Company Announcements

http://www.rns-pdf.londonstockexchange.com/rns/2391R_1-2019-10-25.pdf

 

3M COMPANY

Form 10-Q for the Quarterly Period Ended September 30, 2019

	TABLE OF CONTENTS	BEGINNING PAGE
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Index to Financial Statements:
	Consolidated Statement of Income	3
	Consolidated Statement of Comprehensive Income	4
	Consolidated Balance Sheet	5
	Consolidated Statement of Cash Flows	6
	Notes to Consolidated Financial Statements
	Note 1. Significant Accounting Policies	7
	Note 2. Revenue	11
	Note 3. Acquisitions and Divestitures	14
	Note 4. Goodwill and Intangible Assets	16
	Note 5. Restructuring Actions and Exit Activities	17
	Note 6. Supplemental Income Statement Information	19
	Note 7. Supplemental Equity and Comprehensive Income Information	19
	Note 8. Income Taxes	23
	Note 9. Marketable Securities	24
	Note 10. Long-Term Debt and Short-Term Borrowings	25
	Note 11. Pension and Postretirement Benefit Plans	25
	Note 12. Derivatives	27
	Note 13. Fair Value Measurements	33
	Note 14. Commitments and Contingencies	36
	Note 15. Leases	49
	Note 16. Stock-Based Compensation	53
	Note 17. Business Segments	56
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
	Index to Management's Discussion and Analysis:
	Overview	59
	Results of Operations	67
	Performance by Business Segment	71
	Financial Condition and Liquidity	78
	Cautionary Note Concerning Factors That May Affect Future Results	84
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	84
ITEM 4.	Controls and Procedures	85
PART II	OTHER INFORMATION
ITEM 1.	Legal Proceedings	86
ITEM 1A.	Risk Factors	86
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	89
ITEM 3.	Defaults Upon Senior Securities	90
ITEM 4.	Mine Safety Disclosures	90
ITEM 5.	Other Information	90
ITEM 6.	Exhibits	90

 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended September 30, 2019

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

 

		Three months ended						Nine months ended
		September 30,						September 30,
(Millions, except per share amounts)		2019			2018			2019			2018
Net sales		$	7,991		$	8,152		$	24,025		$	24,820
Operating expenses
Cost of sales			4,188			4,159			12,811			12,622
Selling, general and administrative expenses			1,455			1,547			5,089			5,920
Research, development and related expenses			443			430			1,390			1,384
Gain on sale of businesses			(106)			-			(114)			(530)
Total operating expenses			5,980			6,136			19,176			19,396
Operating income			2,011			2,016			4,849			5,424
Other expense (income), net			45			51			349			144
Income before income taxes			1,966			1,965			4,500			5,280
Provision for income taxes			378			419			888			1,266
Net income including noncontrolling interest		$	1,588		$	1,546		$	3,612		$	4,014
Less: Net income attributable to noncontrolling interest			5			3			11			12
Net income attributable to 3M		$	1,583		$	1,543		$	3,601		$	4,002
Weighted average 3M common shares outstanding - basic			576.5			585.6			577.2			591.1
Earnings per share attributable to 3M common shareholders - basic		$	2.75		$	2.64		$	6.24		$	6.77
Weighted average 3M common shares outstanding - diluted			583.0			598.4			585.9			605.1
Earnings per share attributable to 3M common shareholders - diluted		$	2.72		$	2.58		$	6.15		$	6.61

 

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

 

 

 

3M Company and Subsidiaries

Consolidated Statement of Comprehensive Income

(Unaudited)

 

		Three months ended						Nine months ended
		September 30,						September 30,
(Millions)		2019			2018			2019			2018
Net income including noncontrolling interest		$	1,588		$	1,546		$	3,612		$	4,014
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment			(202)			(112)			(2)			(441)
Defined benefit pension and postretirement plans adjustment			76			114			356			344
Cash flow hedging instruments			8			46			(24)			147
Total other comprehensive income (loss), net of tax			(118)			48			330			50
Comprehensive income (loss) including noncontrolling interest			1,470			1,594			3,942			4,064
Comprehensive (income) loss attributable to noncontrolling interest			(3)			-			(10)			(4)
Comprehensive income (loss) attributable to 3M		$	1,467		$	1,594		$	3,932		$	4,060

 

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

 

 

