to the external customer in the U.S. is provided by a different business segment. This additional dual credit is largely reflected at the division level. For example, certain respiratorsprivacy screen protection products are primarily sold by the Personal SafetyDisplay Materials and Systems Division within the SafetyTransportation and GraphicsElectronics business segment; however, acertain sales districtdistricts within the IndustrialConsumer business segment providesprovide the contactcustomer account activity for sales of the product to particular customers in the U.S. market.customers. In this example, the non-primary selling segment (Industrial)(Consumer) would also receive credit for the associated net sales initiated thoughthrough its sales district and the related approximate operating income. The assigned operating income related to dual credit activity may differ from operating income that would result from actual costs associated with such sales. The offset to the dual credit business segment reporting is reflected as a reconciling item entitled “Elimination of Dual Credit,” such that sales and operating income for the U.S. in total are unchanged.
Certain sales and operating income results for electronic bonding product lines are equally divided between the Electronics and Energy business segment and the Industrial business segment.
5257
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM*
To the Shareholders and Board of Directors of 3M Company:
We have reviewed the accompanying consolidated balance sheetof 3M Company and its subsidiariesas of September 30, 2017, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2017 and 2016 and the consolidated statements of cash flows for the nine-month periods ended September 30, 2017 and 2016. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedbalance sheet as of December 31, 2016, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flowsfor the year then ended (not presented herein), and in our report dated February 9, 2017, except with respect to our opinion on the consolidated financial statements insofar as it relates to the business segment reporting changes discussed in Notes 3 and 16 as to which the date is May 4, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2016, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
|
|
|
|
*Pursuant to Rule 436(c) of the Securities Act of 1933 (“Act”) this should not be considered a “report” within the meaning of Sections 7 and 11 of the Act and the independent registered public accounting firm liability under Section 11 does not extend to it.
53
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of 3M’s financial statements with a narrative from the perspective of management. 3M’s MD&A is presented in the following sections:
| Overview |
| Results of Operations |
| Performance by Business Segment |
| Financial Condition and Liquidity |
| Cautionary Note Concerning Factors That May Affect Future Results |
Forward-looking statements in Part I, Item 2 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to the section entitled “Cautionary Note Concerning Factors That May Affect Future Results” in Part I, Item 2 and the risk factors provided in Part II, Item 1A for discussion of these risks and uncertainties).
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services.
As described in Note 16, effective in the second quarter of 2020, the measure of segment operating performance used by 3M’s Quarterly Reports on Form 10-Q forchief operating decision maker changed and, as a result, the periods ended March 31, 2017 and June 30, 2017, and also in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K),Company’s disclosed measure of segment profit/loss has been updated. Also, effective in the first quarter of 2017,2020, the Company changed its business segment reporting in its continuedcontinuing effort to improve the alignment of businesses around markets and customers. These changes includedAdditionally, the integration ofCompany consolidated the way it presents geographic area net sales by providing an aggregate Americas geographic region (combining former Renewable Energy Division into existing divisions, the combination of two divisions to form the AutomotiveUnited States and Aerospace Solutions Division,Latin America and consolidation of U.S. customer account activity, impacting dual credit reporting. Business segment information presentedCanada areas). Information provided herein reflects the impact of these changes for all periods presented. Refer to Note 14 for additional detail. This quarterly report on Form 10-Q should be read in conjunction with the Company’s consolidated statements and notes included in its Current Report on Form 8-K dated May 4, 2017.
3M manages its operations in fivefour operating business segments: Industrial; Safety and Graphics;Industrial; Transportation and Electronics; Health Care; Electronics and Energy; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis. Any references
Consideration of COVID-19:
3M is impacted by the global pandemic and related effects associated with the coronavirus (COVID-19). The Company updated its risk factors with respect to “Membrana” referCOVID-19, which can be found in Item 1A “Risk Factors” in this document.
Public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote working, have impacted 3M’s operations. 3M is working to protect its employees and the public, maintain business continuity and sustain its operations, including ensuring the safety and protection of people who work in its plants and distribution centers across the world, many of whom support the manufacturing and delivery of products that are critical in response to the former Separations Mediaglobal pandemic. COVID-19 has impacted 3M’s supply chains relative to global demand for products like respirators, surgical masks and commercial cleaning solutions. As this situation continues, 3M is also closely monitoring and responding to potential impacts to the Company’s broader supply chain associated with other products. COVID-19 has also affected the ability of suppliers and vendors to provide products and services to 3M. Furthermore, COVID-19 has impacted the broader economies of affected countries, including negatively impacting economic growth.The Company has taken steps to help employees lead safe and productive lives during the outbreak including remote working; escalated procedures in factories related to personal safety, cleaning and medical screening measures; and pandemic leave policies. 3M is closely monitoring how the spread of COVID-19 is affecting employees and business acquiredoperations and has developed preparedness plans to help protect the safety of employees around the world while safely continuing business. While nearly all of our manufacturing locations and distribution centers are fully or partially operational, the Company implemented plant and/or line shutdowns during 2020 related to certain markets due to weaker customer demand or government mandates. Some of the above factors have increased the demand for 3M products, while others have decreased demand or made it more difficult for 3M to serve customers. Serving 3M customers is a priority and teams continue to communicate with individual customers about potential disruptions.
3M’s total sales increased 4.5% and decreased 1.8% year-on-year in the third quarter and first nine months of 2020, respectively. Organic local-currency sales increased 0.9% and decreased 4.1% year-on-year in the third quarter and first nine months of 2020, respectively. Given the diversity of 3M’s businesses, the impact of COVID-19 varied across the Company in the third quarter and first
58
nine months of 2020. 3M experienced strong sales growth in personal safety, as well as in other areas such as home improvement, general cleaning, semiconductor, data center, and biopharma filtration. COVID-related respirator sales are estimated to have impacted year-on-year organic local-currency sales growth by approximately 3 percent and 2 percent for the third quarter and first nine months of 2020, respectively. At the same time, weakness in several end markets, while improving, contributed in part to sales declines in a number of 3M’s businesses with the biggest year-on-year first nine months total sales decreases in oral care (down 25 percent), automotive and aerospace (down 23 percent), advanced materials (down 20 percent), commercial solutions (down 17 percent), stationery and office (down 15 percent), automotive aftermarket (down 13 percent), and businesses aligned to general industrial applications such as abrasives (down 19 percent) and industrial adhesives and tapes (down 8 percent).
3M’s operating income margins decreased 2.3 and increased 2.3 percentage points year-on-year in the third quarter and first nine months of 2020, respectively. Factoring out the impact on operating income of special items as described in the Certain amounts adjusted for special items - (non-GAAP measures) section below, operating income margins decreased 0.9 and 0.8 percentage points to 22.9 percent and 21.2 percent, respectively, for the third quarter and first nine months of 2020 when compared the same periods in 2019. Various COVID-19 implications contributed in part to these decreases.
Overall, the impact of the COVID-19 pandemic on 3M’s consolidated results of operations was primarily driven by factors related to changes in demand for products and disruption in global supply chains as described above. While it is not feasible to identify or quantify all the other direct and indirect implications on 3M’s results of operations, below are factors that 3M from Polyporebelieves have also impacted its operating income for the third quarter and first nine months of 2020:
Factors contributing to charges:
| ● | Period expenses of unabsorbed manufacturing costs and increased expected credit losses on customer receivables. |
| ● | Restructuring actions addressing structural enterprise costs and operations in certain end markets as a result of the COVID-19 pandemic and related economic impact resulting in a second quarter 2020 charge of $58 million (as further discussed in Note 5). |
| ● | Committed financial support to various COVID-relief and medical research initiatives. |
| ● | Charge of $22 million related to equity securities as discussed in the “Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis” section of Note 13 that use the measurement alternative described therein in addition to an immaterial pre-tax charge related to impairment of certain indefinite lived tradenames in the first quarter of 2020. 3M continues to regularly consider if COVID-19 and other related market implications could indicate it is more likely than not the carrying amount of various applicable assets may be impaired and assess whether certain investments without readily determinable fair values may have been impacted. |
Factors providing benefits or other impacts:
| ● | Decreased discretionary spending in areas such as travel, professional services, and advertising/merchandising as well as cost reduction efforts, hiring freezes, and maintaining only essential contract workers. 3M plans to monitor discretionary spending and cost control efforts as the situation continues. |
| ● | Government-sponsored COVID-response stimulus and relief initiatives, including certain employment retention benefits under the Coronavirus Aid, Relief and Economic Security (CARES) Act in the United States. |
| ● | Lower self-insured medical visit/instance expense during the first nine months of 2020 as a result of lower expense in the second quarter of 2020 compared to the same period in 2019. |
| ● | Instituted accelerated vacation usage policies which benefit the second quarter of 2020 year-on-year, but provide a penalty in comparison to prior year in the second half of 2020. |
As previously disclosed, in 2015.light of circumstances, 3M took actions to ensure sources of cash may remain strong, including the March 2020 issuance of $1.75 billion of registered notes, suspension of share repurchases, and lowering its original $1.6 billion to $1.8 billion range of full year 2020 estimated capital spending which was further updated during the third quarter of 2020 to approximately $1.4 billion to $1.5 billion. While estimated capital spending decreased, it includes additional expansion of respirator production capacity. 3M continues to have access to its commercial paper program and undrawn committed credit facility. Refer to the Financial Condition and Liquidity section below for more information on the Company’s liquidity position.
The Company also continues to evaluate the extent to which it may avail itself of various government-sponsored COVID-response stimulus, relief, and production initiatives around the world, such as under the Defense Production Act (DPA) and CARES Act in the United States. During 2020, under the DPA, the U.S. government initiated certain agreements with 3M involving just over $200
59
million of anticipated funding of assets to expand capacity to supply N-95 respirators to the U.S. government. The nature of the agreement provides a program of expedited partial funding to begin expansion while final terms are completed.
Due to the speed with which the COVID-19 situation is developing and evolving and the uncertainty of its duration and the timing of recovery, 3M is not able at this time to predict the extent to which the COVID-19 pandemic may have a material effect on its consolidated results of operations or financial condition.
Earnings per share attributable to 3M common shareholders – diluted:
The following table provides the increase (decrease) in diluted earnings per share for the three months and nine months ended September 30, 2017 compared2020 and 2019.
| | | | | | | |
| | Three months ended | | Nine months ended | | ||
(Earnings per diluted share) |
| September 30, 2020 |
| September 30, 2020 |
| ||
Same period last year | | $ | 2.72 | | $ | 6.15 | |
Significant litigation-related charges/benefits | | | — | | | 0.72 | |
Loss on deconsolidation of Venezuelan subsidiary | | | — | | | 0.28 | |
Gain/loss on sale of businesses | | | (0.14) | | | (0.22) | |
Same period last year, excluding special items | | $ | 2.58 | | $ | 6.93 | |
Increase/(decrease) in earnings per share - diluted, due to: | | | | | | | |
Organic growth/productivity and other | | | (0.08) | | | (0.31) | |
Acquisitions/divestitures | | | 0.01 | | | (0.11) | |
Foreign exchange impacts | | | — | | | (0.13) | |
Income tax rate | | | (0.08) | | | (0.07) | |
Shares of common stock outstanding | | | — | | | 0.05 | |
Current period, excluding special items | | $ | 2.43 | | $ | 6.36 | |
Significant litigation-related charges/benefits | | | — | | | 0.07 | |
Gain/loss on sale of businesses | | | — | | | 0.52 | |
Divestiture-related restructuring actions | | | — | | | (0.08) | |
Current period | | $ | 2.43 | | $ | 6.87 | |
For the third quarter of 2020, net income attributable to 2016.
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended |
| ||
(Earnings per diluted share) |
| September 30, 2017 |
| September 30, 2017 |
| ||
Same period last year |
| $ | 2.15 |
| $ | 6.28 |
|
Increase/(decrease) in earnings per share - diluted, due to: |
|
|
|
|
|
|
|
Organic growth/productivity |
|
| 0.23 |
|
| 0.53 |
|
Foreign exchange impacts |
|
| (0.03) |
|
| (0.12) |
|
Income tax rate |
|
| 0.01 |
|
| 0.21 |
|
Shares of common stock outstanding/net interest |
|
| 0.02 |
|
| 0.08 |
|
Divestiture gains |
|
| — |
|
| 0.56 |
|
Operating loss/(income) from divested businesses |
|
| 0.01 |
|
| — |
|
Incremental strategic investments |
|
| (0.06) |
|
| (0.46) |
|
Current period |
| $ | 2.33 |
| $ | 7.08 |
|
Earnings3M was $1.413 billion, or $2.43 per diluted share increased 18 cents (or 8.4 percent) and 80 cents (or 12.7 percent)compared to $1.583 billion or $2.72 per diluted share in the third quarter andsame period last year, a decrease of 10.7 percent on a per diluted share basis. For the first nine months of 2017, respectively, when2020 net income attributable to 3M was $3.995 billion, or $6.87 per diluted share compared to $3.601 billion or $6.15 per diluted share in the same periodsperiod last year. Organic growth/productivity includes
54
Tableyear, an increase of Contents11.7 percent on a per diluted share basis.
benefits from higher organic local-currency sales, raw material cost decreases,
The Company refers to various amounts or measures on an “adjusted basis”. These exclude special items. These non-GAAP measures are further described and business transformation, which is having a positive impact on 3M’s productivity efforts. These benefits were partially offset by higher defined benefit pension expenses. During bothreconciled to the most directly comparable GAAP financial measures in the Certain amounts adjusted for special items - (non-GAAP measures) section below.
On an adjusted basis for the third quarter and2020, net income attributable to 3M was $1.413 billion, or $2.43 per diluted share versus $1.504 billion, or $2.58 per diluted share in the same period last year, which was a decrease of 5.8 percent on a per diluted share basis. On an adjusted basis for the first nine months of 2017, organic growth2020, net income attributable to 3M was the primary driver for the year-on-year benefit.
Foreign currency impacts (net of hedging) decreased pre-tax earnings by approximately $29 million and $108 million year-on-year in the third quarter and first nine months of 2017, respectively, excluding the impact of foreign currency changes on tax rates. This is equivalent to a year-on-year decrease of 3 cents and 12 cents$3.699 billion, or $6.36 per diluted share versus $4.058 billion, or $6.93 per diluted share for the third quarter and first nine months of 2017, respectively.
The effective income tax ratesame period last year, which was 28.3 percent in the third quarter of 2017, a decrease of 0.2 percentage points versus last year’s third quarter, and 26.18.2 percent in the first nine months of 2017,on a decline of 2.2 percentage points versus last year’s first nine months. The third quarter and first nine months 2017 change in tax rate was driven by a number of factors as referenced in Note 6.
Lower shares outstanding, partially offset by higher interest expense, increased earnings per share. Weighted-average diluted shares outstanding in the third quarter and first nine months of 2017 declined 1.0 percent and 1.3 percent year-on-year, respectively, which benefited earnings per share. The decrease in the outstanding weighted-average diluted shares relates to the Company’s purchase of $380 million and $1.6 billion of its own stock in the third quarter and first nine months of 2017, respectively. Higher net interest expense was largely due to higher U.S. average debt balances and higher interest rates.
The third quarter and first nine months of 2017 had year-on-year operating income impacts from the following divestitures: Polyfoam and the remaining portion of the library system business (both in first quarter 2016), protective films business and cathode battery technology out-license business (both in fourth quarter 2016), prescription safety eyewear business (January 2017), and identity management business and tolling and automated license/number plate recognition business (both in the second quarter of 2017).
There was no incremental gain on divestiture impact during the third quarter of 2017. The pre-tax operating income increase during the first nine months of 2017 was approximately $450 million year-on-year, which is equivalent to a year-on-year increase of 56 cents per diluted share (largelybasis.
Additional discussion related to the identify management business).components of the year-on-year change in earnings per diluted share follows:
Divestiture lost operating loss/(income)
60
Organic growth/productivity and other:
| ● | Lower organic volume growth in the first nine months of 2020 as a result of significant COVID-19 related impacts, in addition to COVID-related net factors described in the preceding Overview—Consideration of COVID-19 section, decreased earnings per diluted share year-on-year. These net factors included cost saving actions taken in response to COVID-19 but also reflected second quarter 2020 charges for items such as restructuring actions addressing structural enterprise costs and operations in certain end markets as a result of the COVID-19 pandemic and related economic impact (further described in Note 5) along with certain related follow-on accelerated depreciation. Additional items that reduced earnings per diluted share year-on-year include net gains related to certain property sales in the third quarter of 2019. Partially offsetting this net decrease were benefits recognized in the first nine months of 2020 related to the restructuring and other actions taken in 2019 (and the adjustments thereto in 2020) in addition to continued cost management and productivity efforts. |
| ● | On a combined basis, higher defined benefit pension and postretirement service cost increased expense year-on-year. |
| ● | Interest expense (net of interest income) increased year-on-year for both the third quarter and first nine months of 2020, as a result of higher U.S. average debt balances and lower year-on-year interest income driven by lower average interest rates on cash balances. |
Acquisitions/divestitures:
| ● | Acquisition impacts, which are measured for the first twelve months post-transaction, relate to the acquisitions of M*Modal (first quarter 2019), and Acelity (fourth quarter 2019). These items collectively increased earnings per diluted share by 2 cents for the third quarter of 2020 and decreased earnings per diluted share by 7 cents for the first nine months of 2020. The net impacts related to these acquisitions included income from operations, partially offset in the third quarter of 2020 and more than offset for the first nine months of 2020 by transaction and integration costs. Financing costs related to these acquisitions is also included. |
| ● | Divestiture impacts include the lost operating income from divested businesses, which decreased earnings per diluted share by 1 cent and 4 cents for the third quarter and first nine months of 2020, respectively. This was primarily related to the divestiture of the Company’s drug delivery business. |
Foreign exchange impacts:
| ● | Foreign currency impacts (net of hedging) decreased pre-tax earnings year-on-year by approximately $8 million and $103 million, which had a minimal effect on diluted earnings per share for the third quarter of 2020 and 13 cents per diluted share for the first nine months of 2020, excluding the impact of foreign currency changes on tax rates. |
Income tax rate:
| ● | Certain items above reflect specific income tax rates associated with those items. Overall, the effective tax rate for the third quarter of 2020 was 21.4 percent, an increase of 2.1 percentage points versus 2019. The effective tax rate for the first nine months of 2020 was 20.0 percent, an increase of 0.3 percentage points versus 2019. Excluding the special items (as discussed below), the effective tax rate increased 2.4 percentage points and 0.8 percentage points year-on-year for the third quarter and first nine months of 2020, respectively. |
| ● | The primary factor that increased the effective tax rate for the third quarter year-on-year was nonrepeating 2019 favorable adjustments related to international tax provisions of U.S. tax reform. |
| ● | The effective tax rate for the first nine months of 2020 was largely consistent with that of 2019. |
Shares of common stock outstanding:
| ● | Lower shares outstanding had minimal impact to earnings per diluted share for the third quarter of 2020 and increased earnings per share year-on-year by 5 cents per diluted share for the first nine months of 2020. Weighted-average diluted shares outstanding in the third quarter and first nine months of 2020 declined 0.1 percent and 0.7 percent year-on-year, respectively, which benefited earnings per share. The decrease in the outstanding weighted-average diluted shares relates to the Company’s purchase of $366 million of its own stock in the first nine months of 2020, prior to 3M’s suspension of its stock repurchase program in late March 2020. |
61
Certain amounts adjusted for special items - (non-GAAP measures):
In addition to reporting financial results in accordance with U.S. GAAP, the Company also provides non-GAAP measures that adjust for the first twelve months post-transaction, increased pre-tax earnings by approximately $10 millionimpacts of special items. For the periods presented, special items include the items described below. Beginning in 2020, the Company includes gain/loss on sale of businesses and decreased pre-tax earnings by approximately $2 milliondivestiture-related restructuring actions as special items due to their potential distortion of underlying operating results. Information provided herein reflects the impact of this change for the third quarter and first nine months of 2017, respectively.
all periods presented. Operating income (measure of segment operating performance), income before taxes, net income, earnings per share, and the effective tax rate are all measures for which 3M provides the reported GAAP measure and a measure adjusted for special items. The adjusted measures are not in accordance with, nor are they a substitute for, GAAP measures. The Company considers these non-GAAP measures in evaluating and managing the Company’s operations. The Company believes that discussion of results include year-on-year incremental strategic investments that decreased pre-tax earningsadjusted for these items is meaningful to investors as it provides a useful analysis of ongoing underlying operating trends. The determination of these items may not be comparable to similarly titled measures used by approximately $48 million and $362 million in the third quarter and first nine monthsother companies. Special items include:
Significant litigation-related charges/benefits:
| ● | In the first quarter of 2020, 3M recorded a net pre-tax charge of $17 million ($13 million after tax) related to PFAS (certain perfluorinated compounds) matters. The charge was more than offset by a reduction in tax expense of $52 million related to resolution of tax treatment with authorities regarding the previously disclosed 2018 agreement reached with the State of Minnesota that resolved the Natural Resources Damages (NRD) lawsuit. These items, in aggregate, resulted in a $39 million after tax benefit. |
| ● | In the first quarter of 2019, 3M recorded significant litigation-related charges of $548 million ($424 million after tax) related to historical PFAS manufacturing operations and coal mine dust respirator mask lawsuits as further discussed in Note 14. These were reflected in cost of sales ($223 million) and selling, general and administrative expense ($325 million). |
Loss on deconsolidation of 2017, respectively. These incremental strategic investments are comprisedVenezuelan subsidiary:
| ● | In the second quarter of 2019, 3M recorded a pre-tax charge of $162 million related to the deconsolidation of the Company’s Venezuelan subsidiary as further discussed in Note 1. |
Gain/loss on sale of 3M’s investments in growth initiatives and optimization of its portfolio and supply chain footprint. Additional discussion on strategic investments is provided later within “Divestitures and Strategic Investments” and also within the “Results of Operations” section.businesses:
| ● | In the first quarter of 2020, 3M recorded a pre-tax gain of $2 million ($1 million loss after tax) related to the sale of its advanced ballistic-protection business and recognition of certain contingent consideration. In the second quarter of 2020, 3M recorded a pre-tax gain of $387 million ($304 million after tax) related to the sale of its drug delivery business. Refer to Note 3 for further details. |
| ● | In the first quarter of 2019, 3M recorded a gain related to the sale of certain oral care technology comprising a business in addition to reflecting an earnout on a previous divestiture, which together resulted in a net gain of $8 million ($7 million after tax). In the second quarter of 2019, as a result of a “held for sale” tax benefit related to the legal entities associated with the pending divestiture of the Company’s gas and flame detection business, 3M recorded an after tax gain of $43 million. In the third quarter of 2019, 3M recorded a gain related to the divestiture of the Company’s gas and flame detection business and an immaterial impact as a result of measuring a disposal group at the lower of its carrying amount or fair value less cost to sell, which in aggregate resulted in a pre-tax gain of $106 million ($79 million after tax). |
Divestiture-related restructuring actions:
| ● | In the second quarter 2020, following the divestiture of substantially all of the drug delivery business (see Note 3) management approved and committed to undertake certain restructuring actions addressing corporate functional costs and manufacturing footprint across 3M in relation to the magnitude of amounts previously allocated/burdened to the divested business. As a result, 3M recorded a pre-tax charge of $55 million ($46 million after tax). Refer to Note 5 for further details. |
5562
| | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions, except per share amounts) | | | Operating Income | | Operating Income Margin | | | Income Before Taxes | | | Provision for Income Taxes | | Effective Tax Rate | | | Net Income Attributable to 3M | | | Earnings Per Diluted Share | | Earnings per diluted share percent change | |
Three months ended September 30, 2019 GAAP | | $ | 2,011 | | 25.2 | % | $ | 1,966 | | $ | 378 | | 19.3 | % | $ | 1,583 | | $ | 2.72 | | | |
Adjustments for special items: | | | | | | | | | | | | | | | | | | | | | | |
Gain/loss on sale of businesses | | | (106) | | | | | (106) | | | (27) | | | | | (79) | | | (0.14) | | | |
Three months ended September 30, 2019 adjusted amounts (non-GAAP measures) | | $ | 1,905 | | 23.8 | % | $ | 1,860 | | $ | 351 | | 19.0 | % | $ | 1,504 | | $ | 2.58 | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2020 GAAP |
| $ | 1,909 | | 22.9 | % | $ | 1,805 | | $ | 387 | | 21.4 | % | $ | 1,413 | | $ | 2.43 | | (10.7) | % |
Adjustments for special items: | | | | | | | | | | | | | | | | | | | | | | |
None | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2020 adjusted amounts (non-GAAP measures) |
| $ | 1,909 | | 22.9 | % | $ | 1,805 | | $ | 387 | | 21.4 | % | $ | 1,413 | | $ | 2.43 | | (5.8) | % |
| | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions, except per share amounts) | | | Operating Income | | Operating Income Margin | | | Income Before Taxes | | | Provision for Income Taxes | | Effective Tax Rate | | | Net Income Attributable to 3M | | | Earnings Per Diluted Share | | Earnings per diluted share percent change | |
Nine months ended September 30, 2019 GAAP | | $ | 4,849 | | 20.2 | % | $ | 4,500 | | $ | 888 | | 19.7 | % | $ | 3,601 | | $ | 6.15 | | | |
Adjustments for special items: | | | | | | | | | | | | | | | | | | | | | | |
Significant litigation-related charges/benefits | | | 548 | | | | | 548 | | | 124 | | | | | 424 | | | 0.72 | | | |
Gain/loss on sale of businesses | | | (114) | | | | | (114) | | | 15 | | | | | (129) | | | (0.22) | | | |
Loss on deconsolidation of Venezuelan subsidiary |
| | — | | | | | 162 | | | — | | | | | 162 | | | 0.28 | | | |
Nine months ended September 30, 2019 adjusted amounts (non-GAAP measures) | | $ | 5,283 | �� | 22.0 | % | $ | 5,096 | | $ | 1,027 | | 20.2 | % | $ | 4,058 | | $ | 6.93 | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2020 GAAP |
| $ | 5,312 | | 22.5 | % | $ | 5,001 | | $ | 1,002 | | 20.0 | % | $ | 3,995 | | $ | 6.87 | | 11.7 | % |
Adjustments for special items: | | | | | | | | | | | | | | | | | | | | | | |
Significant litigation-related charges/benefits | | | 17 | | | | | 17 | | | 56 | | | | | (39) | | | (0.07) | | | |
Gain/loss on sale of businesses | | | (389) | | | | | (389) | | | (86) | | | | | (303) | | | (0.52) | | | |
Divestiture-related restructuring actions | | | 55 | | | | | 55 | | | 9 | | | | | 46 | | | 0.08 | | | |
Nine months ended September 30, 2020 adjusted amounts (non-GAAP measures) |
| $ | 4,995 | | 21.2 | % | $ | 4,684 | | $ | 981 | | 21.0 | % | $ | 3,699 | | $ | 6.36 | | (8.2) | % |
63
Sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the three months and nine months ended September 30, 20172020 and 2016. In addition to the discussion below, refer2019. Refer to the section entitled “Performance by Business Segment” later in MD&A for a more detailedadditional discussion of the sales and operating incomeconcerning 2020 versus 2019 results, of the Company and its respective business segments (includingincluding Corporate and Unallocated).Unallocated. Refer to Note 1416 for additional information on business segments, including Elimination of Dual Credit. Further discussion of the Company’s operating income results is in the section entitled “Operating Income” within the “Results of Operations” section.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| Three months ended September 30, |
|
|
| |||||||||||||||||||||||||||||||
|
| 2017 |
| 2016 |
| % change |
| |||||||||||||||||||||||||||||
|
| Net |
| Oper. |
| Net |
| Oper. |
| Net |
| Oper. |
| |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||||||||||
| | Three months ended September 30, | | |
| | ||||||||||||||||||||||||||||||
| | 2020 | | 2019 | | % change | | |||||||||||||||||||||||||||||
|
| Net |
| Oper. |
| Net | | Oper. | | Net | | | Oper. | | | |||||||||||||||||||||
(Dollars in millions) |
| Sales |
| Income |
| Sales |
| Income |
| Sales |
| Income |
| | Sales | | Income | | Sales | | Income | | Sales | | | Income | | | ||||||||
Business Segments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | |
Industrial |
| $ | 2,764 |
| $ | 614 |
| $ | 2,603 |
| $ | 595 |
| 6.2 | % | 3.1 | % | |||||||||||||||||||
Safety and Graphics |
|
| 1,529 |
|
| 410 |
|
| 1,500 |
|
| 372 |
| 1.9 | % | 10.5 | % | |||||||||||||||||||
Safety and Industrial | | $ | 3,024 |
| $ | 823 | | $ | 2,829 |
| $ | 647 |
| 6.9 | % | | 27.2 | % | | |||||||||||||||||
Transportation and Electronics | |
| 2,314 |
|
| 552 | |
| 2,500 |
|
| 637 |
| (7.4) | | | (13.2) | | | |||||||||||||||||
Health Care |
|
| 1,476 |
|
| 471 |
|
| 1,371 |
|
| 431 |
| 7.7 | % | 9.3 | % | |
| 2,160 |
|
| 508 | |
| 1,721 |
|
| 459 |
| 25.5 | | | 10.6 | | |
Electronics and Energy |
|
| 1,414 |
|
| 394 |
|
| 1,250 |
|
| 304 |
| 13.1 | % | 29.9 | % | |||||||||||||||||||
Consumer |
|
| 1,236 |
|
| 307 |
|
| 1,210 |
|
| 317 |
| 2.2 | % | (3.2) | % | |
| 1,417 |
|
| 358 | |
| 1,342 |
|
| 313 |
| 5.6 | | | 14.7 | | |
Corporate and Unallocated |
|
| 1 |
|
| (100) |
|
| 2 |
|
| (65) |
| — |
| — |
| |
| — |
|
| (187) | |
| 28 |
|
| 66 |
| — | | | — | | |
Elimination of Dual Credit |
|
| (248) |
|
| (55) |
|
| (227) |
|
| (50) |
| — |
| — |
| |
| (565) |
|
| (145) | |
| (429) |
|
| (111) |
| — | | | — | | |
Total Company |
| $ | 8,172 |
| $ | 2,041 |
| $ | 7,709 |
| $ | 1,904 |
| 6.0 | % | 7.2 | % | | $ | 8,350 |
| $ | 1,909 | | $ | 7,991 |
| $ | 2,011 |
| 4.5 | % | | (5.1) | % | |
| | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | |||||||||||||
| | 2020 | | 2019 | | % change |
| | |||||||||||
|
| Net |
| Oper. |
| Net |
| Oper. |
| Net |
| | Oper. |
| | ||||
(Dollars in millions) | | Sales | | Income | | Sales | | Income | | Sales | | | Income |
| | ||||
Business Segments | | | | | | | | | | | | | | | | | | | |
Safety and Industrial | | $ | 8,627 |
| $ | 2,185 | | $ | 8,729 |
| $ | 1,931 |
| (1.2) | % | | 13.2 | % | |
Transportation and Electronics | |
| 6,489 |
|
| 1,416 | |
| 7,305 |
|
| 1,747 |
| (11.2) | | | (18.9) | | |
Health Care | |
| 6,088 |
|
| 1,270 | |
| 5,290 |
|
| 1,401 |
| 15.1 | | | (9.4) | | |
Consumer | |
| 3,911 |
|
| 914 | |
| 3,862 |
|
| 821 |
| 1.3 | | | 11.4 | | |
Corporate and Unallocated | |
| (1) |
|
| (89) | |
| 98 |
|
| (743) |
| — | | | — | | |
Elimination of Dual Credit | |
| (1,513) |
|
| (384) | |
| (1,259) |
|
| (308) |
| — | | | — | | |
Total Company | | $ | 23,601 |
| $ | 5,312 | | $ | 24,025 |
| $ | 4,849 |
| (1.8) | % | | 9.6 | % | |
| | | | | | | | | | | |
| | Three months ended September 30, 2020 |
| ||||||||
Worldwide Sales Change | | Organic local- | | | | | | | | Total sales |
|
By Business Segment | | currency sales | | Acquisitions | | Divestitures | | Translation | | change |
|
Safety and Industrial |
| 6.9 | % | — | % | (0.4) | % | 0.4 | % | 6.9 | % |
Transportation and Electronics |
| (7.1) | | — | | (1.2) | | 0.9 | | (7.4) | |
Health Care |
| 8.1 | | 23.4 | | (7.1) | | 1.1 | | 25.5 | |
Consumer |
| 5.5 | | — | | — | | 0.1 | | 5.6 | |
Total Company |
| 0.9 | % | 4.8 | % | (1.8) | % | 0.6 | % | 4.5 | % |
| | | | | | | | | | | |
| | Nine months ended September 30, 2020 |
| ||||||||
Worldwide Sales Change | | Organic local- | | | | | | | | Total sales |
|
By Business Segment | | currency sales | | Acquisitions | | Divestitures | | Translation | | change |
|
Safety and Industrial |
| 0.9 | % | — | % | (0.8) | % | (1.3) | % | (1.2) | % |
Transportation and Electronics |
| (9.8) | | — | | (1.0) | | (0.4) | | (11.2) | |
Health Care |
| (1.3) | | 20.9 | | (3.7) | | (0.8) | | 15.1 | |
Consumer |
| 2.1 | | — | | — | | (0.8) | | 1.3 | |
Total Company |
| (4.1) | % | 4.5 | % | (1.3) | % | (0.9) | % | (1.8) | % |
|
|
|
|
|
|
|
|
|
|
|
| Three months ended September 30, 2017 |
| ||||||
|
| Organic |
|
|
|
|
|
|
|
Worldwide |
| local- |
|
|
|
|
| Total |
|
Sales Change Analysis |
| currency |
|
|
|
|
| sales |
|
By Business Segment |
| sales |
| Divestitures |
| Translation |
| change |
|
|
|
|
|
|
|
|
|
|
|
Industrial |
| 6.1 | % | (0.6) | % | 0.7 | % | 6.2 | % |
Safety and Graphics |
| 6.0 |
| (4.9) |
| 0.8 |
| 1.9 |
|
Health Care |
| 6.9 |
| — |
| 0.8 |
| 7.7 |
|
Electronics and Energy |
| 13.2 |
| (0.1) |
| — |
| 13.1 |
|
Consumer |
| 1.9 |
| — |
| 0.3 |
| 2.2 |
|
Total Company |
| 6.6 | % | (1.2) | % | 0.6 | % | 6.0 | % |
Sales in U.S. dollars in the third quarter of 2017 increased 6.0 percent compared to the same period in 2016, with increases in organic local-currency sales (which includes organic volume impacts plus selling price impacts) and foreign currency translation, partially offset by divestiture impacts. Total company organic local-currency sales increased 6.6 percent, with growth in all business segments. Worldwide operating income margins for the third quarter of 2017 were 25.0 percent, compared to 24.7 percent for the third quarter of 2016, with operating income margins greater than 22 percent across all five business segments.
Divestitures reduced third quarter sales growth by 1.2 percent. As part of its ongoing portfolio management process, 3M sold its protective films business and cathode battery technology out-license business (both in fourth quarter 2016). In addition, 3M sold its prescription safety eyewear business (January 2017), its identify management business (May 2017), and its tolling and automated license/number plate recognition business (June 2017). Refer to Note 2 in the Consolidated Financial Statements for additional detail.
5664
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|
|
|
|
|
|
|
|
|
| Nine months ended September 30, |
|
|
| ||||||||||||
|
| 2017 |
| 2016 |
| % change |
| ||||||||||
|
| Net |
| Oper. |
| Net |
| Oper. |
| Net |
| Oper. |
| ||||
(Dollars in millions) |
| Sales |
| Income |
| Sales |
| Income |
| Sales |
| Income |
| ||||
Business Segments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial |
| $ | 8,193 |
| $ | 1,762 |
| $ | 7,856 |
| $ | 1,837 |
| 4.3 | % | (4.1) | % |
Safety and Graphics |
|
| 4,603 |
|
| 1,661 |
|
| 4,538 |
|
| 1,152 |
| 1.4 | % | 44.2 | % |
Health Care |
|
| 4,339 |
|
| 1,317 |
|
| 4,176 |
|
| 1,350 |
| 3.9 | % | (2.4) | % |
Electronics and Energy |
|
| 3,838 |
|
| 920 |
|
| 3,468 |
|
| 716 |
| 10.6 | % | 28.5 | % |
Consumer |
|
| 3,415 |
|
| 724 |
|
| 3,390 |
|
| 836 |
| 0.7 | % | (13.4) | % |
Corporate and Unallocated |
|
| 5 |
|
| (225) |
|
| 5 |
|
| (189) |
| — |
| — |
|
Elimination of Dual Credit |
|
| (726) |
|
| (160) |
|
| (653) |
|
| (144) |
| — |
| — |
|
Total Company |
| $ | 23,667 |
| $ | 5,999 |
| $ | 22,780 |
| $ | 5,558 |
| 3.9 | % | 7.9 | % |
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, 2017 |
| ||||||
|
| Organic |
|
|
|
|
|
|
|
Worldwide |
| local- |
|
|
|
|
| Total |
|
Sales Change Analysis |
| currency |
|
|
|
|
| sales |
|
By Business Segment |
| sales |
| Divestitures |
| Translation |
| change |
|
|
|
|
|
|
|
|
|
|
|
Industrial |
| 5.2 | % | (0.6) | % | (0.3) | % | 4.3 | % |
Safety and Graphics |
| 4.6 |
| (3.0) |
| (0.2) |
| 1.4 |
|
Health Care |
| 4.1 |
| — |
| (0.2) |
| 3.9 |
|
Electronics and Energy |
| 11.0 |
| (0.2) |
| (0.2) |
| 10.6 |
|
Consumer |
| 0.5 |
| — |
| 0.2 |
| 0.7 |
|
Total Company |
| 5.0 | % | (0.9) | % | (0.2) | % | 3.9 | % |
Sales in U.S. dollars in the first nine months of 2017 increased 3.9 percent, with an increase in organic local-currency sales partially offset by divestiture and foreign currency translation impacts. Total company organic local-currency sales increased 5.0 percent, with growth in all business segments. All five of 3M’s business segments achieved operating income margins in excess of 21 percent. Worldwide operating income margins for the first nine months of 2017 were 25.3 percent, compared to 24.4 percent for the first nine months of 2016, helped by a net benefit from divestiture gains, net of lost operating income, partially offset by incremental strategic investments. Organic volume growth also benefited results.
In the first quarter of 2016, 3M completed the sale of the remaining portions of its library systems business. Also, in the first quarter of 2016, 3M divested the assets of 3M’s pressurized polyurethane foam adhesives business (formerly known as Polyfoam). These businesses were formerly part of the Company’s Safety and Graphics business and Industrial business, respectively. Additional acquisition and divestiture impacts that impacted the first nine months ended September 30, 2017 are provided in the preceding third quarter discussion.