 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

		September 30,			December 31,
(Dollars in millions, except per share amount)		2019			2018
Assets
Current assets
Cash and cash equivalents		$	7,731		$	2,853
Marketable securities - current			30			380
Accounts receivable - net			5,020			5,020
Inventories
Finished goods			1,890			2,120
Work in process			1,231			1,292
Raw materials and supplies			886			954
Total inventories			4,007			4,366
Prepaids			717			741
Other current assets			515			349
Total current assets			18,020			13,709
Property, plant and equipment			25,508			24,873
Less: Accumulated depreciation			(16,617)			(16,135)
Property, plant and equipment - net			8,891			8,738
Operating lease right of use assets			834			-
Goodwill			10,410			10,051
Intangible assets - net			2,847			2,657
Other assets			1,548			1,345
Total assets		$	42,550		$	36,500
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt		$	1,960		$	1,211
Accounts payable			2,079			2,266
Accrued payroll			669			749
Accrued income taxes			137			243
Operating lease liabilities - current			241			-
Other current liabilities			2,735			2,775
Total current liabilities			7,821			7,244
Long-term debt			17,479			13,411
Pension and postretirement benefits			2,667			2,987
Operating lease liabilities			584			-
Other liabilities			3,235			3,010
Total liabilities		$	31,786		$	26,652
Commitments and contingencies (Note 14)
Equity
3M Company shareholders' equity:
Common stock par value, $.01 par value; 944,033,056 shares issued		$	9		$	9
Additional paid-in capital			5,861			5,643
Retained earnings			42,085			40,636
Treasury stock, at cost: 368,982,401 shares at September 30, 2019; 367,457,888 shares at December 31, 2018			(29,865)			(29,626)
Accumulated other comprehensive income (loss)			(7,388)			(6,866)
Total 3M Company shareholders' equity			10,702			9,796
Noncontrolling interest			62			52
Total equity		$	10,764		$	9,848
Total liabilities and equity		$	42,550		$	36,500

 

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

 

 

3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

 

		Nine months ended
		September 30,
(Millions)		2019			2018
Cash Flows from Operating Activities
Net income including noncontrolling interest		$	3,612		$	4,014
Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities
Depreciation and amortization			1,130			1,117
Company pension and postretirement contributions			(129)			(303)
Company pension and postretirement expense			242			306
Stock-based compensation expense			230			258
Gain on sale of businesses			(111)			(530)
Deferred income taxes			(88)			(73)
Loss on deconsolidation of Venezuelan subsidiary			162			-
Changes in assets and liabilities
Accounts receivable			(14)			(596)
Inventories			255			(562)
Accounts payable			(222)			148
Accrued income taxes (current and long-term)			(53)			122
Other - net			(282)			280
Net cash provided by (used in) operating activities			4,732			4,181
Cash Flows from Investing Activities
Purchases of property, plant and equipment (PP&E)			(1,161)			(1,046)
Proceeds from sale of PP&E and other assets			91			143
Acquisitions, net of cash acquired			(704)			13
Purchases of marketable securities and investments			(917)			(1,352)
Proceeds from maturities and sale of marketable securities and investments			1,265			2,066
Proceeds from sale of businesses, net of cash sold			236			806
Other - net			45			8
Net cash provided by (used in) investing activities			(1,145)			638
Cash Flows from Financing Activities
Change in short-term debt - net			(466)			(698)
Repayment of debt (maturities greater than 90 days)			(871)			(456)
Proceeds from debt (maturities greater than 90 days)			6,116			2,247
Purchases of treasury stock			(1,243)			(3,601)
Proceeds from issuance of treasury stock pursuant to stock option and benefit plans			437			401
Dividends paid to shareholders			(2,488)			(2,406)
Other - net			(158)			(36)
Net cash provided by (used in) financing activities			1,327			(4,549)
Effect of exchange rate changes on cash and cash equivalents			(36)			(138)
Net increase (decrease) in cash and cash equivalents			4,878			132
Cash and cash equivalents at beginning of year			2,853			3,053
Cash and cash equivalents at end of period		$	7,731		$	3,185

 

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

 

 

3M Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1.  Significant Accounting Policies

 

Basis of Presentation

 

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

 

As described in Note 17, effective in the second quarter of 2019, the Company realigned its former five business segments into four to enable the Company to better serve global customers and markets. In addition, certain product lines were moved to better align with their respective end customers. Earlier in the first quarter of 2019, the Company changed its business segment reporting in its continuing effort to improve the alignment of businesses around markets and customers. These changes included the realignment of certain customer account activity in various countries (affecting dual credit reporting), creation of the Closure and Masking Systems and Medical Solutions divisions, and certain other actions that impacted segment reporting. Segment information presented herein reflects the impact of these changes for all periods presented.

 

Changes to Significant Accounting Policies

 

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

 

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

 

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

 

Foreign Currency Translation

 

Local currencies generally are considered the functional currencies outside the United States. Assets and liabilities for operations in local-currency environments are translated at month-end exchange rates of the period reported. Income and expense items are translated at month-end exchange rates of each applicable month. Cumulative translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in shareholders' equity.

 

3M has a subsidiary in Venezuela, the financial statements of which were remeasured as if its functional currency were that of its parent because Venezuela's economic environment is considered highly inflationary. The operating income of this subsidiary was immaterial as a percent of 3M's consolidated operating income for 2018. The Venezuelan government sets official rates of exchange and conditions precedent to purchase foreign currency at these rates with local currency. The government has also operated various expanded secondary currency exchange mechanisms that have been eliminated and replaced from time to time. Such rates and conditions have been and continue to be subject to change. During the third quarter of 2018, the Venezuelan government effected a conversion of its currency to the Sovereign Bolivar (VES), essentially equating to its previous Venezuelan Bolivar divided by 100,000. For the periods presented through May 2019, the financial statements of 3M's Venezuelan subsidiary were remeasured utilizing the rate associated with the secondary auction mechanism, Tipo de Cambio Complementario (DICOM), or its predecessor.