57
Sales by geographic area:
Percent change information compares the third quarter and first nine months of 20172020 with the same periodsperiod last year, unless otherwise indicated. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis. Additional discussion of geographic area impacts by business segment is provided in the Performance by Business Segment section.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Three months ended September 30, 2017 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| Europe, |
| Latin |
|
|
|
|
|
|
| ||||||||||||||||||
|
| United |
| Asia |
| Middle East |
| America/ |
| Other |
|
|
|
| |||||||||||||||||||||
|
| States |
| Pacific |
| & Africa |
| Canada |
| Unallocated |
| Worldwide |
| ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | |||||||||||||||||||
| | Three months ended September 30, 2020 |
| ||||||||||||||||||||||||||||||||
| | | | | | | | Europe, | | | | | | |
| ||||||||||||||||||||
| | | | Asia | | Middle East | | Other | | | |
| |||||||||||||||||||||||
|
| Americas |
| Pacific |
| & Africa |
| Unallocated |
| Worldwide |
| ||||||||||||||||||||||||
Net sales (millions) |
| $ | 3,223 |
| $ | 2,580 |
| $ | 1,589 |
| $ | 784 |
| $ | (4) |
| $ | 8,172 |
|
| $ | 4,347 |
| $ | 2,474 |
| $ | 1,528 |
| $ | 1 |
| $ | 8,350 | |
% of worldwide sales |
|
| 39.4 | % |
| 31.6 | % |
| 19.4 | % |
| 9.6 | % |
| — |
|
| 100.0 | % | |
| 52.1 | % |
| 29.6 | % |
| 18.3 | % |
| — | |
| 100.0 | % |
Components of net sales change: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | |
Volume — organic |
|
| 3.8 | % |
| 13.4 | % |
| 3.3 | % |
| 4.4 | % |
| — |
|
| 6.6 | % | |
| 2.3 | % |
| (1.8) | % |
| (1.8) | % |
| — | |
| 0.3 | % |
Price |
|
| (0.2) |
|
| (0.6) |
|
| 0.7 |
|
| 0.9 |
|
| — |
|
| — |
| |
| 1.1 | |
| (0.8) | |
| 1.5 | |
| — | |
| 0.6 | |
Organic local-currency sales |
|
| 3.6 |
|
| 12.8 |
|
| 4.0 |
|
| 5.3 |
|
| — |
|
| 6.6 |
| |
| 3.4 | |
| (2.6) | |
| (0.3) | |
| — | |
| 0.9 | |
Acquisitions | |
| 7.5 | |
| 1.0 | |
| 4.1 | |
| — | |
| 4.8 | | |||||||||||||||||||
Divestitures |
|
| (1.6) |
|
| (0.5) |
|
| (0.8) |
|
| (2.1) |
|
| — |
|
| (1.2) |
| |
| (1.8) | |
| (0.6) | |
| (4.0) | |
| — | |
| (1.8) | |
Translation |
|
| — |
|
| (1.5) |
|
| 4.2 |
|
| 2.4 |
|
| — |
|
| 0.6 |
| |
| (1.4) | |
| 1.6 | |
| 4.6 | |
| — | |
| 0.6 | |
Total sales change |
|
| 2.0 | % |
| 10.8 | % |
| 7.4 | % |
| 5.6 | % |
| — |
|
| 6.0 | % | |
| 7.7 | % |
| (0.6) | % |
| 4.4 | % |
| — | |
| 4.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | |||||||||||||||||||
Total sales change: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | |
Industrial |
|
| 4.0 | % |
| 6.4 | % |
| 9.6 | % |
| 7.2 | % |
| — |
|
| 6.2 | % | ||||||||||||||||
Safety and Graphics |
|
| (3.0) | % |
| 6.2 | % |
| 8.7 | % |
| (0.6) | % |
| — |
|
| 1.9 | % | ||||||||||||||||
Safety and Industrial | | | 8.3 | % | | 0.1 | % | | 11.3 | % | | — | | | 6.9 | % | |||||||||||||||||||
Transportation and Electronics | | | (14.6) | % | | (2.2) | % | | (12.7) | % | | — | | | (7.4) | % | |||||||||||||||||||
Health Care |
|
| 8.5 | % |
| 7.4 | % |
| 5.2 | % |
| 10.7 | % |
| — |
|
| 7.7 | % | | | 37.3 | % | | 4.6 | % | | 15.4 | % | | — | | | 25.5 | % |
Electronics and Energy |
|
| (1.8) | % |
| 19.2 | % |
| 4.8 | % |
| 8.3 | % |
| — |
|
| 13.1 | % | ||||||||||||||||
Consumer |
|
| 1.1 | % |
| 5.3 | % |
| 1.6 | % |
| 5.6 | % |
| — |
|
| 2.2 | % | | | 5.8 | % | | 1.6 | % | | 10.0 | % | | — | | | 5.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | |||||||||||||||||||
Organic local-currency sales change: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | |
Industrial |
|
| 5.0 | % |
| 8.7 | % |
| 5.2 | % |
| 5.6 | % |
| — |
|
| 6.1 | % | ||||||||||||||||
Safety and Graphics |
|
| 3.1 | % |
| 11.0 | % |
| 7.7 | % |
| 4.2 | % |
| — |
|
| 6.0 | % | ||||||||||||||||
Safety and Industrial | | | 10.5 | % | | (1.6) | % | | 7.7 | % | | — | | | 6.9 | % | |||||||||||||||||||
Transportation and Electronics | | | (10.8) | % | | (2.7) | % | | (16.4) | % | | — | | | (7.1) | % | |||||||||||||||||||
Health Care |
|
| 8.5 | % |
| 8.8 | % |
| 1.6 | % |
| 8.6 | % |
| — |
|
| 6.9 | % | | | 12.7 | % | | (3.9) | % | | 8.5 | % | | — | | | 8.1 | % |
Electronics and Energy |
|
| (1.5) | % |
| 20.0 | % |
| 0.9 | % |
| 6.2 | % |
| — |
|
| 13.2 | % | ||||||||||||||||
Consumer |
|
| 1.1 | % |
| 7.1 | % |
| (2.2) | % |
| 2.7 | % |
| — |
|
| 1.9 | % | | | 6.9 | % | | (0.6) | % | | 4.8 | % | | — | | | 5.5 | % |
Additional information beyond what is included in the preceding table is as follows:
| In the |
| In the |
|
|
Selling prices were flat year-on-year for the third quarter of 2017, compared to a year-on-year decrease of 0.3 percent for the second quarter of 2017. In Asia Pacific, strong volume growth in electronics had a negative impact on price. Latin America/Canada and EMEA had price growth, while the U.S. selling prices declined slightly.
Foreign currency translation increased year-on-year sales by 0.6 percent, with translation-related sales increases in both EMEA and Latin America/Canada. In Asia Pacific, the U.S. dollar was weaker compared to the third quarter of 2016 by
5865
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 |
| |||||||||||||
| | | | | | | | Europe, | | | | | | |
| |
| | | | Asia | | Middle East | | Other | | | |
| ||||
|
| Americas |
| Pacific |
| & Africa |
| Unallocated |
| Worldwide |
| |||||
Net sales (millions) |
| $ | 12,122 |
| $ | 7,029 |
| $ | 4,450 |
| $ | — |
| $ | 23,601 | |
% of worldwide sales | |
| 51.4 | % |
| 29.8 | % |
| 18.8 | % |
| — | |
| 100.0 | % |
Components of net sales change: | | | | | | | | | | | | | | | | |
Volume — organic | |
| (3.8) | % |
| (4.5) | % |
| (6.7) | % |
| — | |
| (4.6) | % |
Price | |
| 0.9 | |
| (0.5) | |
| 1.1 | |
| — | |
| 0.5 | |
Organic local-currency sales | |
| (2.9) | |
| (5.0) | |
| (5.6) | |
| — | |
| (4.1) | |
Acquisitions | |
| 7.1 | |
| 0.9 | |
| 3.6 | |
| — | |
| 4.5 | |
Divestitures | |
| (1.5) | |
| (0.2) | |
| (2.7) | |
| — | |
| (1.3) | |
Translation | |
| (1.4) | |
| (0.5) | |
| (0.2) | |
| — | |
| (0.9) | |
Total sales change | |
| 1.3 | % |
| (4.8) | % |
| (4.9) | % |
| — | |
| (1.8) | % |
| | | | | | | | | | | | | | | | |
Total sales change: | | | | | | | | | | | | | | | | |
Safety and Industrial | | | (0.5) | % | | (3.9) | % | | 0.3 | % | | — | | | (1.2) | % |
Transportation and Electronics | | | (18.1) | % | | (5.2) | % | | (18.0) | % | | — | | | (11.2) | % |
Health Care | | | 26.6 | % | | (2.7) | % | | 4.3 | % | | — | | | 15.1 | % |
Consumer | | | 2.9 | % | | (2.6) | % | | (2.6) | % | | — | | | 1.3 | % |
| | | | | | | | | | | | | | | | |
Organic local-currency sales change: | | | | | | | | | | | | | | | | |
Safety and Industrial | | | 1.8 | % | | (2.7) | % | | 3.0 | % | | — | | | 0.9 | % |
Transportation and Electronics | | | (14.4) | % | | (4.7) | % | | (17.7) | % | | — | | | (9.8) | % |
Health Care | | | 1.8 | % | | (7.9) | % | | (2.4) | % | | — | | | (1.3) | % |
Consumer | | | 4.0 | % | | (2.4) | % | | (2.7) | % | | — | | | 2.1 | % |
8 percent versus the Japanese Yen, while the Chinese Yuan was flat. In EMEA, the U.S. dollar was stronger compared to the third quarter of 2016 by 6 percent versus the Euro, while the British Pound was flat.
|
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|
| Nine months ended September 30, 2017 |
| ||||||||||||||||
|
|
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|
|
| Europe, |
| Latin |
|
|
|
|
|
|
| ||
|
| United |
| Asia |
| Middle East |
| America/ |
| Other |
|
|
|
| |||||
|
| States |
| Pacific |
| & Africa |
| Canada |
| Unallocated |
| Worldwide |
| ||||||
Net sales (millions) |
| $ | 9,291 |
| $ | 7,335 |
| $ | 4,771 |
| $ | 2,277 |
| $ | (7) |
| $ | 23,667 |
|
% of worldwide sales |
|
| 39.3 | % |
| 31.0 | % |
| 20.1 | % |
| 9.6 | % |
| — |
|
| 100.0 | % |
Components of net sales change: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume — organic |
|
| 2.6 | % |
| 11.4 | % |
| 1.4 | % |
| 2.8 | % |
| — |
|
| 5.1 | % |
Price |
|
| (0.3) |
|
| (0.4) |
|
| 0.5 |
|
| 1.0 |
|
| — |
|
| (0.1) |
|
Organic local-currency sales |
|
| 2.3 |
|
| 11.0 |
|
| 1.9 |
|
| 3.8 |
|
| — |
|
| 5.0 |
|
Divestitures |
|
| (1.3) |
|
| (0.3) |
|
| (0.5) |
|
| (1.3) |
|
| — |
|
| (0.9) |
|
Translation |
|
| — |
|
| (1.0) |
|
| (0.4) |
|
| 2.2 |
|
| — |
|
| (0.2) |
|
Total sales change |
|
| 1.0 | % |
| 9.7 | % |
| 1.0 | % |
| 4.7 | % |
| — |
|
| 3.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales change: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial |
|
| 3.9 | % |
| 6.1 | % |
| 3.0 | % |
| 4.3 | % |
| — |
|
| 4.3 | % |
Safety and Graphics |
|
| (1.2) | % |
| 5.4 | % |
| 2.4 | % |
| 0.8 | % |
| — |
|
| 1.4 | % |
Health Care |
|
| 4.7 | % |
| 6.9 | % |
| (1.7) | % |
| 10.4 | % |
| — |
|
| 3.9 | % |
Electronics and Energy |
|
| (0.6) | % |
| 17.2 | % |
| (1.2) | % |
| 4.0 | % |
| — |
|
| 10.6 | % |
Consumer |
|
| (1.2) | % |
| 6.7 | % |
| (2.8) | % |
| 6.9 | % |
| — |
|
| 0.7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organic local-currency sales change: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial |
|
| 5.0 | % |
| 7.8 | % |
| 3.7 | % |
| 2.6 | % |
| — |
|
| 5.2 | % |
Safety and Graphics |
|
| 2.8 | % |
| 8.3 | % |
| 4.9 | % |
| 3.2 | % |
| — |
|
| 4.6 | % |
Health Care |
|
| 4.7 | % |
| 7.8 | % |
| (0.6) | % |
| 8.1 | % |
| — |
|
| 4.1 | % |
Electronics and Energy |
|
| 0.4 | % |
| 17.8 | % |
| (1.7) | % |
| 2.5 | % |
| — |
|
| 11.0 | % |
Consumer |
|
| (1.2) | % |
| 6.8 | % |
| (2.6) | % |
| 3.9 | % |
| — |
|
| 0.5 | % |
Additional information beyond what is included in the preceding table is as follows:
| In the Americas geographic area, U.S. total sales increased 5 percent as organic-local currency sale decreases of 1 percent were more than offset by acquisition-related sales growth. Total sales in Mexico decreased 18 percent and organic local-currency sales decreased 16 percent. In Canada, total sales decreased 3 percent and organic local-currency sales decreased 6 percent. In Brazil, total sales decreased 20 percent while organic local-currency sales increased 2 percent, as organic sales growth was more than offset by foreign currency translation impacts. |
● | In the Asia Pacific geographic area, |
|
|
|
|
Foreign currency translation reduced year-on-year sales by 0.2 percent, with the translation-related sales increase in Latin America/Canada more than offset by the decreases in EMEA and Asia Pacific.
Managing currency risks:
The stronger U.S. dollar had a negative impact on sales and earnings in the first nine months of 2017.2020 compared to the same period last year, which was partially offset by the positive impact of the weakening dollar in the third quarter of 2020 compared to the same period last year. Net of the Company’s hedging strategy, foreign currency negatively impacted earnings in the third quarter and first nine months of 2020 compared to the same periods last year. 3M utilizes a number of tools to hedge currency risk related to earnings. 3M uses natural hedges such as pricing, productivity, hard currency and hard currency-indexed billings, and localizing source of supply. 3M also uses financial hedges to mitigate
59
currency risk. In the case of more liquid currencies, 3M hedges a portion of its aggregate exposure, using a 12, 24 or 36 month horizon, depending on the currency in question. For less liquid currencies, financial hedging is frequently more expensive with more limitations on tenor. Thus, this risk is largely managed via local operational actions using natural hedging tools as discussed above. In either case, 3M’s hedging approach is designed to mitigate a portion of foreign currency risk and reduce volatility, ultimately allowing time for 3M’s businesses to respond to changes in the marketplace.
66
Financial condition:
3M generated $4.380$5.598 billion of operating cash flows in the first nine months of 2017, a decrease2020, an increase of $73$866 million when compared to the first nine months of 2016.2019, with this increase primarily due to cost saving actions taken in response to COVID-19 and lower year-on-year significant litigation-related charges and the timing of associated payments. Refer to the section entitled “Financial Condition and Liquidity” later in MD&A for a discussion of items impacting cash flows.
In February 2016,November 2018, 3M’s Board of Directors authorizedreplaced the Company’s February 2016 repurchase program with a new repurchase program. This new program authorizes the repurchase of up to $10 billion of 3M’s outstanding common stock, with no pre-established end date. In the first nine months of 2017,2020, the Company purchased $1.6 billion$366 million of its own stock, compared to $2.8$1.2 billion of stock purchases in the first nine months of 2016.2019. As of September 30, 2017,2020, approximately $5.6$7.8 billion remained available under the February 2016 authorization. TheIn the first quarter of 2020, the Company expects to purchase $2.0 billion to $2.5 billionsuspended its stock repurchase program in the face of its own stock in 2017.uncertainty arising from the COVID-19 pandemic. In February 2017,2020, 3M’s Board of Directors declared a first-quarter 20172020 dividend of $1.175$1.47 per share, an increase of 62 percent. This marked the 59th62nd consecutive year of dividend increases for 3M. In May 2017,2020, 3M’s Board of Directors declared a second quarter 2017second-quarter dividend of $1.175$1.47 per share. In August 2017,2020, 3M’s Board of Directors declared a third quarter 2017third-quarter dividend of $1.175$1.47 per share.
3M currently has an AA- credit rating with a stable outlook from Standard & Poor’s and has an A1 credit rating with a stablenegative outlook from Moody’s Investors Service.Service and an A+ credit rating with a negative outlook from Standard & Poor’s. The Company generates significant ongoing cash flow and has proven access to capital markets funding throughout business cycles.
3M expects to contribute approximately $300 million to $500$200 million of cash to its global defined benefit pension and postretirement plans in 2017.2020. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2017.2020.
60
Divestitures and Strategic Investments:
In both the third quarter and first nine months of 2017, the Company continued to execute on accelerating investments in growth initiatives and footprint optimization. In addition, the Company divested certain businesses as it continued to focus its portfolio on opportunities that create greater value for its shareholders. As shown below, these divestitures and strategic investments led to a net year-on-year decrease of approximately $0.05 per diluted share and a benefit of $0.10 per diluted share, respectively, for the three and nine months ended September 30, 2017.
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|
| Three months ended September 30, 2017 |
| Nine months ended September 30, 2017 |
| ||||||||
Divestiture impacts and strategic investments net benefit/(cost) (in millions, except per share amounts) |
| Pre-tax impact |
| Impact per diluted share after-tax |
| Pre-tax impact |
| Impact per diluted share after-tax |
| ||||
Divestiture impacts: |
|
|
|
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|
|
|
|
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|
|
|
2017 divestiture gains |
| $ | — |
|
|
|
| $ | 490 |
|
|
|
|
Less: prior year divestiture gains |
|
| — |
|
|
|
|
| (40) |
|
|
|
|
Year-on-year lost operating loss/(income) from divested businesses |
|
| 10 |
|
|
|
|
| (2) |
|
|
|
|
Year-on-year divestiture impacts, net of lost operating loss/(income) |
| $ | 10 |
| $ | 0.01 |
| $ | 448 |
| $ | 0.56 |
|
Strategic investments: |
|
|
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|
2017 portfolio and footprint optimization activities: |
|
|
|
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|
|
|
|
|
|
|
|
|
Restructuring actions and exit activities |
| $ | — |
|
|
|
| $ | (123) |
|
|
|
|
Asset charges and accelerated depreciation |
|
| (24) |
|
|
|
|
| (140) |
|
|
|
|
Other costs |
|
| (11) |
|
|
|
|
| (26) |
|
|
|
|
Less: prior year portfolio and footprint optimization activities |
|
| 6 |
|
|
|
|
| 21 |
|
|
|
|
Year-on-year portfolio and footprint optimization |
|
| (29) |
| $ | (0.04) |
|
| (268) |
| $ | (0.34) |
|
Incremental year-on-year growth initiatives |
|
| (19) |
|
|
|
|
| (94) |
|
|
|
|
Total incremental strategic investments |
| $ | (48) |
| $ | (0.06) |
| $ | (362) |
| $ | (0.46) |
|
Year-on-year divestiture impacts and strategic investments net benefit/(cost) |
| $ | (38) |
| $ | (0.05) |
| $ | 86 |
| $ | 0.10 |
|
The total pre-tax year-on-year divestiture impacts, net of strategic investments from the table above, are further detailed below by business group:
|
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|
| Three months ended |
| Nine months ended |
| ||
(Millions) |
| September 30, 2017 |
| September 30, 2017 |
| ||
Industrial |
| $ | (12) |
| $ | (114) |
|
Safety and Graphics |
|
| 5 |
|
| 460 |
|
Health Care |
|
| (4) |
|
| (49) |
|
Electronics and Energy |
|
| (7) |
|
| (80) |
|
Consumer |
|
| (13) |
|
| (88) |
|
Corporate and Unallocated |
|
| (7) |
|
| (43) |
|
Total pretax divestiture gains, net of strategic investments |
| $ | (38) |
| $ | 86 |
|
61
Fourth Quarter 2017 Items:
In October 2017, 3M sold its electronic monitoring business to an affiliate of Apax Partners for $200 million, net of cash sold and closing and other adjustments. 3M expects a pre-tax gain of approximately $100 million (or 12 cents per diluted share) in the fourth quarter of 2017 as a result of this divestiture. Refer to Note 2 for additional details.
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, net of closing and other adjustments. The income from on-going operations, net of acquisition and integration costs, is expected to decrease earnings in the fourth quarter of 2017 by approximately 8 cents per diluted share. Refer to Note 2 for additional details.
During the fourth quarter of 2017, a debt extinguishment charge of approximately $95 million related to the repurchase of $305 million aggregate principal amount of the Company’s high coupon debt via tender offers is expected to decrease earnings by approximately 11 cents per diluted share. Refer to Note 8 for additional details.
Additionally in the fourth quarter of 2017, the Company will recognize additional incremental strategic investments comprised of growth initiatives and portfolio and footprint optimization charges. These incremental strategic investments are expected to decrease fourth quarter 2017 earnings year-on-year by approximately 6 cents to 10 cents per diluted share.
Net Sales:
Refer to the preceding sections entitled “Sales“Overview” section and operating incomethe “Performance by business segment” and “Sales and operating income by geographic area”Business Segment” section later in MD&A for additional discussion of sales change.
Operating Expenses:
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| |||||||||||||
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| Three months ended |
| Nine months ended |
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| September 30, |
| September 30, |
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| | | | | | | | | | | | | | ||||||||||||||
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| Three months ended |
| Nine months ended |
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| | September 30, | | September 30, | | ||||||||||||||||||||||
(Percent of net sales) |
| 2017 |
| 2016 |
| Change |
| 2017 |
| 2016 |
| Change |
|
| | 2020 | | 2019 | | Change | | 2020 | | 2019 |
| Change |
|
Cost of sales |
| 49.4 | % | 49.9 | % | (0.5) | % | 50.5 | % | 49.7 | % | 0.8 | % |
|
| 51.5 | % | 52.4 | % | (0.9) | % | 51.7 | % | 53.3 | % | (1.6) | % |
Selling, general and administrative expenses |
| 19.9 |
| 19.9 |
| — |
| 20.4 |
| 20.3 |
| 0.1 |
|
|
| 20.1 | | 18.2 | | 1.9 | | 21.4 | | 21.2 | | 0.2 | |
Research, development and related expenses |
| 5.7 |
| 5.5 |
| 0.2 |
| 5.9 |
| 5.8 |
| 0.1 |
|
|
| 5.5 | | 5.5 | | — | | 6.0 | | 5.8 | | 0.2 | |
Gain from sale of businesses |
| — |
| — |
| — |
| (2.1) |
| (0.2) |
| (1.9) |
|
| |||||||||||||
Operating income |
| 25.0 | % | 24.7 | % | 0.3 | % | 25.3 | % | 24.4 | % | 0.9 | % |
| |||||||||||||
Gain on sale of businesses | | — | | (1.3) | | 1.3 | | (1.6) | | (0.5) | | (1.1) | | ||||||||||||||
Operating income margin |
| 22.9 | % | 25.2 | % | (2.3) | % | 22.5 | % | 20.2 | % | 2.3 | % | ||||||||||||||
3M expects global defined benefit pension and postretirement service cost expense in 2017 (before settlements, curtailments, special termination benefits and other)2020 to increase by approximately $74$34 million pre-tax when compared to 2016,2019, which impacts cost of sales; selling, general and administrative expenses (SG&A); and research, development and related expenses (R&D). Refer to 3M’s Current Report on Form 8-K dated May 4, 2017 (MD&A section entitled Critical Accounting Estimates — Pension and Postretirement Obligations and Note 11, Pension and Postretirement Benefit Plans) for background concerning the change to the spot yield curve approach and other factors that will impact pension and postretirement expenses in 2017. The year-on-year increase in defined benefit pension and postretirement service cost expense for the third quarter and first nine months of 20172020 was $20approximately $11 million and $64$27 million, respectively.
62
The Company is investing in an initiative called business transformation, with these investments impacting cost of sales, SG&A, and R&D. Business transformation encompasses the ongoing multi-year phased implementation of an enterprise resource planning (ERP) system on a worldwide basis, as well as changes in processes and internal/external service delivery across 3M.
Following the divestiture of substantially all of the drug delivery business management approved and committed to undertake certain restructuring actions addressing corporate functional costs and manufacturing footprint across 3M in relation to the magnitude of
67
amounts previously allocated/burdened to the divested business (as discussed earlier in the Certain amounts adjusted for special items - (non-GAAP measures). In bothaddition, the threeCompany approved and nine months ended September 30, 2017, strategic investmentscommitted to certain restructuring actions addressing structural enterprise costs and operations in growth initiatives, portfoliocertain end markets as a result of the COVID-19 pandemic and related economic impacts. These restructuring actions impacted cost of sales, SG&A, and footprint optimization,R&D. 3M also reflected adjustments in addition2020 related to gains on divestitures,restructuring initiated in 2019. See Note 5 for additional details.
Additionally, the Company’s operating expenses were impacted 3M’s operating expenses. The table below reflects actual amounts withinby factors described in the period and does not include any year-on-year impacts.preceding Overview – Consideration of COVID-19 section above.
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended |
| ||
(Millions) |
| September 30, 2017 |
| September 30, 2017 |
| ||
Cost of sales |
| $ | 18 |
| $ | 220 |
|
Selling, general and administrative expenses |
|
| 57 |
|
| 185 |
|
Research, development and related charges |
|
| — |
|
| 9 |
|
Gain on sale of businesses |
|
| — |
|
| (490) |
|
Total |
| $ | 75 |
| $ | (76) |
|
Cost of Sales:
Cost of sales includes manufacturing, engineering and freight costs.
Cost of sales, measured as a percent of sales, decreased in the third quarter of 2017, helped by 6.6 percent organic sales volume growth and an approximate 1 percent year-on-year reduction in raw material input costs as a result of input management. This decrease was partially offset by year-on-year charges related to 3M’s optimization of its portfolio and supply chain footprint, foreign currency effects (net of hedge impacts), and higher defined benefit pension expense.
Cost of sales, measured as a percent of sales, increased in the first nine months of 2017 due2020 when compared to incremental strategic investmentsthe same periods last year. Decreases were related to lower significant litigation-related charges taken in productivity, portfolio actions and footprint optimization, foreign currency effects (netthe first quarter of hedge impacts), and higher defined benefit pension expense. This was2020 compared to the same period in 2019, which were partially offset by an approximate 1.5 percent year-on-year reductionCOVID-related net impacts, including period expenses of unabsorbed manufacturing costs, in raw material input costs as a resultaddition to higher restructuring action charges taken in the second quarter of input management. Selling prices decreased2020 versus the same period last year along with certain related follow-on accelerated depreciation. In addition, selling price increased net sales year-on-year by 0.10.6 percent in the third quarter and 0.5 percent in the first nine months of 2017.2020, and lower raw material costs reduced cost of sales as a percentage of sales.
Selling, General and Administrative Expenses:
SG&A, in dollarsas a percent of sales, increased 6.1 percent and 4.5 percent in the third quarter and first nine months of 2017, respectively,2020 when compared to the same periodperiods last year,year. SG&A was affected by the COVID-19 pandemic’s impact on overall sales and as a result yielded higher costs as a percent of sales. SG&A was also impacted by incremental strategic investmentsincreased spending year-on-year related to Acelity, which was acquired in the fourth quarter of 2019. Partially offsetting these were cost saving actions taken in response to COVID-19, in addition to lower year-on-year second quarter impact related to restructuring action charges and higher defined benefit pension expense.benefits from prior year restructuring (and adjustments thereto in 2020). Additional factors that decreased SG&A in the first nine months of 2020 also include lower year-on-year impact related to significant litigation-related charges.
Research, Development and Related Expenses:
R&D in dollars increased $36$18 million and $93$32 million in the third quarter and first nine months of 2017,2020, respectively, when compared to the same period last year. R&D, measured as a percent of sales, was flat for the third quarter and and increased for the first nine months of 2020, as 3M continued to invest in its key initiatives, including R&D aimed at disruptive innovation programs with the potential to create entirely new markets and disrupt existing markets. The increase is primarily driven by additional R&D spending related to the Company’s acquisition of Acelity.
Gain on Sale of Businesses:
In January 2017, 3M completedDuring the salefirst quarter of assets related to its safety prescription eyewear business to HOYA Vision Care. 3M received proceeds of $53 million for this transaction and recognized, net of assets sold, transaction and other costs,2020, the Company recorded a pre-tax gain of $29$2 million which was reported within the Company’s Safety and Graphics business.
In May 2017, 3M completed($1 million loss after tax) related to the sale of its identity managementadvanced ballistic-protection business to Gemalto N.V. In June 2017, 3M completedand recognition of certain contingent consideration. During the salesecond quarter of its tolling and automated license/number plate recognition business to Neology, Inc. 3M received proceeds of $833 million, or $809 million net of cash sold, and reflected2020, the Company recorded a pre-tax gain of $461$387 million ($304 after tax) related to the sale of substantially all of its drug delivery business.
During the first quarter of 2019, the Company sold certain oral care technology comprising a business and reflected an earnout on a previous divestiture resulting in a pre-tax gain of $8 million ($7 million gain after tax). In the third quarter of 2019, 3M recorded a gain related to the divestiture of the Company’s gas and flame detection business and an immaterial impact as a result of these two
63
divestitures inmeasuring a disposal group at the second quarter of 2017, which was reported within the Company’s Safety and Graphics business. For more details, refer to Note 2.
In the first quarter of 2016, 3M completed the sale of the remainder of the assets of 3M’s library systems business to One Equity Partners Capital Advisors L.P. (OEP). Also in the first quarter of 2016, 3M completed the salelower of its pressurized polyurethane foam adhesives business (formerly known as Polyfoam)carrying amount or fair value less cost to Innovative Chemical Products Group, a portfolio company of Audax Private Equity. 3M received proceeds of $56 million for these transactions and recognizedsell, which in aggregate resulted in a pre-tax gain of $40$106 million as a result of these two divestitures in the first quarter of 2016. These businesses were formerly part of the Company’s Safety and Graphics business and Industrial business, respectively.($79 million after tax). Refer to Note 2 in 3M’s Current Report3 for additional details on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K) for more information on 3M’s acquisitions and divestitures.
68
Operating Income:
3M uses operating income as one of its primary business segment performance measurement tools. Refer to the table below for a reconciliation of operating income margins for the three months and nine months ended September 30, 2017 versus the same periods last year.2020 and 2019.
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| Nine months ended |
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(Percent of net sales) |
| September 30, 2017 |
| September 30, 2017 |
|
Same period last year |
| 24.7 | % | 24.4 | % |
Increase/(decrease) in operating income margin, due to: |
|
|
|
|
|
Organic volume/productivity |
| 0.9 |
| 0.8 |
|
Selling price and raw material impact |
| 0.3 |
| 0.3 |
|
Foreign exchange impacts |
| (0.4) |
| (0.4) |
|
Pension and postretirement benefit costs |
| (0.3) |
| (0.3) |
|
Divestiture gains |
| — |
| 1.9 |
|
Operating loss/(income) from divested businesses |
| 0.4 |
| 0.1 |
|
Incremental strategic investments |
| (0.6) |
| (1.5) |
|
Current period |
| 25.0 | % | 25.3 | % |
| | | | | |
| | Three months ended | | Nine months ended | |
(Percent of net sales) |
| September 30, 2020 |
| September 30, 2020 | |
Same period last year | | 25.2 | % | 20.2 | % |
Significant litigation-related charges/benefits | | — | | 2.3 | |
Gain/loss on sale of businesses | | (1.4) | | (0.5) | |
Same period last year, excluding special items | | 23.8 | % | 22.0 | % |
Increase/(decrease) in operating income margin, due to: | | | | | |
Organic volume/productivity and other | | (1.2) | | (0.7) | |
Acquisitions/divestitures | | (0.2) | | (0.6) | |
Selling price and raw material impact | | 0.8 | | 0.7 | |
Foreign exchange impacts | | (0.3) | | (0.2) | |
Current period, excluding special items | | 22.9 | % | 21.2 | % |
Significant litigation-related charges/benefits | | — | | (0.1) | |
Gain/loss on sale of businesses | | — | | 1.6 | |
Divestiture-related restructuring actions | | — | | (0.2) | |
Current period | | 22.9 | % | 22.5 | % |
Operating income margins increased 0.3decreased 2.3 percentage points in the third quarter of 2017 and increased 0.92.3 percentage points in the first nine months of 2017 when compared to the same periods last year. 3M benefited from year-on-year divestiture gains (refer to Note 2), non-repeating net operating losses from divested businesses, higher organic local-currency sales growth and productivity. 3M also benefited from raw material cost decreases. Items that reduced operating income margins included year-on-year incremental strategic investments in growth, productivity and portfolio actions, in addition to charges related to 3M’s optimization of its portfolio and supply chain footprint. Additional items that reduced operating margins included foreign currency effects (net of hedge impacts) and higher year-on-year defined benefit pension expense.
Interest Expense and Income:
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| September 30, |
| September 30, |
| ||||||||
(Millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Interest expense |
| $ | 57 |
| $ | 50 |
| $ | 156 |
| $ | 135 |
|
Interest income |
|
| (13) |
|
| (8) |
|
| (33) |
|
| (20) |
|
Total |
| $ | 44 |
| $ | 42 |
| $ | 123 |
| $ | 115 |
|
Interest expense was higher in the third quarter and first nine months of 20172020, respectively. Factoring out the impact on operating income of special items as described in the Certain amounts adjusted for special items - (non-GAAP measures) section above, operating margins decreased 0.9 and 0.8 percentage points to 22.9 percent and 21.2 percent, respectively, for the third quarter and first nine months of 2020 when compared to the same periods last year, largely duein 2019.
Additional discussion related to higher U.S. average debt balancesthe components of the year-on-year change in operating income margins follows:
Organic volume/productivity and other:
| ● | Lower organic volume growth in the first nine months of 2020 as a result of significant COVID-19 related impacts, in addition to COVID-related net factors described in the preceding Overview—Consideration of COVID-19 section, decreased operating income margins year-on-year. These net factors included cost saving actions taken in response to COVID-19 but also reflected second quarter 2020 charges for items such as restructuring actions addressing structural enterprise costs and operations in certain end markets as a result of the COVID-19 pandemic and related economic impact (further described in Note 5) along with certain related follow-on accelerated depreciation. Additional items that reduced operating income margins year-on-year include net gains related to certain property sales in the third quarter of 2019. Partially offsetting this net decrease were benefits recognized in the first nine months of 2020 related to restructuring and other actions taken in 2019 (and adjustments thereto in 2020) in addition to continued cost management and productivity efforts. |
| ● | Operating income margins decreased year-on-year due to higher defined benefit pension and postretirement service cost expense. |
Acquisitions/divestitures:
| ● | Acquisition-related impacts relate to the ongoing integration of M*Modal and Acelity, which decreased operating income margins year-on-year. |
| ● | Divestiture impacts, which includes lost operating income from divested businesses, increased operating income margins year-on-year. |
Selling price and raw material impact:
| ● | Higher selling prices in addition to lower raw material cost impacts benefited operating income margins year-on-year for both the third quarter and first nine months of 2020. |
69
Foreign exchange impacts:
| ● | Foreign currency effects (net of hedge gains) decreased operating income margins year-on-year. |
Significant litigation-related charges:
| ● | Operating income margins for the first nine months of 2020 and 2019 included the $17 million and $548 million impact, respectively, of significant litigation-related charges (as discussed earlier in the Certain amounts adjusted for special items - (non-GAAP measures) section). |
Gain/loss on sale of businesses:
| ● | There were no gains on the sale of businesses for the third quarter of 2020, whereas, operating income margins for the third quarter of 2019 included gains of $106 million on the sale of businesses. The first nine months of 2020 and 2019 included gains of $389 million and $114 million, respectively, on sale of businesses. See the Certain amounts adjusted for special items - (non-GAAP measures) section for more information. |
Divestiture-related restructuring actions:
| ● | Operating income margins for the first nine months of 2020 included the $55 million second quarter impact as a result of certain restructuring actions following the divestiture of substantially all of the drug delivery business addressing corporate functional costs and manufacturing footprint across 3M in relation to the magnitude of amounts previously allocated/burdened to the divested business. Refer to Note 5 for further details. This item was also discussed earlier in the Certain amounts adjusted for special items - (non-GAAP measures) section. |
Other Expense (Income), Net:
See Note 6 for a detailed breakout of this line item.
Interest expense (net of interest rates. Interest income was higherincome) increased in the third quarter and first nine months of 20172020 compared to the same periods last year,period in 2019 due to higher U.S. average cashdebt balances and lower year-on-year interest income driven by lower average interest rates on cash yields.balances.
64
the 2019 deconsolidation of the Company’s Venezuelan subsidiary. Refer to Note 1 for additional details. In addition, other expense (income) also decreased year-on-year due to the charge associated with the voluntary retirement incentive program taken in the second quarter of 2019. Refer to Note 11 for additional details.
Provision for Income Taxes:
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(Percent of pre-tax income) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
Effective tax rate |
| 28.3 | % | 28.5 | % | 26.1 | % | 28.3 | % |
| 21.4 | % | 19.3 | % | 20.0 | % | 19.7 | % |
The effective tax rate for the third quarter of 20172020 was 28.321.4 percent, compared to 28.519.3 percent in the third quarter of 2016, a decrease2019, an increase of 0.22.1 percentage points. The effective tax rate for the first nine months of 20172020 was 26.120.0 percent, compared to 28.319.7 percent in the first nine months 2019, an increase of 2016, a decrease of 2.20.3 percentage points. The changes inFactors that impacted the tax rates between years are impacted by many factors, as described further discussed in the Overview section above and in Note 6.8.
Due to uncertainty around the ultimate impact from the COVID-19 pandemic, 3M is not providing an estimated range of its 2020 effective tax rate at this time. The Company will continue to assess the situation and provide quarterly updates throughout the year.
The Company currently anticipates its 2017 full-year tax rate will be 26.0 to 27.0 percent. The rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, and changes in tax laws, and employee share-based payment accounting; as well as recurring factors, such as the geographic mix of income before taxes and foreign currency effects.taxes.
Refer to Note 8 for further discussion of income taxes.
70
Net Income (Loss) Attributable to Noncontrolling Interest:
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(Millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||||
Net income attributable to noncontrolling interest | $ | 4 |
| $ | 2 |
| $ | 9 |
| $ | 7 |
| |||||||||||||
Net income (loss) attributable to noncontrolling interest | | $ | 4 | | $ | 5 | | $ | 3 | | $ | 11 | | ||||||||||||
Net income (loss) attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M ownership interests in 3M consolidated entities. The primary noncontrolling interest relates to 3M India Limited, of which 3M’s effective ownership is 75 percent.
Currency Effects:
3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by $29approximately $8 million and $108$103 million for the threethird quarter of 2020 and nine months ended September 30, 2017,2020, respectively. This estimate includes the effect of translating profits from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks and any impacts from swapping Venezuelan bolivars into U.S. dollars.risks. 3M estimates that year-on-year derivative and otherforeign currency transaction gains and losseseffects, including hedging impacts, decreased pre-tax income by $34approximately $15 million and $99$4 million for the three and nine months ended September 30, 2017,2020, respectively. These estimates include transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks.
Significant Accounting Policies and Critical Accounting Estimates:Policies:
Information regarding new accounting standards is included in Note 1 to the Consolidated Financial Statements. In addition, refer to the Critical Accounting Estimates section within MD&A of 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K).
65
PERFORMANCE BY BUSINESS SEGMENT
Disclosures relating to 3M’s business segments are provided in Note 14.16. Effective in the second quarter of 2020, the measure of segment operating performance used by 3M’s chief operating decision maker (CODM) changed and, as a result, 3M’s disclosed measure of segment profit/loss (business segment operating income) has been updated for all periods presented. The change to business segment operating income aligns with the update to how the CODM assesses performance and allocates resources for the Company’s business segments.
As discussed in Note 16, 3M discloses business segment operating income as its measure of segment profit/loss, reconciled to both total 3M operating income and income before taxes. Business segment operating income includes dual credit for certain related operating income (as described below in “Elimination of Dual Credit”). Business segment operating income excludes certain expenses and income that are not allocated to business segments (as described below in “Corporate and Unallocated”). Additionally, the following special items are excluded from business segment operating income and, instead, are included within Corporate and Unallocated: significant litigation-related charges/benefits, gain/loss on sale of businesses, and divestiture-related restructuring actions.
Additionally, effective in the first quarter of 2017, as part of 3M’s continuing effort to improve the alignment of its businesses around markets and customers,2020, the Company made the following changes:changed its business segment reporting (see Note 16 for additional details).
Integration of former Renewable Energy Division
|
|
Creation of Automotive and Aerospace Solutions Division
|
|
Consolidation of U.S. customer account activity - impacting dual credit reporting
|
|
Business segment information presentedInformation provided herein reflects the impact of these changes for all periods presented. 3M manages its operations in fivefour business segments. The reportable segments are Industrial; Safety and Graphics; ElectronicsIndustrial; Transportation and Energy;Electronics; Health Care; and Consumer.
Corporate and Unallocated:
In addition to these fivefour business segments, 3M assigns certain costs to “Corporate and Unallocated,” which is presented separately in the preceding business segments table and in Note 14.16. Corporate and Unallocated includes a variety of miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain insurance-related gains and losses, certain litigation
71
and environmental expenses, corporate restructuring charges and certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the Company determines not to allocate directly to its business segments. Additionally, Corporate and Unallocated operating income includes special items such as significant litigation-related charges/benefits, gain/loss on sale of businesses, and divestiture-related restructuring costs. Corporate and Unallocated also includes sales, costs, and income from contract manufacturing, transition services and other arrangements with the acquirer of the Communication Markets Division following its 2018 divestiture through 2019 and the acquirer of the former drug delivery business following its 2020 divestiture. Because this category includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.
Corporate and Unallocated expense for the third quarter and first nine months 2020 when compared to same periods last year are as follows:
Special Items
Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section and Note 5 for additional details on the impact of significant litigation-related charges/benefits, gain/loss on sale of businesses, and divestiture-related restructuring actions that are reflected in Corporate and Unallocated.
Other Corporate Expense - Net
Other corporate operating expenses increased by $35 million and $36 million in both the third quarter and first nine months of 2017, respectively,2020, when compared to the same periodperiods last year. In both the firstyear, due to lower year-on-year gains from certain property sales, in addition to transition service and second quartersother arrangement costs, net of 2017, a portionincome, post-divestiture of the severance actionsCompany’s former drug delivery business in 2020, and increased legal expenses. These were reflectedpartially offset by lower year-on-year restructuring charges. In the second quarter of 2020 and 2019, operating expenses included non-divestiture-related restructuring charges of $23 million and $82 million, respectively, as further discussed in Corporate and Unallocated.Note 5. In addition, 3M’s defined benefit pension and postretirement service-cost expense allocation to Corporate and Unallocated increased by $8 million and $27 million, respectively, inyear-on-year.
Operating Business Segments:
Information related to 3M’s business segments for both the third quarter and first nine months of 2017 when compared to the same periods last year.
66
Operating Business Segments:
Information related to 3M’s business segments for the third quarter2020 and first nine months of 2017 and 2016 is2019 are presented in the tables that follow. Organic local-currency sales include both organic volume impacts plus selling price impacts. Acquisition impacts, if any, are measured separately for the first twelve months post-transaction. The divestiture impacts, if any, foreign currency translation impacts and total sales change are also provided for each business segment. Any references to EMEA relate to Europe, Middle East and Africa on a combined basis.