 

Note 1 in 3M's 2018 Annual Report on Form 10-K provides additional information the Company considers in determining the exchange rate used relative to its Venezuelan subsidiary as well as factors which could lead to its deconsolidation. As described therein, a need to deconsolidate the Company's Venezuelan subsidiary's operations results from a lack of exchangeability of VES-denominated cash coupled with an acute degradation in the ability to make key operational decisions due to government regulations in Venezuela. 3M continued to review changes in these underlying factors such as the ability to access various exchange mechanisms; the impact of government regulations on the Company's ability to manage its Venezuelan subsidiary's capital structure, purchasing, product pricing, and labor relations; and the current political and economic situation within Venezuela. In light of circumstances, including the country's unstable environment and heightened unrest leading to sustained lack of demand, 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 operations. As a result, as of May 31, 2019, the Company began reflecting its interest in the Venezuelan subsidiary as an equity investment that does not have a readily determinable fair value. This resulted in a pre-tax charge of $162 million within other expense (income) in the second quarter of 2019. The charge primarily relates to $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 accumulated other comprehensive loss along with write-down of intercompany receivable and investment balances associated with this subsidiary. Beginning May 31, 2019, 3M's consolidated balance sheets and statements of operations no longer include the Venezuelan entity's operations other than an immaterial equity investment and associated loss or income thereon largely only to the extent, if any, that 3M provides support or materials and receives funding or dividends.

 

3M has subsidiaries in Argentina, the operating income of which was less than one half of one percent of 3M's consolidated operating income for 2018. Based on various indices, Argentina's cumulative three-year inflation rate exceeded 100 percent in the second quarter of 2018, thus being considered highly inflationary. As a result, beginning in the third quarter of 2018, the financial statements of the Argentine subsidiaries were remeasured as if their functional currency were that of their parent. As of September 30, 2019, the Company had a balance of net monetary assets denominated in Argentine pesos (ARS) of approximately 430 million ARS and the exchange rate was approximately 57 ARS per U.S. dollar.

 

Earnings Per Share

 

The difference in the weighted average 3M shares outstanding for calculating basic and diluted earnings per share attributable to 3M common shareholders is a result of the dilution associated with the Company's stock-based compensation plans. Certain options outstanding under these stock-based compensation plans were not included in the computation of diluted earnings per share attributable to 3M common shareholders because they would have had an anti-dilutive effect (11.9 million average options for the three months ended September 30, 2019; 8.0 million average options for the nine months ended September 30, 2019; 3.2 million average options for the three months ended September 30, 2018; 2.8 million average options for the nine months ended September 30, 2018). The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 

		Three months ended						Nine months ended
		September 30,						September 30,
(Amounts in millions, except per share amounts)		2019			2018			2019			2018
Numerator:
Net income attributable to 3M		$	1,583		$	1,543		$	3,601		$	4,002
Denominator:
Denominator for weighted average 3M common shares outstanding - basic			576.5			585.6			577.2			591.1
Dilution associated with the Company's stock-based compensation plans			6.5			12.8			8.7			14.0
Denominator for weighted average 3M common shares outstanding - diluted			583.0			598.4			585.9			605.1
Earnings per share attributable to 3M common shareholders - basic		$	2.75		$	2.64		$	6.24		$	6.77
Earnings per share attributable to 3M common shareholders - diluted		$	2.72		$	2.58		$	6.15		$	6.61

 

 

 

New Accounting Pronouncements

 

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

 

Standards Adopted During the Current Fiscal Year
Standard		Relevant Description	Effective Date for 3M	Impact and Other Matters
ASU No. 2016-02, Leases (as amended by ASU Nos. 2018-10, 2018-11, 2018-20, and 2019-01)		Provides a lessee model that requires entities to recognize assets and liabilities for most leases, but recognize expenses on their income statements in a manner similar to previous accounting. This ASU does not make fundamental changes to previous lessor accounting.	January 1, 2019	See Note 15 for detailed discussion and disclosures.   Adopted using the modified retrospective approach.   Impact on January 1, 2019 includes a $14 million increase in the balance of retained earnings and recording of additional lease assets and liabilities of $0.8 billion each.
ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities		Shortens the amortization period to the earliest call date for the premium related to certain callable debt securities that have explicit, noncontingent call features and are callable at a fixed price and preset date.	January 1, 2019	3M's marketable security portfolio includes limited instances of callable debt securities held at a premium.   The adoption of this ASU did not have a material impact.
ASU No. 2017-11, (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception		Amends (1) the classification of financial instruments with down-round features as liabilities or equity by revising certain guidance relative to evaluating if they must be accounted for as derivative instruments and (2) the guidance on recognition and measurement of freestanding equity-classified instruments.	January 1, 2019	No financial instruments with down-round features have been issued.   The adoption of this ASU did not have a material impact.
ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, and related ASU No. 2018-16	Amends previous guidance to simplify application of hedge accounting in certain situations and allow companies to better align their hedge accounting with risk management activities.   Simplifies related accounting by eliminating requirement to separately measure and report hedge ineffectiveness.   Expands an entity's ability to hedge nonfinancial and financial risk components.		January 1, 2019		See Note 12 for additional details.   The adoption of this ASU did not have a material impact.
ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income		Permits entities to reclassify, to retained earnings, the one-time income tax effects stranded in accumulated other comprehensive income arising from the change in the U.S. federal corporate tax rate as a result of the Tax Cuts and Jobs Act of 2017.	January 1, 2019	See Note 8 for additional discussion.   Impact on January 1, 2019 includes increases of $0.9 billion in each of retained earnings and accumulated other comprehensive loss.   See also the preceding "Changes to Significant Accounting Policies" section.
ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting		Aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees.   Clarifies that any share-based payment issued to a customer should be evaluated under ASC 606, Revenue from Contracts with Customers.	January 1, 2019	The adoption of this ASU did not have a material impact as 3M does not issue share-based payments to nonemployees or customers.