Refer to the preceding “Sales and operating income by geographic area” section for organic local-currency sales growth by business segment within major geographic areas.
Industrial Business:
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| September 30, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| ||||
Sales (millions) |
| $ | 2,764 |
| $ | 2,603 |
| $ | 8,193 |
| $ | 7,856 |
|
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Sales change analysis: |
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Organic local-currency |
|
| 6.1 | % |
| (1.3) | % |
| 5.2 | % |
| (1.5) | % |
|
Acquisitions |
|
| — |
|
| 1.6 |
|
| — |
|
| 2.1 |
|
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Divestitures |
|
| (0.6) |
|
| (0.2) |
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| (0.6) |
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| (0.2) |
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Translation |
|
| 0.7 |
|
| 0.7 |
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| (0.3) |
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| (1.2) |
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Total sales change |
|
| 6.2 | % |
| 0.8 | % |
| 4.3 | % |
| (0.8) | % |
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Operating income (millions) |
| $ | 614 |
| $ | 595 |
| $ | 1,762 |
| $ | 1,837 |
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Percent change |
|
| 3.1 | % |
| 1.9 | % |
| (4.1) | % |
| 2.2 | % |
|
Percent of sales |
|
| 22.2 | % |
| 22.9 | % |
| 21.5 | % |
| 23.4 | % |
|
The Industrial segment serves a broad rangeRefer to 3M’s 2019 Annual Report on Form 10-K, Item 1, Business, for discussion of markets, such as automotive original equipment manufacturer (OEM) and automotive aftermarket (auto body shops and retail), electronics, appliance, paper and printing, packaging, food and beverage, and construction. Industrial products include tapes, a wide variety of coated, non-woven and bonded abrasives, adhesives, advanced ceramics, sealants, specialty materials, 3M purification (filtration products), closure systems for personal hygiene products, acoustic systems products, and components and products that are usedincluded in the manufacture, repaireach business segment.
Safety and maintenance of automotive, marine, aircraft and specialty vehicles. 3M is also a leading global supplier of precision grinding technology serving customers in the area of hard-to-grind precision applications in industrial, automotive, aircraft and cutting tools. 3M develops and produces advanced technical ceramics for demanding applications in the automotive, oil and gas, solar, industrial, electronics and defense industries.Industrial Business:
| | | | | | | | | | | | | | |
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| | September 30, | | September 30, | | | ||||||||
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| 2020 |
| 2019 |
| 2020 |
| 2019 |
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Sales (millions) | | $ | 3,024 | | $ | 2,829 | | $ | 8,627 | | $ | 8,729 | | |
Sales change analysis: | | | | | | | | | | | | | | |
Organic local-currency | |
| 6.9 | % |
| (3.4) | % |
| 0.9 | % |
| (3.6) | % | |
Divestitures | | | (0.4) | | | (0.8) | | | (0.8) | | | (1.9) | | |
Translation | |
| 0.4 | |
| (1.6) | |
| (1.3) | |
| (2.5) | | |
Total sales change | |
| 6.9 | % |
| (5.8) | % |
| (1.2) | % |
| (8.0) | % | |
| | | | | | | | | | | | | | |
Business segment operating income (millions) | | $ | 823 | | $ | 647 | | $ | 2,185 | | $ | 1,931 | | |
Percent change | |
| 27.2 | % |
| (6.5) | % |
| 13.2 | % |
| (12.7) | % | |
Percent of sales | |
| 27.2 | % |
| 22.9 | % |
| 25.3 | % |
| 22.1 | % | |
Third Quarter 2017 results:
Sales in Industrial totaled $2.8 billion, up 6.2 percent in U.S. dollars. Organic local-currency sales increased 6.1 percent, divestitures reduced sales by 0.6 percent, and foreign currency translation increased sales by 0.7 percent.
On an organic local-currency sales basis:
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Acquisitions and divestitures:
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6772
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Operating income:
|
|
First Nine Months 2017 results:
Sales in Industrial totaled $8.2 billion, up 4.3 percent in U.S. dollars. Organic local-currency sales increased 5.2 percent, divestitures reduced sales by 0.6 percent, and foreign currency translation reduced sales by 0.3 percent.
On an organic local-currency sales basis:
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Acquisitions and divestitures:
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Operating income:
|
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Safety and Graphics Business:
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| ||||
Sales (millions) |
| $ | 1,529 |
| $ | 1,500 |
| $ | 4,603 |
| $ | 4,538 |
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Sales change analysis: |
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|
Organic local-currency |
|
| 6.0 | % |
| 1.5 | % |
| 4.6 | % |
| 2.1 | % |
|
Acquisitions |
|
| — |
|
| 2.0 |
|
| — |
|
| 5.1 |
|
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Divestitures |
|
| (4.9) |
|
| (2.1) |
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| (3.0) |
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| (2.2) |
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Translation |
|
| 0.8 |
|
| 0.4 |
|
| (0.2) |
|
| (1.9) |
|
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Total sales change |
|
| 1.9 | % |
| 1.8 | % |
| 1.4 | % |
| 3.1 | % |
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Operating income (millions) |
| $ | 410 |
| $ | 372 |
| $ | 1,661 |
| $ | 1,152 |
|
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Percent change |
|
| 10.5 | % |
| 11.7 | % |
| 44.2 | % |
| 9.4 | % |
|
Percent of sales |
|
| 26.8 | % |
| 24.8 | % |
| 36.1 | % |
| 25.4 | % |
|
The Safety and Graphics segment serves a broad range of markets that increase the safety, security and productivity of people, facilities and systems. Major product offerings include personal protection products, such as respiratory, hearing, eye and fall protection equipment; traffic safety solutions, such as retroreflective sign sheeting; commercial solutions, including commercial graphics sheeting and systems, architectural design solutions for surfaces, and cleaning and protection products for commercial establishments; and roofing granules for asphalt shingles.
68
Third quarter 2020 results:
Third Quarter 2017 results:
Sales in Safety and GraphicsIndustrial totaled $1.5$3.0 billion, up 1.9 percent in U.S. dollars. Organic local-currency sales increased 6.0 percent, divestitures reduced sales by 4.9 percent, and foreign currency translation increased sales by 0.8 percent.
On an organic local-currency sales basis:
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Acquisitions and divestitures:
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Operating income:
|
|
First Nine Months 2017 results:
Sales in Safety and Graphics totaled $4.6 billion, up 1.4 percent in U.S. dollars. Organic local-currency sales increased 4.6 percent, divestitures reduced sales by 3.0 percent, and foreign currency translation reduced sales by 0.2 percent.
On an organic local-currency sales basis:
|
|
|
|
Acquisitions and divestitures:
|
|
|
|
|
|
|
|
Operating income:
|
|
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, net of closing and other adjustments. This business will be reported within the Company’s Safety and Graphics business. Refer to Note 2 for additional details.
Also in October 2017, 3M completed the sale of its electronic monitoring business. The Company expects to reflect a pre-tax gain of approximately $100 million in the fourth quarter of 2017 as a result of this divestiture; which will be reported within the Safety and Graphics business. Refer to Note 2 for additional details.
69
Health Care Business:
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| Three months ended |
| Nine months ended |
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| ||||||||
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| September 30, |
| September 30, |
|
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| ||||
Sales (millions) |
| $ | 1,476 |
| $ | 1,371 |
| $ | 4,339 |
| $ | 4,176 |
|
|
Sales change analysis: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
Organic local-currency |
|
| 6.9 | % |
| 1.6 | % |
| 4.1 | % |
| 4.3 | % |
|
Acquisitions |
|
| — |
|
| — |
|
| — |
|
| 0.3 |
|
|
Translation |
|
| 0.8 |
|
| (0.4) |
|
| (0.2) |
|
| (1.8) |
|
|
Total sales change |
|
| 7.7 | % |
| 1.2 | % |
| 3.9 | % |
| 2.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (millions) |
| $ | 471 |
| $ | 431 |
| $ | 1,317 |
| $ | 1,350 |
|
|
Percent change |
|
| 9.3 | % |
| (0.5) | % |
| (2.4) | % |
| 5.0 | % |
|
Percent of sales |
|
| 31.9 | % |
| 31.5 | % |
| 30.4 | % |
| 32.3 | % |
|
The Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, dental and orthodontic practitioners, health information systems, and food manufacturing and testing. Products and services provided to these and other markets include medical and surgical supplies, skin health and infection prevention products, inhalation and transdermal drug delivery systems, oral care solutions (dental and orthodontic products), health information systems, and food safety products.
Third Quarter 2017 results:
Sales in Health Care totaled $1.5 billion, up 7.76.9 percent in U.S. dollars. Organic local-currency sales increased 6.9 percent, divestitures decreased sales by 0.4 percent, and foreign currency translation increased sales by 0.80.4 percent.
On an organic local-currency sales basis:
| Sales increased in |
| ● | Strong growth related to unprecedented demand for respirators as a result of the |
|
|
|
|
Divestitures:
| ● | In 2018, 3M completed the sale of substantially all of its Communication Markets Division. |
| ● | In August 2019, 3M completed the sale of its gas and |
Acquisitions:Business segment operating income:
|
|
Operating income:
|
|
First nine months 2020 results:
First Nine Months 2017 results:
Sales in Health CareSafety and Industrial totaled $4.3$8.6 billion, up 3.9down 1.2 percent in U.S. dollars. Organic local-currency sales increased 4.10.9 percent, divestitures decreased sales by 0.8 percent, and foreign currency translation reduceddecreased sales by 0.21.3 percent.
On an organic local-currency sales basis:
| Sales increased in |
| ● | Strong growth related to unprecedented demand for respirators as a result of the |
Divestitures:
| ● | 2018 divestitures that impacted the first nine months of 2019 results relate to the sale of certain personal safety product offerings primarily focused on noise, environmental, and |
| ● | Also in 2018, 3M completed the sale of substantially all of its Communication Markets Division. |
| ● | In August 2019, 3M completed the sale of its gas and |
Business segment operating income:
|
|
7073
Transportation and Electronics Business:
| | | | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended |
| | ||||||||
| | September 30, | | September 30, | | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| | ||||
Sales (millions) | | $ | 2,314 | | $ | 2,500 | | $ | 6,489 | | $ | 7,305 | | |
Sales change analysis: | | | | | | | | | | | | | | |
Organic local-currency | |
| (7.1) | % |
| (3.5) | % |
| (9.8) | % |
| (2.8) | % | |
Divestitures | | | (1.2) | | | — | | | (1.0) | | | — | | |
Translation | |
| 0.9 | |
| (1.0) | |
| (0.4) | |
| (1.9) | | |
Total sales change | |
| (7.4) | % |
| (4.5) | % |
| (11.2) | % |
| (4.7) | % | |
| | | | | | | | | | | | | | |
Business segment operating income (millions) | | $ | 552 | | $ | 637 | | $ | 1,416 | | $ | 1,747 | | |
Percent change | |
| (13.2) | % |
| (12.3) | % |
| (18.9) | % |
| (14.7) | % | |
Percent of sales | |
| 23.9 | % |
| 25.4 | % |
| 21.8 | % |
| 23.9 | % | |
Acquisitions:Third quarter 2020 results:
Sales in Transportation and Electronics totaled $2.3 billion, down 7.4 percent in U.S. dollars. Organic local-currency sales decreased 7.1 percent, divestitures decreased sales by 1.2 percent, and foreign currency translation increased sales by 0.9 percent.
On an organic local-currency sales basis:
| Sales declined in transportation safety, commercial solutions, automotive and aerospace, and advanced materials. Automotive and aerospace was primarily impacted by the decline in global car and light truck builds. Commercial solutions and transportation safety were impacted by soft-end markets such as hospitality, advertising and highway infrastructure due to social distancing and work-from-home protocols as a result of COVID-19. |
| Sales increased 1 percent in 3M’s electronics-related businesses. Electronics-related sales |
Divestitures:
| In |
OperatingBusiness segment operating income:
|
|
Electronics and Energy Business:First nine months 2020 results:
|
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| Three months ended |
| Nine months ended |
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| September 30, |
| September 30, |
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| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| ||||
Sales (millions) |
| $ | 1,414 |
| $ | 1,250 |
| $ | 3,838 |
| $ | 3,468 |
|
|
Sales change analysis: |
|
|
|
|
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|
|
|
|
|
|
|
|
|
Organic local-currency |
|
| 13.2 | % |
| (7.9) | % |
| 11.0 | % |
| (10.0) | % |
|
Divestitures |
|
| (0.1) |
|
| — |
|
| (0.2) |
|
| — |
|
|
Translation |
|
| — |
|
| 0.6 |
|
| (0.2) |
|
| (0.6) |
|
|
Total sales change |
|
| 13.1 | % |
| (7.3) | % |
| 10.6 | % |
| (10.6) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (millions) |
| $ | 394 |
| $ | 304 |
| $ | 920 |
| $ | 716 |
|
|
Percent change |
|
| 29.9 | % |
| (9.5) | % |
| 28.5 | % |
| (18.4) | % |
|
Percent of sales |
|
| 27.9 | % |
| 24.3 | % |
| 24.0 | % |
| 20.6 | % |
|
The Electronics and Energy segment includes solutions that improve the dependability, cost-effectiveness, and performance of electronic devices; electrical products, including infrastructure protection; telecommunications networks; and power generation and distribution. This segment’s electronics solutions include optical film solutions for the electronic display industry; high-performance fluids and abrasives; high-temperature and display tapes; flexible circuits, which use electronic packaging and interconnection technology; and touch systems products. This segment’s energy solutions include pressure sensitive tapes and resins; electrical insulation; infrastructure products that provide both protection and detection solutions; a wide array of fiber-optic and copper-based telecommunications systems; and renewable energy component solutions for the solar and wind power industries.
Third Quarter 2017 results:
Sales in Transportation and Electronics totaled $6.5 billion, down 11.2 percent in U.S. dollars. Organic local-currency sales decreased 9.8 percent, divestitures decreased sales by 1.0 percent, and Energyforeign currency translation decreased sales by 0.4 percent.
On an organic local-currency sales basis:
| ● | Sales declined in transportation safety, advanced materials, commercial solutions, and automotive and aerospace. Automotive and aerospace was primarily impacted by the decline in global car and light truck builds. Commercial solutions and transportation safety were impacted by soft-end markets such as hospitality, advertising and highway infrastructure due to social distancing and work-from-home protocols as a result of COVID-19. |
| ● | Sales were flat in 3M’s electronics-related businesses. Electronics-related growth was led by demand for semiconductor, data center, and factory automation end-markets, offset by softness in the consumer electronics end-market. |
74
Divestitures:
| ● | In January 2020, 3M completed the sale of its advanced ballistic-protection business. Refer to Note 3 for details. |
Business segment operating income:
| ● | Business segment operating income margins decreased 2.1 percentage points, primarily related to lower sales and reduced productivity in key end-markets due to COVID-19 related impacts, partially offset by continued cost discipline and benefits from last year’s restructuring actions. |
Health Care Business:
| | | | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended |
| | ||||||||
| | September 30, | | September 30, | | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| | ||||
Sales (millions) | | $ | 2,160 | | $ | 1,721 | | $ | 6,088 | | $ | 5,290 | | |
Sales change analysis: | | | | | | | | | | | | | | |
Organic local-currency | |
| 8.1 | % |
| 2.1 | % |
| (1.3) | % |
| 2.1 | % | |
Acquisitions | |
| 23.4 | |
| 4.4 | |
| 20.9 | |
| 3.8 | | |
Divestitures | | | (7.1) | | | — | | | (3.7) | | | — | | |
Translation | |
| 1.1 | |
| (1.7) | |
| (0.8) | |
| (2.5) | | |
Total sales change | |
| 25.5 | % |
| 4.8 | % |
| 15.1 | % |
| 3.4 | % | |
| | | | | | | | | | | | | | |
Business segment operating income (millions) | | $ | 508 | | $ | 459 | | $ | 1,270 | | $ | 1,401 | | |
Percent change | |
| 10.6 | % |
| (3.1) | % |
| (9.4) | % |
| (2.7) | % | |
Percent of sales | |
| 23.5 | % |
| 26.7 | % |
| 20.9 | % |
| 26.5 | % | |
Third quarter 2020 results:
Sales in Health Care totaled $1.4$2.2 billion, up 13.125.5 percent in U.S. dollars. Organic local-currency sales increased 13.28.1 percent, acquisitions increased sales by 23.4 percent, divestitures reduceddecreased sales by 0.17.1 percent, and foreign currency translation was flat.increased sales by 1.1 percent.
Total sales within the electronics-related businesses were up 18 percent and energy-related businesses sales were up 3 percent. Total sales increased 19 percent in Asia Pacific.
On an organic local-currency sales basis:
| Sales increased |
| ● | Medical solutions and oral care benefitted from increases in |
|
|
Acquisitions:
| ● | In February 2019, 3M acquired M*Modal, a leading healthcare technology provider of cloud-based, conversational artificial intelligence-powered systems that help physicians efficiently capture and improve the patient narrative. |
| ● | In October 2019, 3M completed the acquisition of Acelity Inc. and its KCI subsidiaries, a leading global medical technology company focused on advanced wound care and specialty surgical applications. |
Divestitures:
| ● | In the first quarter of 2019, the Company sold certain oral care technology comprising a business. |
| ● | In May 2020, 3M completed the sale of substantially all of its drug delivery business. |
Business segment operating income:
| ● | Business segment operating income margins decreased 3.2 percentage points year-on-year, primarily driven by impacts related to the Acelity acquisition and investments in productivity and growth, partially offset by continued cost discipline. |
75
First nine months 2020 results:
Sales in Health Care totaled $6.1 billion, up 15.1 percent in U.S. dollars. Organic local-currency sales decreased 1.3 percent, acquisitions increased sales by 20.9 percent, divestitures decreased sales by 3.7 percent, and foreign currency translation decreased sales by 0.8 percent.
On an organic local-currency sales basis:
| ● | Sales increased in separation and purification sciences, medical solutions, and food safety, while sales decreased in health information systems and oral care. |
| ● | Increases in healthcare and elective procedure volumes benefited both Medical solutions and oral care after significant disruptions in the second quarter, with strong pandemic-related demand for disposable respirators resulting in increased sales for medical solutions, while oral care sales decreased year-on-year. In addition, health information systems decreased due to hospitals remaining cautious relative to their information technology investments. |
Acquisitions:
| ● | In February 2019, 3M acquired M*Modal, a leading healthcare technology provider of cloud-based, conversational artificial intelligence-powered systems that help physicians efficiently capture and improve the patient narrative. |
| ● | In October 2019, 3M completed the acquisition of Acelity Inc. and its KCI subsidiaries, a leading global medical technology company focused on advanced wound care and specialty surgical applications. |
Divestitures:
| ● | In the first quarter of 2019, the Company sold certain oral care technology comprising a business. |
| ● | In May 2020, 3M completed the sale of substantially all of its drug delivery business. |
Business segment operating income:
| ● | Business segment operating income margins decreased 5.6 percentage points year-on-year, driven by impacts related to the Acelity acquisition in addition to significant sales declines in |
|
|
Consumer Business:
| | | | | | | | | | | | | | |
|
| Three months ended |
| Nine months ended |
| | ||||||||
| | September 30, | | September 30, | | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| | ||||
Sales (millions) | | $ | 1,417 | | $ | 1,342 | | $ | 3,911 | | $ | 3,862 | | |
Sales change analysis: | | | | | | | | | | | | | | |
Organic local-currency | |
| 5.5 | % |
| 3.4 | % |
| 2.1 | % |
| 2.1 | % | |
Translation | |
| 0.1 | |
| (0.9) | |
| (0.8) | |
| (1.5) | | |
Total sales change | |
| 5.6 | % |
| 2.5 | % |
| 1.3 | % |
| 0.6 | % | |
| | | | | | | | | | | | | | |
Business segment operating income (millions) | | $ | 358 | | $ | 313 | | $ | 914 | | $ | 821 | | |
Percent change | |
| 14.7 | % |
| 3.1 | % |
| 11.4 | % |
| 0.2 | % | |
Percent of sales | |
| 25.3 | % |
| 23.3 | % |
| 23.4 | % |
| 21.3 | % | |
71
Divestitures:
|
|
Third quarter 2020 results:
Operating income:
|
|
First Nine Months 2017 results:
Sales in Electronics and EnergyConsumer totaled $3.8$1.4 billion, up 10.6an increase of 5.6 percent in U.S. dollars. Organic local-currency sales increased 11.0 percent, divestitures reduced sales by 0.25.5 percent and foreign currency translation reducedincreased sales by 0.20.1 percent.