 

 

 

Standards Adopted During the Current Fiscal Year (continued)
Standard	Relevant Description	Effective Date for 3M	Impact and Other Matters
ASU No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made	Clarifies that a contribution is conditional if the arrangement includes both a barrier for the recipient to be entitled to the assets transferred and a right of return for the assets transferred.   Recognition of contribution expense is deferred for conditional arrangements and is immediate for unconditional arrangements.	January 1, 2019	Adopted prospectively with no immediate impact.
ASU No. 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities	Changes how entities evaluate decision-making fees under the variable interest guidance.   Indirect interests held through related parties under common control will be considered on a proportionate basis rather than in their entirety.	January 1, 2019	Adoption of this ASU did not have a material impact as 3M does not have significant involvement with entities subject to consolidation considerations impacted by variable interest entity model factors.
ASU No. 2018-18, Clarifying the Interaction between Topic 808 and Topic 606	Clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606, Revenue from Contracts with Customers, when the counterparty is a customer.   Precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction.	January 1, 2019	Adoption of this ASU did not have a material impact as 3M has limited collaborative arrangements.
ASU No. 2017-09, Scope of Modification Accounting	·   Provides that fewer changes to the terms of share-based payment awards will require accounting under the modification model (which generally would have required additional compensation cost).	January 1, 2018	·   Adopted prospectively with no immediate impact. ·   3M does not typically make changes to the terms or conditions of its issued share-based payments.

 

Standards Issued and Not Yet Adopted
Standard	Relevant Description	Effective Date for 3M	Impact and Other Matters
ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (in conjunction with ASU No. 2018-19, 2019-04 and 2019-05)	Introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities.   Amends the current other-than-temporary impairment model for available-for-sale debt securities. For such securities with unrealized losses, entities will still consider if a portion of any impairment is related only to credit losses and therefore recognized as a reduction in income.	January 1, 2020	Required to make a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.   3M continues to evaluate this ASU's impact on its consolidated results of operations and financial condition. Based on the analysis completed to date and 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, 3M does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.   See the "Relevant New Standards Issued Subsequent to Most Recent Annual Report" below for further discussion on ASU No. 2019-04 and 2019-05 issued in April 2019 and May 2019, respectively.
ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement	Eliminates, amends, and adds disclosure requirements for fair value measurements, primarily related to Level 3 fair value measurements.	January 1, 2020	As this ASU relates to disclosures only, there will be no impact to 3M's consolidated results of operations and financial condition.
ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract	Aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service arrangement (i.e. hosting arrangement) with the guidance on capitalizing costs in ASC 350-40, Internal-Use Software.	January 1, 2020	ASU permits either prospective or retrospective transition.   As 3M utilizes limited cloud-computing services where significant implementation costs are incurred, the Company does not expect this ASU to have a material impact.

 

Relevant New Standards Issued Subsequent to Most Recent Annual Report

 

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 - Financial Instruments and in May 2019, the FASB issued ASU No. 2019-05, Targeted Transition Relief to Topic 326, Financial Instruments - Credit Losses. ASU No. 2019-04 provides narrow-scope amendments to help apply these recent standards, while ASU No. 2019-05 provides the option to make a one-time fair value election regarding certain assets which is not applicable for 3M as the Company does not have any assets carried under the fair value option. The effective date for 3M is January 1, 2020 with early adoption permitted for certain amendments. The Company does not expect this ASU to have a material impact on its consolidated results of operations and financial condition.

 

 

NOTE 2.  Revenue

 

Contract Balances:

Deferred revenue (current portion) as of September 30, 2019 and December 31, 2018 was $605 million and $617 million, respectively, and primarily relates to revenue that is recognized over time for one-year software license contracts, the changes in balance of which are related to the satisfaction or partial satisfaction of these contracts. The balance also contains a deferral for goods that are in-transit at period end for which control transfers to the customer upon delivery. Approximately $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, while approximately $70 million and $460 million of the December 31, 2017 balance was recognized as revenue during the the three and nine months ended September 30, 2018, respectively. The amount of noncurrent deferred revenue is not significant.

 

 

 

Disaggregated revenue information:

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

 

		Three months ended						Nine months ended
		September 30,						September 30,
Net Sales (Millions)		2019			2018			2019			2018
Abrasives		$	345		$	362		$	1,079		$	1,171
Adhesives and Tapes			696			734			2,075			2,191
Automotive Aftermarket			310			334			929			1,038
Closure and Masking Systems			282			300			835			920
Communication Markets			-			8			-			169
Electrical Markets			298			315			911			949
Personal Safety			813			864			2,656			2,745
Roofing Granules			101			83			293			283
Other Safety and Industrial			4			21			18			76
Total Safety and Industrial Business Segment		$	2,849		$	3,021		$	8,796		$	9,542
Advanced Materials		$	319		$	313		$	961		$	932
Automotive and Aerospace			485			509			1,486			1,610
Commercial Solutions			437			436			1,361			1,415
Electronics			1,001			1,101			2,759			2,951
Transportation Safety			261			260			745			758
Other Transportation and Electronics			-			-			-			(1)
Total Transportation and Electronics Business Segment		$	2,503		$	2,619		$	7,312		$	7,665
Drug Delivery		$	99		$	102		$	301		$	340
Food Safety			86			82			254			246
Health Information Systems			296			208			853			618
Medical Solutions			737			732			2,294			2,273
Oral Care			312			317			991			1,013
Separation and Purification Sciences			191			203			602			631
Other Health Care			-			(1)			(5)			(3)
Total Health Care Business Group		$	1,721		$	1,643		$	5,290		$	5,118
Consumer Health Care		$	97		$	97		$	297		$	300
Home Care			242			249			747			773
Home Improvement			612			579			1,739			1,694
Stationery and Office			361			367			1,006			1,022
Other Consumer			12			10			32			30
Total Consumer Business Group		$	1,324		$	1,302		$	3,821		$	3,819
Corporate and Unallocated		$	28		$	35		$	98		$	47
Elimination of Dual Credit			(434)			(468)			(1,292)			(1,371)
Total Company		$	7,991		$	8,152		$	24,025		$	24,820

 

 

 

	Three months ended September 30, 2019
Net Sales (Millions)		United States			Asia Pacific			Europe, Middle East and Africa			Latin America and Canada			Other Unallocated			Worldwide
Safety and Industrial		$	1,153		$	713		$	626		$	356		$	1		$	2,849
Transportation and Electronics			594			1,390			363			157			(1)			2,503
Health Care			827			360			388			145			1			1,721
Consumer			843			233			136			112			-			1,324
Corporate and Unallocated			25			1			1			1			-			28
Elimination of Dual Credit			(150)			(207)			(49)			(27)			(1)			(434)
Total Company		$	3,292		$	2,490		$	1,465		$	744		$	-		$	7,991

 

	Nine months ended September 30, 2019
Net Sales (Millions)		United States			Asia Pacific			Europe, Middle East and Africa			Latin America and Canada			Other Unallocated			Worldwide
Safety and Industrial		$	3,498		$	2,190		$	2,035		$	1,073		$	-		$	8,796
Transportation and Electronics			1,796			3,917			1,138			463			(2)			7,312
Health Care			2,477			1,121			1,253			438			1			5,290
Consumer			2,342			745			413			321			-			3,821
Corporate and Unallocated			91			1			1			6			(1)			98
Elimination of Dual Credit			(462)			(591)			(158)			(81)			-			(1,292)
Total Company		$	9,742		$	7,383		$	4,682		$	2,220		$	(2)		$	24,025

 

	Three months ended September 30, 2018
Net Sales (Millions)		United States			Asia Pacific			Europe, Middle East and Africa			Latin America and Canada			Other Unallocated			Worldwide
Safety and Industrial		$	1,208		$	788		$	665		$	361		$	(1)		$	3,021
Transportation and Electronics			627			1,464			378			149			1			2,619
Health Care			740			357			399			146			1			1,643
Consumer			818			237			137			110			-			1,302
Corporate and Unallocated			36			-			-			-			(1)			35
Elimination of Dual Credit			(164)			(225)			(52)			(25)			(2)			(468)
Total Company		$	3,265		$	2,621		$	1,527		$	741		$	(2)		$	8,152

 

	Nine months ended September 30, 2018
Net Sales (Millions)		United States			Asia Pacific			Europe, Middle East and Africa			Latin America and Canada			Other Unallocated			Worldwide
Safety and Industrial		$	3,726		$	2,397		$	2,296		$	1,126		$	(3)		$	9,542
Transportation and Electronics			1,838			4,151			1,218			458			-			7,665
Health Care			2,248			1,114			1,303			453			-			5,118
Consumer			2,273			778			438			330			-			3,819
Corporate and Unallocated			43			-			-			3			1			47
Elimination of Dual Credit			(471)			(639)			(178)			(81)			(2)			(1,371)
Total Company		$	9,657		$	7,801		$	5,077		$	2,289		$	(4)		$	24,820

 

 

 

 

 

NOTE 3.  Acquisitions and Divestitures

 

Acquisitions:

 

3M makes acquisitions of certain businesses from time to time that are aligned with its strategic intent with respect to, among other factors, growth markets and adjacent product lines or technologies. Goodwill resulting from business combinations is largely attributable to the existing workforce of the acquired businesses and synergies expected to arise after 3M's acquisition of these businesses.