Total sales within the electronics-related businesses were up 17 percent while energy-related businesses were flat. Total sales increased 17 percent in Asia Pacific.
On an organic local-currency sales basis:
| Sales grew in home care and home improvement, while consumer health care was flat. |
| Stationery and |
76 |
|
|
| Sales |
Business segment operating income:
Divestitures:
|
|
Operating income:
|
|
Consumer Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended |
|
| ||||||||
|
| September 30, |
| September 30, |
|
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| ||||
Sales (millions) |
| $ | 1,236 |
| $ | 1,210 |
| $ | 3,415 |
| $ | 3,390 |
|
|
Sales change analysis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organic local-currency |
|
| 1.9 | % |
| 2.9 | % |
| 0.5 | % |
| 2.7 | % |
|
Translation |
|
| 0.3 |
|
| 1.1 |
|
| 0.2 |
|
| (0.8) |
|
|
Total sales change |
|
| 2.2 | % |
| 4.0 | % |
| 0.7 | % |
| 1.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (millions) |
| $ | 307 |
| $ | 317 |
| $ | 724 |
| $ | 836 |
|
|
Percent change |
|
| (3.2) | % |
| 8.2 | % |
| (13.4) | % |
| 5.5 | % |
|
Percent of sales |
|
| 24.8 | % |
| 26.2 | % |
| 21.2 | % |
| 24.7 | % |
|
The Consumer segment serves markets that include consumer retail, office retail, office business to business, home improvement, drug and pharmacy retail, and other markets. Products in this segment include office supply products, stationery products, construction and home improvement products (do-it-yourself), home care products, protective material products, certain consumer retail personal safety products, and consumer health care products.
72
Third Quarter 2017 results:
First nine months 2020 result:
Sales in Consumer totaled $1.2$3.9 billion, up 2.2an increase of 1.3 percent in U.S. dollars. Organic local-currency sales increased 1.92.1 percent whileand foreign currency translation increaseddecreased sales by 0.30.8 percent.
On an organic local-currency sales basis:
|
|
|
|
|
|
Operating income:
|
|
First Nine Months 2017 results:
Sales in Consumer totaled $3.4 billion, up 0.7 percent in U.S. dollars. Organic local-currency sales increased 0.5 percent, while foreign currency translation increased sales by 0.2 percent.
On an organic local-currency sales basis:
| Sales grew in home care and home improvement, while consumer health care and |
|
|
| ● | Stationery and office declined year-on-year as a result of many business |
| ● | Sales showed continued strength in the |
OperatingBusiness segment operating income:
|
|
FINANCIAL CONDITION AND LIQUIDITY
3M continues its transition to a better-optimized capital structure and is adding leverage at a measured pace. The strength and stability of 3M’s business model and strong free cash flow capability, together with proven capital markets access, enableprovides financial flexibility and enables the Company to implement this strategy.invest through business cycles. Investing in 3M’s businessesbusiness to drive organic growth and deliver strong return on invested capital remains the first priority for capital deployment, includingdeployment. This includes research and development, capital expenditures, and commercialization capability. Investment in organic growthOrganic investments will be supplemented by complementary acquisitions. The Company also continues to actively manage its portfolio to maximize value for shareholders. Given uncertainty arising from COVID-19, the Company suspended its share repurchase program effective March 2020. 3M will also continue to return cash to shareholders through dividends and will consider whether to resume share repurchases. Sources forrepurchases once the COVID-19 impacts are better known. 3M maintains strong liquidity and further added to its liquidity position through the issuance of $1.75 billion in registered notes in March 2020. To fund cash availabilityneeds in the United States, such asthe Company relies on ongoing cash flow from U.S. operations, and access to capital markets have historically been sufficientand repatriation of the earnings of its foreign affiliates that are not considered to fund dividend payments to shareholders and share repurchases, as well as funding U.S. acquisitions and other items as needed. be permanently reinvested.For those international earnings still considered to be reinvested indefinitely, the Company currently has no plans or intentions to repatriate these funds for U.S. operations. However, if these international funds are needed for operations in the U.S., 3M would be required to accrue and pay U.S. taxes to repatriate them. See Note 8 in 3M’s Current Report on Form 8-K dated May 4, 2017, for further information on earnings considered to be reinvested indefinitely.
3M’s primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances. 3M believes it will have continuous access to the commercial paper market. 3M’s commercial paper program permits the Company to have a maximum of $5 billion outstanding with a maximum maturity of 397 days from date of issuance. At September 30, 2017,2020, there was approximately $225 million inno commercial paper issued and outstanding.
73
Total Debt:
The Company’s total debt was approximately $11.7 billionoutstanding, compared to $150 million outstanding at both September 30, 2017 and December 31, 2016. In May 2016, 3M issued 500 million Euro aggregate principal amount of 5.75-year fixed rate medium-term notes due February 2022 with a coupon rate of 0.375% and 500 million Euro aggregate principal amount of 15-year fixed rate medium-term notes due 2031 with a coupon rate of 1.50%. In September 2016, 3M issued $600 million aggregate principal amount of five-year fixed rate medium-term notes due 2021 with a coupon rate of 1.625%, $650 million aggregate principal amount of 10-year fixed rate medium-term notes due 2026 with a coupon rate of 2.250%, and $500 million aggregate principal amount of 30-year fixed rate medium-term notes due 2046 with a coupon rate of 3.125%. All of these 2016 issuances were under the medium-term notes program (Series F).2019.
In September 2016, 3M repaid $1 billion aggregate principal amount of fixed rate medium-term notes that matured. In June 2017, 3M repaid $650 million aggregate principal amount of fixed rate medium-term notes that matured.Total debt:
In October 2017, 3M issued $650 million aggregate principal amount of 5.5-year fixed rate medium-term notes due 2023 with a coupon rate of 2.25%, $850 million aggregate principal amount of 10-year fixed rate medium-term notes due 2027 with a coupon rate of 2.875%, and $500 million aggregate principal amount of 30-year fixed rate medium-term notes due 2047 with a coupon rate of 3.625%.
The proceeds from the debt issuance will be used to fund the notes repurchase described below, the purchase of Scott Safety (refer to Note 2 for details), and for general corporate purposes.
In October 2017, 3M, via cash tender offers, repurchased $305 million aggregate principal amount of its outstanding notes. This included $110 million of its $330 million principal amount of 6.375% notes due 2028 and $195 million of its $750 million principal amount of 5.70% notes due 2037. The Company will reflect an early debt extinguishment charge of approximately $95 million in the fourth quarter of 2017 within interest expense associated with the differential between the carrying value and the amount paid to acquire the tendered notes and related expenses.
As of September 30, 2017, the total amount of debt issued as part of the medium-term notes program (Series F), inclusive of debt issued in 2011, 2012, 2014, 2015 and the 2016 debt referenced above (excluding the October 2017 issuance above), is approximately $11.1 billion (utilizing the foreign exchange rates applicable at the time of issuance for the Euro denominated debt). Information with respect to long-term debt issuances and maturities for the periods presented is included in Note 10 of 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 2016 Annual Report on Form 10-K) .
The strength of 3M’s capital structurecredit profile and significant ongoing cash flows provide 3M proven access to capital markets. Additionally, the Company’s debt maturity profile is staggered to help ensure refinancing needs in any given year are reasonable in proportion to the total portfolio. 3M currently has an AA- credit rating with a stable outlook from Standard & Poor’s and has an A1 credit rating with a stablenegative outlook from Moody’s Investors Service. Service and an A+ credit rating with a negative outlook from Standard & Poor’s.
The Company’s ongoing transitiontotal debt was $0.7 billion lower at September 30, 2020 when compared to a more optimized capital structure, financed with additional low-costDecember 31, 2019. Decreases in debt could impact 3M’sinclude the repayment of aggregate $445 million principal amount of Third Lien Notes subject to in-substance defeasance (see Note 10), 650 million euros and $500 million aggregate principal amount of floating-rate medium-term notes that matured, lower
77
commercial paper balance, and the repayment of the 80 billion Japanese yen and 150 million euro credit ratingfacilities. These decreases were partially offset by the March 2020 issuance of $1.75 billion of registered notes. For discussion of repayments of and proceeds from debt refer to the following “Cash Flows from Financing Activities” section.
In July 2017, the United Kingdom’s Financial Conduct Authority announced that it would no longer require banks to submit rates for the London InterBank Offered Rate (“LIBOR”) after 2021. The Company is in the future. process of reviewing its debt securities, bank facilities, derivative instruments and commercial contracts that utilize LIBOR as the reference rate. 3M will continue its impact assessment and monitor regulatory developments during the transition period.
Effective February 24, 2017,10, 2020, the Company updated its “well-known seasoned issuer” (WKSI) shelf registration statement, which registers an indeterminate amount of debt or equity securities for future issuance and sale. This replaced 3M’s previous shelf registration dated May 16, 2014.February 24, 2017. In May 2016, in connection with the WKSI shelf, 3M entered into an amended and restated distribution agreement relating to the future issuance and sale (from time to time) of the Company’s medium-term notes program (Series F), up to the aggregate principal amount of $18 billion, which was an increase from the previous aggregate principal amount up to $9 billion of the same Series.
InAs of September 30, 2020, the total amount of debt issued as part of the medium-term notes program (Series F), inclusive of debt issued in February 2019 and prior years is approximately $17.6 billion (utilizing the foreign exchange rates applicable at the time of issuance for the euro denominated debt). Additionally, the August 2019 and March 2016, 3M amended2020 debt was issued under the WKSI shelf registration, but not as part of the medium-term notes program (Series F). Information with respect to long-term debt issuances and restated its existing $2.25maturities for the periods presented is included in Note 10 of this Form 10-Q and Note 12 of 3M’s 2019 Annual Report on Form 10-K.
The Company has a $3.0 billion five-year revolving credit facility expiring in August 2019 to a $3.75 billion five-yearNovember 2024. The revolving credit facility expiring in March 2021. This credit agreement includes a provision under which 3M may request an increase of up to $1.25$1.0 billion (at lenders’lender’s discretion), bringing the total facility up to $5.0$4.0 billion. This revolvingIn addition, 3M entered into a $1.25 billion 364-day credit facility isexpiring in November 2020. The 364-day credit agreement includes a provision under which 3M may convert any advances outstanding on the maturity date into term loans with a maturity date one year later. These credit facilities were undrawn at September 30, 2017.2020. Under both the $3.75$3.0 billion and $1.25 billion credit agreement,agreements, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not
74
less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the same period. At September 30, 2017,2020, this ratio was approximately 4217 to 1. Debt covenants do not restrict the payment of dividends.
Apart from the committed credit facilities $290described above, 3M has a credit facility initially expiring in July 2020 in the amount of 80 billion Japanese yen that in July 2020 was further extended until August 2021. In November 2019, 3M entered into a credit facility expiring in November 2020 in the amount of 150 million euros. During the third quarter of 2020, the Company paid the outstanding balances and closed these credit facilities. The Company also had $271 million in stand-alone letters of credit and bank guarantees were also issued and outstanding at September 30, 2017.2020. These lines of creditinstruments are utilized in connection with normal business activities.
Cash, Cash Equivalentscash equivalents and Marketable Securities:marketable securities:
At September 30, 2017,2020, 3M had $3.4$4.6 billion of cash, cash equivalents and marketable securities, of which approximately $3.3$2.9 billion was held by the Company’s foreign subsidiaries and approximately $140 million$1.7 billion was held byin the United States. These balances are invested in bank instruments and other high-quality fixed income securities. At December 31, 2016,2019, cash, cash equivalents and marketable securities held by the Company’s foreign subsidiaries and byin the United States totaled approximately $2.35$2.4 billion and $350$100 million, respectively. The increase from December 31, 2019 primarily resulted from $1.75 billion of debt the Company issued in March 2020 in light of the uncertain impact of the COVID-19 pandemic.
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Net Debt (non-GAAP measure):
Net debt is not defined under U.S. GAAP and may not be computed the same as similarly titled measures used by other companies. The Company defines net debt as total debt less the total of cash, cash equivalents and current and long-term marketable securities. 3M believes net debt is meaningful to investors as 3M considers net debt and its components to be important indicators of liquidity and financial position. The following table provides net debt as of September 30, 2017,2020 and December 31, 2016.2019.
|
|
|
|
|
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|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
(Millions) |
| September 30, 2017 |
| December 31, 2016 |
| Change |
|
| September 30, 2020 |
| December 31, 2019 |
| Change | | ||||||
Total debt |
| $ | 11,663 |
| $ | 11,650 |
| $ | 13 |
| | $ | 19,598 | | $ | 20,313 | | $ | (715) | |
Less: Cash, cash equivalents and marketable securities |
|
| 3,434 |
|
| 2,695 |
|
| 739 |
| |
| 4,595 | |
| 2,494 | |
| 2,101 | |
Net debt (non-GAAP measure) |
| $ | 8,229 |
| $ | 8,955 |
| $ | (726) |
| | $ | 15,003 | | $ | 17,819 | | $ | (2,816) | |
InRefer to the first nine months of 2017, net debt decreased by $726 million to a net debt balance of $8.2 billion, impacted by the increase in cashpreceding “Total Debt” and cash equivalents“Cash, Cash Equivalents and marketable securities. Marketable Securities” sections for additional details.
Balance Sheet:
3M’s strong balance sheet and liquidity provide the Company with significant flexibility to take advantage offund its numerous opportunities going forward. The Company will continue to invest in its operations to drive growth, including continual review of acquisition opportunities.
The Company uses working capital measures that place emphasis and focus on certain working capital assets. These measures include working capital,assets, such as accounts receivable turns, and inventory turns.activity.
Working Capitalcapital (non-GAAP measure):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions) |
|
| September 30, 2017 |
|
| December 31, 2016 |
|
| Change |
|
Current assets |
| $ | 13,656 |
| $ | 11,726 |
| $ | 1,930 |
|
Less: Current liabilities |
|
| (6,598) |
|
| (6,219) |
|
| (379) |
|
Working capital (non-GAAP measure) |
| $ | 7,058 |
| $ | 5,507 |
| $ | 1,551 |
|
| | | | | | | | | | |
| | | | | | | | | | |
(Millions) | | September 30, 2020 | | December 31, 2019 | | Change | | |||
Current assets | | $ | 14,110 | | $ | 12,971 | | $ | 1,139 | |
Less: Current liabilities | |
| 7,410 | |
| 9,222 | |
| (1,812) | |
Working capital (non-GAAP measure) | | $ | 6,700 | | $ | 3,749 | | $ | 2,951 | |
Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. Working capital is not defined under U.S. generally accepted accounting principles and may not be computed the same as similarly titled measures used by other companies. The Company defines working capital as current assets minus current liabilities. Working capital increased $1.551 billion compared to December 31, 2016. Current asset balance changes increased working capital by $1.930 billion, driven by increases in accounts receivable, and inventories (discussed further below), plus increases in cash. Current liability balance changes decreased working capital by $379 million, largely due to increases in other current liabilities and accrued payroll,
75
partially offset by decreases in short-term debt. 3M believes working capital is meaningful to investors as a measure of operational efficiency and short-term financial health.
Accounts ReceivableWorking capital increased $3.0 billion compared with December 31, 2019. Balance changes in current assets increased working capital by $1.2 billion, driven by increases to cash and Inventory Turns (non-GAAP measures):cash equivalents, partially offset by decreases in account receivable and inventory. Balance changes in current liabilities increased working capital by $1.8 billion, primarily due to decreases in short-term borrowing and the current portion of long-term debt.
Accounts receivable and inventory turns are not defined under U.S. generally accepted accounting principles and may not be computed the same as similarly titled measures used by other companies. 3M defines accounts receivable turns as quarterly net sales multiplied by 4 divided by ending accounts receivable – net, and defines inventory turns as quarterly manufacturing cost multiplied by 4 divided by ending inventory. 3M believes accounts receivable turns is meaningful to investors as a measure of how efficiently the Company manages credit and collects from its customers. For inventory turns calculation purposes, manufacturing cost is defined as cost of sales less freight and engineering costs. 3M believes inventory turns is meaningful to investors as a measure of how quickly inventory is sold. Details of these calculations follow.
|
|
|
|
|
|
|
|
Accounts receivable turns (non-GAAP measure) |
|
|
|
|
|
|
|
(Millions, except turns) |
|
| September 30, 2017 |
|
| December 31, 2016 |
|
Quarterly net sales |
| $ | 8,172 |
| $ | 7,329 |
|
Ending accounts receivable - net |
| $ | 5,156 |
| $ | 4,392 |
|
Accounts receivable turns |
|
| 6.34 |
|
| 6.67 |
|
|
|
|
|
|
|
|
|
Inventory turns (non-GAAP measure) |
|
|
|
|
|
|
|
(Millions, except turns) |
|
| September 30, 2017 |
|
| December 31, 2016 |
|
Quarterly cost of sales |
| $ | 4,045 |
| $ | 3,716 |
|
Less: Freight and engineering |
| $ | 165 |
| $ | 160 |
|
Manufacturing cost |
| $ | 3,880 |
| $ | 3,556 |
|
Ending inventory |
| $ | 3,975 |
| $ | 3,385 |
|
Inventory turns |
|
| 3.91 |
|
| 4.20 |
|
Concerning accounts receivable, higher September 2017 salesdecreased $168 million compared to December 201631, 2019, primarily due to lower sales contributedin 2020 in relation to sales in the accounts receivable increase. Onfourth quarter 2019 and increased expected credit losses on customer receivables related to COVID-19 uncertainty. Inventory decreased $150 million from December 31, 2019 as a seasonal basis, both accounts receivableresult of actions taken to reduce inventory in light of slower growth conditions in several key end-markets, changes in channel inventory levels by customers related to impacts from COVID-19 and inventory turns are historically higher at year-end, driven by lower year-end accounts receivable and inventory balances.improving sequential organic sales volumes in the third quarter. Inventory also decreased as a result of the divestiture of the drug delivery business.
79
Cash Flows:
Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts in the Consolidated Statement of Cash Flows exclude the effects of acquisitions, divestitures and exchange rate impacts on cash and cash equivalents, which are presented as separate line items withinseparately in the statement of cash flows. Thus, the amounts presented in the following operating, investing and financing activities tables reflect changes in balances from period to period adjusted for these effects.
76
Cash Flows from Operating Activities:
|
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|
|
|
|
|
| |||||||
|
| Nine months ended |
| |||||||||||
|
| September 30, |
| |||||||||||
| | | | | | | | |||||||
|
| Nine months ended |
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| | September 30, | | |||||||||||
(Millions) |
| 2017 |
| 2016 |
| | 2020 |
| 2019 | | ||||
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Net income including noncontrolling interest |
| $ | 4,344 |
| $ | 3,902 |
| | $ | 3,998 | | $ | 3,612 | |
Depreciation and amortization |
|
| 1,195 |
|
| 1,090 |
| |
| 1,413 | |
| 1,130 | |
Company pension contributions |
|
| (311) |
|
| (320) |
| |||||||
Company postretirement contributions |
|
| (3) |
|
| (3) |
| |||||||
Company pension expense |
|
| 207 |
|
| 144 |
| |||||||
Company postretirement expense |
|
| 37 |
|
| 36 |
| |||||||
Company pension and postretirement contributions | |
| (122) | |
| (129) | | |||||||
Company pension and postretirement expense | |
| 295 | |
| 242 | | |||||||
Stock-based compensation expense |
|
| 266 |
|
| 244 |
| |
| 216 | |
| 230 | |
Gain on sale of businesses |
|
| (490) |
|
| (40) |
| | | (389) | | | (111) | |
Income taxes (deferred and accrued income taxes) |
|
| 144 |
|
| 55 |
| |
| 89 | |
| (141) | |
Loss on deconsolidation of Venezuelan subsidiary | | | — | | | 162 | | |||||||
Accounts receivable |
|
| (595) |
|
| (469) |
| |
| 113 | |
| (14) | |
Inventories |
|
| (436) |
|
| (15) |
| |
| 43 | |
| 255 | |
Accounts payable |
|
| (25) |
|
| (107) |
| |
| (48) | |
| (222) | |
Other — net |
|
| 47 |
|
| (64) |
| |
| (10) | |
| (282) | |
Net cash provided by operating activities |
| $ | 4,380 |
| $ | 4,453 |
| |||||||
Net cash provided by (used in) operating activities | | $ | 5,598 | | $ | 4,732 | | |||||||
Cash flows from operating activities can fluctuate significantly from period to period, as pension funding decisions, tax timing differences and other items can significantly impact cash flows.