 

		2019 Acquisition Activity
					Finite-Lived
					Intangible-Asset
(Millions)					Weighted-Average
Asset (Liability)		M*Modal			Lives (Years)
Accounts receivable		$	77
Other current assets			2
Property, plant, and equipment			8
Purchased finite-lived intangible assets:
Customer related intangible assets			275		14
Other technology-based intangible assets			160		6
Definite-lived tradenames			11		6
Purchased goodwill			508
Other assets			59
Accounts payable and other liabilities			(124)
Interest bearing debt			(251)
Deferred tax asset/(liability)			(21)
Net assets acquired		$	704
Supplemental information:
Cash paid		$	708
Less: Cash acquired			4
Cash paid, net of cash acquired		$	704

 

Purchased identifiable finite-lived intangible assets related to acquisitions which closed in the nine months ended September 30, 2019 totaled $446 million. The associated finite-lived intangible assets acquired will be amortized on a systematic and rational basis (generally straight line) over a weighted-average life of 11 years (lives ranging from 6 to 14 years).

 

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

 

In October 2019, 3M completed the acquisition of Acelity Inc. and its KCI subsidiaries for cash of approximately $4.5 billion, subject to closing and other adjustments, and assumption of $2.5 billion of debt and related items (see also Note 10). Acelity is a leading global medical technology company focused on advanced wound care and specialty surgical applications marketed under the KCI brand. This transaction will be reflected within the Company's Health Care business. Due to the limited amount of time since the October acquisition date and the limitations on access to Acelity information prior to the acquisition date, the preliminary allocation of purchase consideration is incomplete at this time. As a result, the Company is unable to provide the amounts recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed, including the information required for valuation of intangible assets and goodwill.

 

There were no acquisitions that closed during the nine months ended September 30, 2018.

 

Divestitures:

 

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

 

2019 divestitures:

 

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

 

In August 2019, 3M closed on the sale of its gas and flame detection business, a leader in fixed and portable gas and flame detection, to Teledyne Technologies Incorporated. This business has annual sales of approximately $120 million. The transaction resulted in a pre-tax gain of $112 million that was reported within the Company's Safety and Industrial business.

 

In August 2019, 3M entered into an agreement with Avon Rubber p.l.c. to purchase 3M's advanced ballistic-protection business for $91 million, subject to closing and other adjustments, plus contingent considerations of up to $25 million depending on the outcome of pending tenders. The business, with annual sales of approximately $85 million, consists of ballistic helmets, body armor, flat armor and related helmet-attachment products serving government and law enforcement. The transaction, which is subject to customary closing conditions and regulatory approvals, is expected to be completed in late 2019 or early 2020. The Company reflected an immaterial impact in the third quarter of 2019 within the Transportation and Electronics business as a result of measuring this disposal group at the lower of its carrying amount or fair value less cost to sell.

 

2018 divestitures:

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

 

Operating income and held for sale amounts:

The aggregate operating income of these businesses was approximately $30 million and immaterial in the first nine months of 2018 and 2019, respectively. The approximate amounts of major assets and liabilities associated with disposal groups classified as held-for-sale as of December 31, 2018 were not material and as of September 30, 2019 included the following:

 

		September 30,
(Millions)		2019
Inventory		$	25
Property, plant and equipment			10
Intangible assets			35

 

In addition, approximately $10 million of goodwill was estimated to be attributable to disposal groups classified as held-for-sale as of September 30, 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 3 in 3M's 2018 Annual Report on Form 10-K for more information on 3M's acquisitions and divestitures.

 

NOTE 4.  Goodwill and Intangible Assets

 

Goodwill from acquisitions totaled $508 million during the first nine months of 2019. The amounts in the "Translation and other" row in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balance by business segment as of December 31, 2018 and September 30, 2019, follow:

 

Goodwill

 

(Millions)		Safety and Industrial			Transportation and Electronics			Health Care			Consumer			Total Company
Balance as of December 31, 2018			4,716			1,857			3,248			230			10,051
Acquisition activity			-			-			508			-			508
Divestiture activity			(49)			-			-			-			(49)
Translation and other			(51)			(27)			(53)			31			(100)
Balance as of September 30, 2019		$	4,616		$	1,830		$	3,703		$	261		$	10,410

 

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 correspond to a division.

 

As described in Note 17, effective in the second quarter of 2019, the Company realigned its former five business segments into four to enable the Company to better serve global customers and markets. In addition, effective in the first quarter of 2019, the Company changed its business segment reporting in its continuing effort to improve the alignment of its businesses around markets and customers. For any product changes that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill of the associated reporting units. During the first and second quarters of 2019, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.

 

Acquired Intangible Assets

 

The carrying amount and accumulated amortization of acquired finite-lived intangible assets, in addition to the balance of non-amortizable intangible assets, as of September 30, 2019, and December 31, 2018, follow:

 

		September 30,			December 31,
(Millions)		2019			2018
Customer related intangible assets		$	2,525		$	2,291
Patents			536			542
Other technology-based intangible assets			727			576
Definite-lived tradenames			673			664
Other amortizable intangible assets			122			125
Total gross carrying amount		$	4,583		$	4,198
Accumulated amortization - customer related			(1,107)			(998)
Accumulated amortization - patents			(493)			(487)
Accumulated amortization - other technology-based			(382)			(333)
Accumulated amortization - definite-lived tradenames			(300)			(276)
Accumulated amortization - other			(89)			(88)
Total accumulated amortization		$	(2,371)		$	(2,182)
Total finite-lived intangible assets - net		$	2,212		$	2,016
Non-amortizable intangible assets (primarily tradenames)			635			641
Total intangible assets - net		$	2,847		$	2,657

 

Certain tradenames acquired by 3M are not amortized because they have been in existence for over 55 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.

 

Amortization expense for the three and nine months ended September 30, 2019 and 2018 follows:

 

		Three months ended						Nine months ended
		September 30,						September 30,
(Millions)		2019			2018			2019			2018
Amortization expense		$	69		$	61		$	208		$	188

 

Expected amortization expense for acquired amortizable intangible assets recorded as of September 30, 2019:

 

		Remainder of																		After
(Millions)		2019			2020			2021			2022			2023			2024			2024
Amortization expense		$	69		$	264		$	256		$	242		$	213		$	183		$	950

 

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, 2019. See Note 3 for additional details. 3M expenses the costs incurred to renew or extend the term of intangible assets.

 

NOTE 5.  Restructuring Actions and Exit Activities

2019 Restructuring Actions:

 

During the second quarter of 2019, in light of a 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 Company recorded a second quarter 2019 pre-tax charge of $148 million. The restructuring charges were recorded in the income statement as follows:

 

(Millions)		Second Quarter 2019
Cost of sales		$	18
Selling, general and administrative expenses			89
Research, development and related expenses			5
Total operating income impact			112
Other expense (income), net			36
Total income before taxes impact		$	148

 

The 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 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.

 

Restructuring actions, including cash and non-cash impacts, follow:

 

(Millions)		Employee-Related			Asset-Related			Total
Expense incurred in the second quarter of 2019		$	108		$	40		$	148
Non-cash changes			(36)			(40)			(76)
Cash payments			(41)			-			(41)
Adjustments			(14)			-			(14)
Accrued restructuring action balances as of September 30, 2019		$	17		$	-		$	17

 

Remaining activities related to this restructuring are expected to be completed largely through the first quarter of 2020.

 

2018 Restructuring Actions:

 

During the second quarter and fourth quarter of 2018, management approved and committed to undertake certain restructuring actions related to addressing corporate functional costs following the Communication Markets Division divestiture. These actions affected approximately 1,200 positions worldwide and resulted in a second quarter 2018 pre-tax charge of $105 million and a fourth quarter pre-tax charge of $22 million, net of adjustments for reductions in cost estimates of $10 million, essentially all within Corporate and Unallocated. The restructuring charges were recorded in the income statement as follows:

 

(Millions)		Second Quarter 2018			Fourth Quarter 2018
Cost of sales		$	12		$	15
Selling, general and administrative expenses			89			16
Research, development and related expenses			4			1
Total		$	105		$	32

 

Restructuring actions, including cash and non-cash impacts, follow:

 

(Millions)		Employee-Related			Asset-Related			Total
Expense incurred in the second quarter and fourth quarter of 2018		$	125		$	12		$	137
Non-cash changes			-			(12)			(12)
Cash payments			(24)			-			(24)
Adjustments			(17)			-			(17)
Accrued restructuring action balances as of December 31, 2018		$	84		$	-		$	84
Cash payments			(68)			-			(68)
Adjustments			(3)			-			(3)
Accrued restructuring action balances as of September 30, 2019		$	13		$	-		$	13

 

Remaining activities related to this restructuring are expected to be largely completed through 2019.

 

 

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)		2019			2018			2019			2018
Interest expense		$	109		$	85		$	324		$	255
Interest income			(26)			(15)			(64)			(52)
Pension and postretirement net periodic benefit cost (benefit)			(38)			(19)			(73)			(59)
Loss on deconsolidation of Venezuelan subsidiary			-			-			162			-
Total		$	45		$	51		$	349		$	144

 

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 for the nine months ended September 30, 2019 include a second quarter 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 second quarter of 2019, the Company incurred a charge of $162 million related to the deconsolidation of its Venezuelan subsidiary. Refer to Note 1 for additional details.

 

NOTE 7.  Supplemental Equity and Comprehensive Income Information

 

Cash dividends declared and paid totaled $1.44 and $1.36 per share for the first, second and third quarters 2019 and 2018, respectively, or $4.32 and $4.08 per share for the first nine months of 2019 and 2018, respectively.