In the first nine months of 2017,2020, cash flows provided by operating activities decreased $73 millionincreased $0.9 billion compared to the same period last year. Factors that decreased operating cash flows were increasesyear, with this increase primarily due to cost saving actions taken in accounts receivableresponse to COVID-19 and inventories.lower year-on-year significant litigation-related charges and the timing of associated payments. The combination of accounts receivable, inventories and accounts payable increased working capital by $1.056 billion$108 million in the first nine months of 2017,2020, compared to the working capital increases of $591$19 million in the first nine months of 2016.2019. Additional discussion on working capital changes is provided earlier in the “Financial Condition and Liquidity” section.
Cash Flows from Investing Activities:
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|
|
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| |||||||
|
| Nine months ended |
| |||||||||||
|
| September 30, |
| |||||||||||
| | | | | | | | |||||||
|
| Nine months ended |
| |||||||||||
| | September 30, | | |||||||||||
(Millions) |
| 2017 |
| 2016 |
| | 2020 |
| 2019 | | ||||
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Purchases of property, plant and equipment (PP&E) |
| $ | (914) |
| $ | (984) |
| | $ | (1,079) | | $ | (1,161) | |
Proceeds from sale of PP&E and other assets |
|
| 18 |
|
| 18 |
| |
| 29 | |
| 91 | |
Acquisitions, net of cash acquired |
|
| (12) |
|
| (17) |
| |
| (25) | |
| (704) | |
Purchases and proceeds from maturities and sale of marketable securities and investments, net |
|
| (310) |
|
| (242) |
| |
| 170 | |
| 348 | |
Proceeds from sale of businesses, net of cash sold |
|
| 862 |
|
| 56 |
| |
| 576 | |
| 236 | |
Other — net |
|
| 2 |
|
| (4) |
| |
| 8 | |
| 45 | |
Net cash used in investing activities |
| $ | (354) |
| $ | (1,173) |
| |||||||
Net cash provided by (used in) investing activities | | $ | (321) | | $ | (1,145) | | |||||||
Investments in property, plant and equipment enable growth across many diverse markets, helping to meet product demand and increasing manufacturing efficiency. The Company expects full-year 2020 estimated capital spending to be approximately $1.4 billion to $1.5 billion (which was further updated in the third quarter of 2020 versus original guidance of $1.6 billion to $1.8 billion) as 3M
80
reduces overall spending in light of uncertainty regarding COVID-19, but continues to invest in expanding the Company’s ability to increase production of respiratory products to meet worldwide demand.
3M invests in renewal and maintenance programs, which pertain to cost reduction, cycle time, maintaining and renewing current capacity, eliminating pollution, reduction, and compliance. Costs related to maintenance, ordinary repairs, and certain other items are expensed. 3M also invests in growth, which adds to capacity, driven by new growth capacity,products, both through expansion of current facilities and by building new facilities. Finally, 3M also invests in corporateother initiatives, such as information technology (IT), laboratory facilities, and information technology (IT). The Company expects 2017 capital spending to be approximately $1.4 billion.a continued focus on investments in sustainability.
Refer to Note 23 for information on acquisitions and divestitures. The Company is actively considering additional acquisitions, investments and strategic alliances, and from time to time may also divest certain businesses. Acquisitions, net of cash acquired, in the first nine months of 2019 primarily includes the purchase of M*Modal. Acquisitions, net of cash acquired, in the first nine months of 2020 primarily relate to the payment made for contingent consideration in regards to the Acelity acquisition. Proceeds from sale of businesses in the first nine months of 20172019 primarily relate to the divestituresale of certain oral care technology comprising a business and the gas and flame detection business. Proceeds from sale of businesses in 2020 primarily relate to the sales of the assets of the prescription safety
77
eyewear, identity management,Company’s advanced ballistic-protection business and tolling and automated license/number plate recognition businesses within the Safety and Graphics business segment.its drug delivery business.
Purchases of marketable securities and investments and proceeds from maturities and sale of marketable securities and investments are primarily attributable to asset-backed securities, certificates of deposit/time deposits, commercial paper, and other securities, which are classified as available-for-sale. In the first nine months of 2020 these included the maturity of the held-to-maturity debt security that was entered into to satisfy the redemption of the Third Lien Notes (which matured in May 2020). Refer to Note 79 for more details about 3M’s diversified marketable securities portfolio. Purchases of investments include additional survivor benefit insurance, plus cost method andinvestments in equity investments.securities.
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
| |||||||
|
| Nine months ended |
| |||||||||||
|
| September 30, |
| |||||||||||
| | | | | | | | |||||||
|
| Nine months ended |
| |||||||||||
| | September 30, | | |||||||||||
(Millions) |
| 2017 |
| 2016 |
| | 2020 |
| 2019 | | ||||
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Change in short-term debt — net |
| $ | 60 |
| $ | (498) |
| | $ | (138) | | $ | (466) | |
Repayment of debt (maturities greater than 90 days) |
|
| (650) |
|
| (992) |
| |
| (2,477) | |
| (871) | |
Proceeds from debt (maturities greater than 90 days) |
|
| — |
|
| 2,832 |
| |
| 1,745 | |
| 6,116 | |
Total cash change in debt |
| $ | (590) |
| $ | 1,342 |
| | $ | (870) | | $ | 4,779 | |
Purchases of treasury stock |
|
| (1,564) |
|
| (2,829) |
| |
| (366) | |
| (1,243) | |
Proceeds from issuances of treasury stock pursuant to stock option and benefit plans |
|
| 582 |
|
| 741 |
| |
| 325 | |
| 437 | |
Dividends paid to shareholders |
|
| (2,104) |
|
| (2,014) |
| |
| (2,540) | |
| (2,488) | |
Other — net |
|
| (23) |
|
| (20) |
| |
| (47) | |
| (158) | |
Net cash used in financing activities |
| $ | (3,699) |
| $ | (2,780) |
| |||||||
Net cash provided by (used in) financing activities | | $ | (3,498) | | $ | 1,327 | | |||||||
Total debt was approximately $11.7$19.6 billion at both September 30, 20172020 and year-end 2016. Changes$20.3 billion at December 31, 2019. Repayment of debt primarily consists of the aggregate $445 million principal amount of Third Lien Notes and the 650 million euros and $500 million aggregate principal amount of floating-rate medium-term notes that matured in short-termMay 2020 and August 2020, respectively. Increases in debt includesrelated to the net impactMarch 2020 issuance of $1.75 billion in registered notes. Outstanding commercial paper was zero at September 30, 2020, as compared to $150 million at December 31, 2019. During the third quarter of 2020, the Company paid the outstanding balances on their Japanese yen and and euro credit facilities. Net commercial paper issuances in addition to repayments and borrowings by international subsidiaries are largely reflected in addition to“Change in short-term debt – net” in the preceding table. 3M’s primary short-term liquidity needs are met through cash on hand and U.S. commercial paper issuances, if any. Refer to the preceding “Total Debt” section for discussion of repayment of debt and proceeds from debt issuances.
Repurchases of common stock are made to support the Company’s stock-based employee compensation plans and for other corporate purposes. In February 2016,November 2018, 3M’s Board of Directors authorizedreplaced the Company’s February 2016 repurchase program with a new repurchase program. This new program authorizes the repurchase of up to $10 billion of 3M’s outstanding common stock, with no pre-established end date. TheIn the first nine months of 2020, the Company expects full-year 2017 grosspurchased $366 million of its own stock prior to 3M’s suspension of its share repurchases will berepurchase program in the range of $2.0 billion to $2.5 billion.late March. For more information, refer to the table titled “Issuer Purchases of Equity Securities” in Part II, Item 2. The Company does not utilize derivative instruments linked to the Company’s stock.
81
3M has paid dividends each year since 1916. In February 2017,2020, 3M’s Board of Directors declared a first-quarter 20172020 dividend of $1.175$1.47 per share, an increase of 62 percent. This is equivalent to an annual dividend of $4.70$5.88 per share and marked the 59th62nd consecutive year of dividend increases for 3M.increases. In May 2017,2020, 3M’s Board of Directors declared a second-quarter 20172020 dividend of $1.175$1.47 per share. In August 2017,2020, 3M’s Board of Directors declared a third-quarter 20172020 dividend of $1.175$1.47 per share.
Other cash flows from financing activities may include various other items, such as cash paid associated with certain derivative instruments, distributions to or sales of noncontrolling interests, changes in cash overdraft balances, and principal payments for capitalfinance leases.
Free Cash Flow (non-GAAP measure):
Free cash flow and free cash flow conversion are not defined under U.S. generally accepted accounting principles (GAAP). Therefore, they should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. The Company defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. The Company defines free cash flow conversion as free cash flow divided by net income attributable to 3M. The Company believes free cash flow and
78
free cash flow conversion are meaningful to investors as they are useful measures of performance and the Company uses these measures as an indication of the strength of the company and its ability to generate cash. The first quarter of each year is typically 3M’s seasonal low for free cash flow and free cash flow conversion. Below find a recapIn the table below details the components of free cash flow for the nine months ended September 30, 20172020 and 2016.2019.
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|
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|
|
|
|
|
| Nine months ended |
| ||||
|
|
|
|
| September 30, |
| ||||
(Millions) |
|
|
|
| 2017 |
| 2016 |
| ||
|
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|
|
|
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|
|
|
Major GAAP Cash Flow Categories |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
| $ | 4,380 |
| $ | 4,453 |
|
Net cash provided by (used in) investing activities |
|
|
|
|
| (354) |
|
| (1,173) |
|
Net cash used in financing activities |
|
|
|
|
| (3,699) |
|
| (2,780) |
|
|
|
|
|
|
|
|
|
|
|
|
Free Cash Flow (non-GAAP measure) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
| $ | 4,380 |
| $ | 4,453 |
|
Purchases of property, plant and equipment (PP&E) |
|
|
|
|
| (914) |
|
| (984) |
|
Free cash flow |
|
|
|
| $ | 3,466 |
| $ | 3,469 |
|
Net income attributable to 3M |
|
|
|
| $ | 4,335 |
| $ | 3,895 |
|
Free cash flow conversion |
|
|
|
|
| 80 | % |
| 89 | % |
In the first nine months of 2020 and 2019, free cash flow conversion was impacted by cost saving actions taken in response to COVID-19 and significant litigation-related charges and timing of associated payments. Refer to the preceding “Cash Flows from Operating Activities” section for discussion of additional items that impacted operating cash flow. Refer to the proceeding “Cash Flows from Investing Activities” section for discussion on capital spending for property, plant and equipment.
| | | | | | | | | | |
| | | | | Nine months ended | | ||||
| | | | | September 30, | | ||||
(Millions) | | | | | 2020 |
| 2019 | | ||
Major GAAP Cash Flow Categories | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | | | $ | 5,598 | | $ | 4,732 | |
Net cash provided by (used in) investing activities | | | | | | (321) | | | (1,145) | |
Net cash provided by (used in) financing activities | | | | | | (3,498) | | | 1,327 | |
| | | | | | | | | | |
Free Cash Flow (non-GAAP measure) | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | | | $ | 5,598 | | $ | 4,732 | |
Purchases of property, plant and equipment (PP&E) | | | | |
| (1,079) | |
| (1,161) | |
Free cash flow | | | | | $ | 4,519 | | $ | 3,571 | |
Net income attributable to 3M | | | | | $ | 3,995 | | $ | 3,601 | |
Free cash flow conversion | | | | |
| 113 | % |
| 99 | % |
7982
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to shareholders and in press releases. In addition, the Company’s representatives may from time to time make oral forward-looking statements.
Forward-looking statements relate to future events and typically address the Company’s expected future business and financial performance. Words such as “plan,” “expect,” “aim,” “believe,” “project,” “target,” “anticipate,” “intend,” “estimate,” “will,” “should,” “could,” “forecast” and other words and terms of similar meaning, typically identify such forward-looking statements. In particular, these include, among others, statements relating to:
| worldwide economic, political, regulatory, capital markets and other external conditions, such as interest rates, foreign currency exchange rates, financial conditions of our suppliers and customers, trade restrictions such as tariffs in addition to retaliatory counter measures, and natural and other disasters or climate change affecting the operations of the Company or our suppliers and customers, |
● | risks related to public health crises such as the global pandemic associated with the coronavirus (COVID-19), |
| ● | liabilities related to certain fluorochemicals and the outcome of contingencies, such as legal and regulatory proceedings, |
| ● | the Company’s strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance, and market position, |
| competitive conditions and customer preferences, |
| foreign currency exchange rates |
| new business opportunities, product development, and future performance or results of current or anticipated products, |
| fluctuations in the costs and availability of purchased components, compounds, raw materials and energy, |
● | Information technology systems including ERP system roll-out and implementations, |
| ● | Security breaches and other disruptions to information technology infrastructure, |
| ● | the scope, nature or impact of |
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| future levels of indebtedness, common stock repurchases and capital spending, |
| future availability of and access to credit markets, |
| pension and postretirement obligation assumptions and future contributions, |
| asset impairments, |
| tax liabilities, and |
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| the effects of changes in tax (including the Tax Cuts and Jobs Act), environmental and other laws and regulations in the United States and other countries in which we operate. |
The Company assumes no obligation to update or revise any forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those reflected in any such forward-looking statements depending on a variety of factors. Important information as to these factors can be found in this document, including, among others, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings of “Overview,” “Financial Condition and Liquidity” and annually in “Critical Accounting Estimates.” Discussion of these factors is incorporated by reference from Part II, Item 1A, “Risk Factors,” of this document, and should be considered an integral part of Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For additional information concerning factors that may cause actual results to vary materially from those stated in the forward-looking statements, see our reports on Form 10-K, 10-Q and 8-K filed with the SEC from time to time.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the context of Item 3, 3M is exposed to market risk due to the risk of loss arising from adverse changes in foreign currency exchange rates, interest rates and commodity prices. Changes in those factors could impact the Company’s results of operations and financial condition. For a discussion of sensitivity analysis related to these types of market risks, refer to Part II, Item 7A, Quantitative
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and Qualitative Disclosures About Market Risk, in 3M’s Current Report on Form 8-K dated May 4, 2017 (which updated 3M’s 20162019 Annual Report on Form 10-K).10-K. There have been no material changes in information that would have been provided in the context of Item 3 from the end of the preceding year until September 30, 2017.2020. However, the Company does provide risk management discussion in various places in this Quarterly Report on Form 10-Q, primarily in the Derivatives note.
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Item 4. Controls and Procedures.
a. The Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
b. There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is implementing an enterprise resource planning (“ERP”) system on a worldwide basis, which is expected to improve the efficiency of certain financial and related transaction processes. The gradual implementation is expected to occur in phases over the next several years. The implementation of a worldwide ERP system will likely affect the processes that constitute our internal control over financial reporting and will require testing for effectiveness.
The Company completed implementation with respect to elements of certainvarious processes/sub-processes in limitedcertain subsidiaries/locations, including aspects relative to the United States, and will continue to roll out the ERP system over the next several years. As with any new information technology application we implement, this application, along with the internal controls over financial reporting included in this process, was appropriately considered within the testing for effectiveness with respect to the implementation in these instances. We concluded, as part of its evaluation described in the above paragraphs, that the implementation of the ERP system in these circumstances has not materially affected our internal control over financial reporting.
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3M COMPANY
FORM 10-Q
For the Quarterly Period Ended September 30, 20172020
PART II. Other Information
Discussion of legal matters is incorporated by reference from Part I, Item 1, Note 12,14, “Commitments and Contingencies” of this document, and should be considered an integral part of Part II, Item 1, “Legal Proceedings.”
Item 1A. Risk Factors.
Provided below is a cautionary discussion of what we believe to be the most important risk factors applicable to the Company. Discussion of these factors is incorporated by reference into and considered an integral part of Part I, Item 2, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”
Risks Related to the Global Economy and Public Health Crises
* ResultsThe Company’s results are impacted by the effects of, and changes in, worldwide economic, political, regulatory, international trade and capital marketsother external conditions.
The Company operates in more than 70 countries and derives approximately 60 percent of its revenues from outside the United States. TheStates, and, accordingly, the Company’s business is subject to global competition and geopolitical risks and may be adversely affected by factors in the United States and other countries that are beyond its control, such as slower economic growth, disruptions in financial markets, economic downturns, in the form of either contained or widespread recessionary conditions, inflation, elevated unemployment levels, sluggish or uneven recovery,government actions impacting international trade agreements, imposing trade restrictions such as tariffs, and retaliatory counter measures, government deficit reduction and other austerity measures in specific countries or regions, or in the various industries in which the Company operates; social, political or labor conditions in specific countries or regions; natural and other disasters or climate change affecting the operations of the Company or its customers and suppliers; or adverse changes in the availability and cost of capital, interest rates, tax related matters such as tax rates, tax laws, changing political environments in the U.S. and foreign jurisdictions that impact tax examination, assessment and enforcement approaches, or exchange control, ability to expatriate earnings and other regulations in the jurisdictions in which the Company operates.
* Change in the Company’s credit ratings could increase cost of funding. The Company’s credit ratings are important to 3M’s cost of capital. The major rating agencies routinely evaluate the Company’s credit profile and assign debt ratings to 3M. This evaluation is based on a number of factors, which include financial strength, business and financial risk, Climate change, as well as transparencyrelated environmental and social regulations, may negatively impact the Company or its customers and suppliers, in terms of availability and cost of natural resources, sources and supply of energy, product demand and manufacturing, and the health and well-being of individuals and communities in which we operate.
* The Company is subject to risks related to public health crises such as the global pandemic associated with rating agenciesthe coronavirus (COVID-19).
3M, as a global company, is impacted by public health crises such as the global pandemic associated with COVID-19. The outbreak has significantly increased economic and timelinessdemand uncertainty. In addition, public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote working, have impacted 3M’s operations. In these challenging and dynamic circumstances, 3M is working to protect its employees and the public, maintain business continuity and sustain its operations, including ensuring the safety and protection of approximately 50,000 people who work in our plants and distribution centers across the world, many of whom support the manufacturing and delivery of products that are critical in response to the global pandemic. COVID-19 has impacted 3M’s supply chains relative to global demand for products like respirators, surgical masks and commercial cleaning solutions. Even with 3M’s accelerated production at its global facilities combined with capacity from other manufacturers, the industry-wide challenge is that global demand for N95 and other respirators continues to exceed the industries’ ability to deliver. Within individual regions and countries around the world, 3M is working with governments, distributors and others to prioritize supplies to the most critical customer and public health needs. 3M’s manufacturing, supply chain and distribution protocols have, for example, been impacted by the need to prioritize rated orders issued by the Federal Emergency Management Agency pursuant to the U.S. Defense Production Act. In addition, trade barriers, export restrictions and other similar measures imposed by national governments also negatively impact the supplies of personal protection equipment including those made by 3M going into the most needed areas. COVID-19 has also affected the ability of suppliers and vendors to provide products and services to 3M. Some of these COVID-related factors have increased demand for certain 3M products, while others have decreased demand from certain end markets or could make it more difficult for 3M to serve customers. 3M has received reports of price gouging, counterfeiting and other illegal or fraudulent activities involving its N95 respirators, has taken legal action in several states and continues to work with state, federal and international law enforcement to protect the public and 3M against those who seek
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to exploit 3M’s brand and reputation and defraud others. Furthermore, COVID-19 has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial reporting. 3M currentlyand capital markets, foreign currency exchange rates, and interest rates. For example, COVID-19 has an AA- credit rating with a stable outlook from Standard & Poor’sled to disruption and has an A1 credit rating with a stable outlook from Moody’s Investors Service. The Company’s credit ratings have served to lower 3M’s borrowing costs and facilitate access to a variety of lenders. The Company’s ongoing transition to a better-optimized capital structure, financed with additional low-cost debt, could impact 3M’s credit ratingvolatility in the future. Failure to maintain strong investment grade ratings would adversely affectglobal capital markets, which increases the Company’s cost of fundingcapital and could adversely affect liquidity andimpact access to capital markets.
* The Company’s results are affected by competitive conditions and customer preferences. Demandcapital. As economies start to reopen in certain parts of the world, workplace safety, for the Company’s products, which impacts revenueCompany and profit margins, is affected by (i) the development and timingothers, will increasingly become a focus of concern. As part of the introductionreturn to work process at the Company, the Company could face additional privacy and data security risks related to the collection of competitive products; (ii)data regarding employees and contractors with respect to COVID-19 testing, temperature checks, and contact tracing. Due to the Company’s response to downward pricing to stay competitive; (iii) changes in customer order patterns, such as changes inspeed and scope with which the levelsCOVID situation is developing and evolving and the uncertainty of inventory maintained by customersits duration and the timing of customer purchasesrecovery, 3M is not able at this time to predict the extent to which the COVID-19 pandemic may be affected by announced price changes, changes in the Company’s incentive programs,have a material effect on its consolidated results of operations or the customer’s ability to achieve incentive goals; and (iv) changes in customers’ preferences for our products, including the success of products offered by our competitors, and changes in customer designs for their products that can affect the demand for some of the Company’s products.financial condition.
* Foreign currency exchange rates and fluctuations in those rates may affect the Company’s ability to realize projected growth rates in its sales and earnings.
Because the Company’s financial statements are denominated in U.S. dollars and approximately 60 percent of the Company’s revenues are derived from outside the United States, the Company’s results of operations and its ability to realize projected growth rates in sales and earnings could be adversely affected if the U.S. dollar strengthens significantly against foreign currencies.
Risks Related to Legal and Regulatory Proceedings
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* The Company’s growth objectives are largely dependent on the timing and market acceptance of its new product offerings, including its ability to continually renew its pipeline of new products and to bring those products to market. This ability may be adversely affected by difficulties or delays in product development, such as the inability to identify viable new products, obtain adequate intellectual property protection, or gain market acceptance of new products. There are no guarantees that new products will prove to be commercially successful.
* The Company’s future results are subject to fluctuations in the costs and availability of purchased components, compounds, raw materials and energy, including oil and natural gas and their derivatives, due to shortages, increased demand, supply interruptions, currency exchange risks, natural disasters and other factors.The Company depends on various components, compounds, raw materials, and energy (including oil and natural gas and their derivatives) supplied by others for the manufacturing of its products. It is possible that any of its supplier relationships could be interrupted duefaces liabilities related to natural and other disasters and other events, or be terminated in the future. Any sustained interruption in the Company’s receipt of adequate supplies could have a material adverse effect on the Company. In addition, while the Company has a process to minimize volatility in component and material pricing, no assurance can be given that the Company will be able to successfully manage price fluctuations or that future price fluctuations or shortages will not have a material adverse effect on the Company.
* Acquisitions, strategic alliances, divestitures, and other unusual events resulting from portfolio management actions and other evolving business strategies, and possible organizational restructuring could affect future results. The Company monitors its business portfolio and organizational structure and has made and may continue to make acquisitions, strategic alliances, divestitures and changes to its organizational structure. With respect to acquisitions, future results will be affected by the Company’s ability to integrate acquired businesses quickly and obtain the anticipated synergies.
* The Company’s future results may be affected if the Company generates fewer productivity improvements than estimated. The Company utilizes various tools, such as Lean Six Sigma, and engages in ongoing global business transformation. Business transformation is defined as changes in processes and internal/external service delivery across 3M to move to more efficient business models to improve operational efficiency and productivity, while allowing 3M to serve customers with greater speed and efficiency. This is enabled by the ongoing multi-year phased implementation of an enterprise resource planning (ERP) system on a worldwide basis. There can be no assurance that all of the projected productivity improvements will be realized.
* The Company employs information technology systems to support its business, including ongoing phased implementation of an ERP system as part of business transformation on a worldwide basis over the next several years. Security breaches and other disruptions to the Company’s information technology infrastructure could interfere with the Company’s operations, compromise information belonging to the Company and its customers, suppliers, and employees, exposing the Company to liabilitycertain fluorochemicals, which could adversely impact the Company’s business and reputation. In the ordinary course of business,our results.
As previously reported, the Company relieshas been voluntarily cooperating with various local, state, federal (primarily the U.S. Environmental Protection Agency (EPA)), and international agencies in their review of the environmental and health effects of a broad group of perfluoroalkyl and polyfluoroalkyl substances produced by the Company, collectively known as “PFAS.” The PFAS group contains several categories and classes of durable chemicals and materials with properties that include oil, water, temperature, chemical and fire resistance, as well as electrical insulating properties. The strength of the carbon-fluorine bond also means that these compounds do not easily degrade. These characteristics have made PFAS critical to the manufacture of electronic devices such as cell phones, tablets and semi-conductors. They are also used to help prevent infections in products like surgical gowns and drapes. Commercial aircraft and low-emissions vehicles also rely on informationPFAS technology. PFAS compounds are manufactured by various companies, including 3M, and are used in everyday products. As science and technology networksevolve and systems, someadvance, and in response to evolving knowledge and the understanding that PFAS compounds had the potential to build up over time, 3M announced in 2000 that we would voluntarily phase out production of which are managedperfluorooctanoate (PFOA) and perfluorooctane sulfonate (PFOS) globally as a precautionary measure. We phased out of materials used to produce certain repellants and surfactant products, with most of these activities in the U.S. completed by third parties,the end of 2002. Phased out products included Aqueous Film Forming Foam (AFFF) and coatings for food packaging, for example. 3M currently is defending lawsuits concerning various PFAS-related products and chemistries, and is subject to process, transmitunasserted and store electronic information,asserted claims and governmental regulatory proceedings and inquiries related to manage or supportthe production and use of PFAS in a variety of business processesjurisdictions, as discussed in Note 14, “Commitments and activities. Additionally,Contingencies,” within the Company collectsNotes to Consolidated Financial Statements. An adverse outcome in any one or more of these matters could be material to our financial results. For example, we recorded a pre-tax charge of $897 million, inclusive of legal fees and stores certain data, including proprietary business information, and may have accessother related obligations, in the first quarter of 2018 with respect to confidential or personal informationthe settlement of a matter brought by the State of Minnesota involving the presence of PFAS in certain of our businesses that is subject to privacy and security laws, regulations and customer-imposed controls. Despite our cybersecurity measures (including employee and third-party training, monitoring of networks and systems, and maintenance of backup and protective systems) which are continuously reviewed and upgraded, the Company’s information technology networks and infrastructure may still be vulnerable to damage, disruptions or shutdowns due to attack by hackers or breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, service providers including cloud services, natural disastersgroundwater, surface water, fish or other catastrophic events. It is possible for such vulnerabilities to remain undetected for an extended period, up toaquatic life, and including several years. While we have experienced, and expect to continue to experience, these types of threats to the Company’s information technology networks and infrastructure, none of them to date has had a material impact to the Company. There may be other challenges and risks as the Company upgrades and standardizes its ERP system on a worldwide basis. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to the Company’s reputation, which could adversely affect the Company’s business. Although the Company
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maintains insurance coverage for various cybersecurity risks, there can be no guarantee that all costs or losses incurred will be fully insured.
* The Company’s defined benefit pension and postretirement plans are subject to financial market risks that could adversely impact our results. The performance of financial markets and discount rates impact the Company’s funding obligations under its defined benefit plans. Significant changes in market interest rates, decreasessediments in the fair valuestate. Governmental inquiries or lawsuits involving PFAS could lead to our incurring liability for damages or other costs, civil or criminal proceedings, the imposition of plan assetsfines and investment lossespenalties, or other remedies, as well as restrictions on plan assets, and relevant legislative or regulatory changes relating to defined benefit plan funding may increaseadded costs for our business operations going forward, including in the Company’s funding obligations and adversely impact its resultsform of operations and cash flows.restrictions on discharges at our manufacturing facilities or otherwise.
* The Company’s future results may be affected by various asserted and unasserted legal and regulatory proceedings and legal compliance risks, including those involving product liability, antitrust, intellectual property, environmental, tax, the U.S. Foreign Corrupt Practices Act and other anti-bribery anti-corruption,laws, U.S. trade sanctions compliance, regulations of the U.S. Food and Drug Administration (FDA) and similar foreign agencies, U.S. federal healthcare program-related laws and regulations including the False Claims Act, anti-kickback laws, the Sunshine Act, or other matters.Legal compliance risks also include third-party risks where the Company’s suppliers, vendors or channel partners have business practices that are inconsistent with 3M’s Supplier Responsibility Code, 3M performance requirements or with legal requirements.
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The outcome of these legal proceedings may differ from the Company’s expectations because the outcomes of litigation, including regulatory matters, are often difficult to reliably predict. Although the Company maintains general liability insurance, the amount of liability that may result from certain of these risks may not always be covered by, or could exceed, the applicable insurance coverage. Various factors or developments can lead the Company to change current estimates of liabilities and related insurance receivables where applicable, or make such estimates for matters previously not susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in future charges that could have a material adverse effect on the Company’s results of operations or cash flows in any particular period. In addition, negative publicity related to product liability, environmental, health and safety or other matters referenced above involving the Company may negatively impact the Company’s reputation. For a more detailed discussion of the legal proceedings involving the Company and the associated accounting estimates, see the discussion in Note 1214, “Commitments and Contingencies”Contingencies,” within the Notes to Consolidated Financial Statements.
Risks Related to Our Products and Customer Preferences
* The Company’s results are affected by competitive conditions and customer preferences.
Demand for the Company’s products, which impacts revenue and profit margins, is affected by (i) the development and timing of the introduction of competitive products; (ii) the Company’s response to downward pricing to stay competitive; (iii) changes in customer order patterns, such as changes in the levels of inventory maintained by customers and the timing of customer purchases which may be affected by announced price changes, changes in the Company’s incentive programs, or the customer’s ability to achieve incentive goals; (iv) changes in customers’ preferences for our products, including the success of products offered by our competitors, and changes in customer designs for their products that can affect the demand for some of the Company’s products; and (v) changes in the business environment related to disruptive technologies, such as artificial intelligence, block-chain, expanded analytics and other enhanced learnings from increasing volume of available data.
* The Company’s growth objectives are largely dependent on the timing and market acceptance of its new product offerings, including its ability to continually renew its pipeline of new products and to bring those products to market.
This ability is subject to difficulties or delays in product development, such as the inability to identify viable new products, obtain adequate intellectual property protection, or gain market acceptance of new products. There are no guarantees that new products will prove to be commercially successful.
* The Company’s future results are subject to vulnerability with respect to materials and fluctuations in the costs and availability of purchased components, compounds, raw materials and energy, due to shortages, increased demand, supply interruptions, manufacturing site disruptions, natural disasters and other disruptive factors.
The Company depends on various components, compounds, raw materials, and energy (including oil and natural gas and their derivatives) supplied by others for the manufacturing of its products. Supplier relationships have been and could be interrupted in the future due to supplier material shortage, climate impacts, natural and other disasters and other disruptive events, or be terminated. Any sustained interruption in the Company’s receipt of adequate supplies or disruption to key manufacturing sites’ operations could have a material adverse effect on the Company. In addition, while the Company has a process to minimize volatility in component and material pricing, no assurance can be given that the Company will be able to successfully manage price fluctuations or that future price fluctuations or shortages will not have a material adverse effect on the Company.
Risks Related to Our Business
* The Company employs information technology systems to support its business, including ongoing phased implementation of an enterprise resource planning (ERP) system as part of business transformation on a worldwide basis over the next several years. Security breaches and other disruptions to the Company’s information technology infrastructure could interfere with the Company’s operations, compromise information belonging to the Company or its customers, suppliers, and employees, exposing the Company to liability which could adversely impact the Company’s business and reputation.
In the ordinary course of business, the Company relies on centralized and local information technology networks and systems, some of which are hosted or managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of businesses. Additionally, the Company collects and stores certain data, including proprietary business information, and has access to confidential or personal information in certain of our businesses that is subject to privacy and security laws, regulations and
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customer-imposed controls. Despite our cybersecurity and business continuity measures (including employee and third-party training, monitoring of networks and systems, patching, maintenance, and backup of systems and data), the Company’s information technology networks and infrastructure are still potentially vulnerable to security breaches, damage, disruptions or shutdowns due to attacks by threat actors, computer viruses, ransomware, service or cloud provider disruptions or security breaches, employee error or malfeasance, power outages, telecommunication or utility failures, systems failures, natural disasters or other catastrophic events. The Company’s increased adoption of remote working, which was driven by the pandemic, may also introduce additional threats to our information technology networks and infrastructure. Despite our cybersecurity measures, it is possible for security vulnerabilities to remain undetected for an extended period of time, up to and including several years. While we have experienced, and expect to continue to experience, threats and disruptions to the Company’s information technology infrastructure, none of them to date has had a material impact to the Company. Any such threats or disruptions could result in legal claims or proceedings, liability or penalties under privacy laws, interference with the Company’s operations, and damage to the Company’s reputation, which could adversely affect the Company’s business. Although the Company maintains insurance coverage for various cybersecurity and business continuity risks, there can be no guarantee that all costs or losses incurred will be fully insured.
* Acquisitions, strategic alliances, divestitures, and other unusual events resulting from portfolio management actions and other evolving business strategies, and possible organizational restructuring could affect future results.
The Company monitors its business portfolio and organizational structure and has made and may continue to make acquisitions, strategic alliances, divestitures and changes to its organizational structure. With respect to acquisitions, including, for example, the recently completed acquisition of Acelity, Inc. and its KCI subsidiaries (a leading global medical technology company), future results will be affected by the Company’s ability to integrate acquired businesses quickly and obtain the anticipated synergies. The Company realigned from five to four business segments, effective in April of 2019, to better serve its global customers and markets. Successful execution of the realignment and the associated adjustments of our portfolio and business operating model, as well as other organizational changes, will be important to the Company’s future results.
* The Company’s future results may be affected by its operational execution, including scenarios where the Company generates fewer productivity improvements than estimated.
The Company’s financial results depend on the successful execution of its business operating plans. The Company utilizes various tools, such as Lean Six Sigma, and engages in ongoing global business transformation. Business transformation is defined as changes in processes and internal/external service delivery across 3M to move to more efficient business models to improve operational efficiency and productivity, while allowing 3M to serve customers with greater speed and efficiency. This is enabled by the ongoing multi-year phased implementation of an ERP system. There can be no assurance that all of the projected productivity improvements will be realized. In addition, ability to adapt to business model and other changes and agility to respond to customer needs and service expectations are important, which, if not done successfully, could negatively impact the Company’s ability to win new business and enhance revenue and 3M’s brand. Operational challenges, including those related to customer service, pace of change and productivity improvements, could have a material adverse effect on the Company’s business, financial conditions and results of operations.
Risks Related to Financial and Capital Markets
* The Company's defined benefit pension and postretirement plans are subject to financial market risks that could adversely impact our results.
The performance of financial markets and discount rates impact the Company's funding obligations under its defined benefit plans. Significant changes in market interest rates, decreases in the fair value of plan assets and investment losses on plan assets, and legislative or regulatory changes relating to defined benefit plan funding may increase the Company's funding obligations and adversely impact its results of operations and cash flows.
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* Change in the Company’s credit ratings could increase cost of funding.
The Company’s credit ratings are important to 3M’s cost of capital. The major rating agencies routinely evaluate the Company’s credit profile and assign debt ratings to 3M. This evaluation is based on a number of factors, which include financial strength, business and financial risk, as well as transparency with rating agencies and timeliness of financial reporting. 3M currently has an A1 credit rating with a negative outlook from Moody’s Investors Service and an A+ credit rating with a negative outlook from Standard & Poor’s. The Company’s credit ratings have served to lower 3M’s borrowing costs and facilitate access to a variety of lenders. The addition of further leverage to the Company’s capital structure could impact 3M’s credit ratings in the future. Failure to maintain strong investment grade ratings would adversely affect the Company’s cost of funding and could adversely affect liquidity and access to capital markets.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
Repurchases of 3M common stock are made to support the Company’s stock-based employee compensation plans and for other corporate purposes. In February 2016,November 2018, 3M’s Board of Directors authorizedreplaced the Company’s February 2016 repurchase program with a new repurchase program. This new program authorizes the repurchase of up to $10 billion of 3M’s outstanding common stock, with no pre-established end date.
Issuer Purchases of Equity
Securities (registered pursuant to
Section 12 of the Exchange Act)
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| | Total Number of | | Average Price | | as Part of Publicly | | under the Plans |
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| | Shares Purchased | | Paid per | | Announced Plans | | or Programs |
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Period | | (1) | | Share | | or Programs (2) | | (Millions) |
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January 1-31, 2020 |
| 567,358 | | $ | 175.01 |
| 567,162 | | $ | 7,973 | |
February 1-29, 2020 |
| 752,388 | | $ | 157.29 |
| 750,262 | | $ | 7,855 | |
March 1-31, 2020 |
| 723,676 | | $ | 140.55 |
| 723,676 | | $ | 7,753 | |
Total January 1-March 31, 2020 |
| 2,043,422 | | $ | 156.28 |
| 2,041,100 | | $ | 7,753 | |
April 1-30, 2020 |
| 86 | | $ | 133.13 |
| — | | $ | 7,753 | |
May 1-31, 2020 |
| — | | $ | — |
| — | | $ | 7,753 | |
June 1-30, 2020 |
| — | | $ | — |
| — | | $ | 7,753 | |
Total April 1-June 30, 2020 |
| 86 | | $ | 114.18 |
| — | | $ | 7,753 | |
July 1-31, 2020 | | — | | $ | — | | — | | $ | 7,753 | |
August 1-31, 2020 | | — | | $ | — | | — | | $ | 7,753 | |
September 1-30, 2020 | | 779 | | $ | 172.38 | | — | | $ | 7,753 | |
Total July 1-September 30, 2020 | | 779 | | $ | 172.38 | | — | | $ | 7,753 | |
Total January 1-September 30, 2020 | | 2,044,287 | | $ | 156.29 |
| 2,041,100 | | $ | 7,753 | |
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| Yet Be Purchased |
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| under the Plans |
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| Share |
| or Programs (2) |
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January 1-31, 2017 |
| 1,245,580 |
| $ | 177.61 |
| 1,245,347 |
| $ | 6,835 |
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February 1-28, 2017 |
| 1,038,362 |
| $ | 182.41 |
| 1,037,719 |
| $ | 6,645 |
|
March 1-31, 2017 |
| 1,168,893 |
| $ | 190.75 |
| 1,168,893 |
| $ | 6,422 |
|
Total January 1-March 31, 2017 |
| 3,452,835 |
| $ | 183.50 |
| 3,451,959 |
| $ | 6,422 |
|
April 1-30, 2017 |
| 934,900 |
| $ | 191.64 |
| 933,463 |
| $ | 6,244 |
|
May 1-31, 2017 |
| 1,017,290 |
| $ | 197.80 |
| 1,017,000 |
| $ | 6,042 |
|
June 1-30, 2017 |
| 396,770 |
| $ | 208.83 |
| 396,770 |
| $ | 5,960 |
|
Total April 1-June 30, 2017 |
| 2,348,960 |
| $ | 197.21 |
| 2,347,233 |
| $ | 5,960 |
|
Total January 1-June 30, 2017 |
| 5,801,795 |
| $ | 189.05 |
| 5,799,192 |
| $ | 5,960 |
|
July 1-31, 2017 |
| 431,272 |
| $ | 205.00 |
| 431,272 |
| $ | 5,871 |
|
August 1-31, 2017 |
| 572,552 |
| $ | 204.69 |
| 572,552 |
| $ | 5,754 |
|
September 1-30, 2017 |
| 893,559 |
| $ | 209.62 |
| 893,559 |
| $ | 5,567 |
|
Total July 1-September 30, 2017 |
| 1,897,383 |
| $ | 207.08 |
| 1,897,383 |
| $ | 5,567 |
|
Total January 1-September 30, 2017 |
| 7,699,178 |
| $ | 193.49 |
| 7,696,575 |
| $ | 5,567 |
|
| (1) |
| The total number of shares purchased includes: (i) shares purchased under the Board’s authorizations described above, and (ii) shares purchased in connection with the exercise of stock options. |
| (2) |
| The total number of shares purchased as part of publicly announced plans or programs includes shares purchased under the Board’s authorizations described above. |
8589
Item 3. Defaults Upon Senior Securities. — No matters require disclosure.
Item 4. Mine Safety Disclosures.Disclosures. Pursuant to Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), the Company is required to disclose, in connection with the mines it operates, information concerning mine safety violations or other regulatory matters in its periodic reports filed with the SEC. The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Act is included in Exhibit 95 to this quarterly report.
Item 5. Other Information.— No matters require disclosure.
| ||
| ||
| ||
| (31.1) | |
| (31.2) | |
| (32.1) | |
| (32.2) | |
| (95) | |
| (101.INS) | Inline XBRL Instance |
| (101.SCH) | Inline XBRL Taxonomy Extension Schema |
| (101.CAL) | Inline XBRL Taxonomy Extension Calculation Linkbase |
| (101.DEF) | Inline XBRL Taxonomy Extension Definition Linkbase |
| (101.LAB) | Inline XBRL Taxonomy Extension Label Linkbase |
| (101.PRE) | Inline XBRL Taxonomy Extension Presentation Linkbase |
| (104) | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
90
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
3M COMPANY
(Registrant)
Date: October 31, 201727, 2020
| | | | | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| By | /s/ Monish Patolawala | | ||||||||
| | Monish Patolawala, | | ||||||||
|
| ||||||||||
| |||||||||||
| |||||||||||
Senior Vice President and Chief Financial Officer | |||||||||||
(Mr. | |||||||||||
been duly authorized to sign on behalf of the Registrant.) | |||||||||||
8691