 

Consolidated Changes in Equity

 

Three months ended September 30, 2019

 

					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

 

 

 

Nine Months Ended September 30, 2019

					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 (See Note 1)			-						853						(853)
Impact of adoption of ASU No. 2016-02 (See Note 1)			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

 

 

Three months ended September 30, 2018

					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, 2018		$	10,428		$	5,559		$	39,442		$	(27,617)		$	(7,019)		$	63
Net income			1,546						1,543									3
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment			(112)												(109)			(3)
Defined benefit pension and post-retirement plans adjustment			114												114			-
Cash flow hedging instruments			46												46			-
Total other comprehensive income (loss), net of tax			48
Dividends declared			(794)						(794)
Stock-based compensation			47			47
Reacquired stock			(1,058)									(1,058)
Issuances pursuant to stock option and benefit plans			94						(71)			165
Balance at September 30, 2018		$	10,311		$	5,606		$	40,120		$	(28,510)		$	(6,968)		$	63

 

Nine months ended September 30, 2018

 

					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, 2017		$	11,622		$	5,361		$	39,115		$	(25,887)		$	(7,026)		$	59
Net income			4,014						4,002									12
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment			(441)												(433)			(8)
Defined benefit pension and post-retirement plans adjustment			344												344			-
Cash flow hedging instruments			147												147			-
Total other comprehensive income (loss), net of tax			50
Dividends declared			(2,406)						(2,406)
Stock-based compensation			245			245
Reacquired stock			(3,621)									(3,621)
Issuances pursuant to stock option and benefit plans			407						(591)			998
Balance at September 30, 2018		$	10,311		$	5,606		$	40,120		$	(28,510)		$	(6,968)		$	63

 

Changes in Accumulated Other Comprehensive Income (Loss) Attributable to 3M by Component

 

Three months ended September 30, 2019

											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)

 

Nine months ended September 30, 2019

 

											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 (See Note 1)			(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)

 

Three months ended September 30, 2018

											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, 2018, net of tax:		$	(1,962)		$	(5,046)		$	(11)		$	(7,019)
Other comprehensive income (loss), before tax:
Amounts before reclassifications			(110)			-			22			(88)
Amounts reclassified out			-			150			37			187
Total other comprehensive income (loss), before tax			(110)			150			59			99
Tax effect			1			(36)			(13)			(48)
Total other comprehensive income (loss), net of tax			(109)			114			46			51
Balance at September 30, 2018, net of tax:		$	(2,071)		$	(4,932)		$	35		$	(6,968)

 

Nine months ended September 30, 2018

 

											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, 2017, net of tax:		$	(1,638)		$	(5,276)		$	(112)		$	(7,026)
Other comprehensive income (loss), before tax:
Amounts before reclassifications			(392)			-			122			(270)
Amounts reclassified out			-			452			99			551
Total other comprehensive income (loss), before tax			(392)			452			221			281
Tax effect			(41)			(108)			(74)			(223)
Total other comprehensive income (loss), net of tax			(433)			344			147			58
Balance at September 30, 2018, net of tax		$	(2,071)		$	(4,932)		$	35		$	(6,968)

 

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 subsequently recorded as part of net income.

Reclassifications out of Accumulated Other Comprehensive Income Attributable to 3M

 

		Amount Reclassified from
Details about Accumulated Other		Accumulated Other Comprehensive Income
Comprehensive Income Components		Three months ended September 30,						Nine months ended September 30,						Location on Income
(Millions)		2019			2018			2019			2018			Statement
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
Prior service benefit		$	18		$	20		$	50		$	58		See Note 11
Net actuarial loss			(119)			(170)			(358)			(510)		See Note 11
Deconsolidation of Venezuelan subsidiary			-			-			(2)			-		Other income (expense), net
Total before tax			(101)			(150)			(310)			(452)
Tax effect			25			36			70			108		Provision for income taxes
Net of tax		$	(76)		$	(114)		$	(240)		$	(344)
Cash flow hedging instruments gains (losses)
Foreign currency forward/option contracts		$	22		$	(37)		$	50		$	(98)		Cost of sales
Interest rate swap contracts			(1)			-			(2)			(1)		Interest expense
Total before tax			21			(37)			48			(99)
Tax effect			(4)			8			(9)			22		Provision for income taxes
Net of tax		$	17		$	(29)		$	39		$	(77)
Total reclassifications for the period, net of tax		$	(59)		$	(143)		$	(343)		$	(421)

 

 

 

 

NOTE 8.  Income Taxes

 

The IRS has completed its field examination of the Company's U.S. federal income tax returns for the years 2005 to 2014, and 2016. The Company is in the process of resolving open issues identified during those examinations. The Company remains under examination by the IRS for its U.S. federal income tax returns for the years 2015, 2017 and 2018. In addition to the U.S. federal examination, there is also audit activity in several U.S. state and foreign jurisdictions. As of September 30, 2019, no taxing authority has proposed significant adjustments to the Company's tax positions for which the Company is not adequately reserved.

 

It is reasonably possible that the amount of unrecognized tax benefits could significantly change within the next 12 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, 2019 and December 31, 2018 are $736 million and $655 million, respectively.

 

As of September 30, 2019 and December 31, 2018, the Company had valuation allowances of $70 million and $67 million on its deferred tax assets, respectively.

 

The effective tax rate for the third quarter of 2019 was 19.3 percent, compared to 21.3 percent in the third quarter of 2018, a decrease of 2.0 percentage points. Primary factors that decreased the Company's effective tax rate included adjustments related to impacts of U.S. international tax provisions, geographical income mix, and increased benefits from the R&D tax credit. These decreases were partially offset by the tax related to the divestiture of the Company's gas and flame detection business and decreased benefit from stock options.

 

The effective tax rate for the first nine months of 2019 was 19.7 percent, compared to 24.0 percent in the first nine months of 2018, a decrease of 4.3 percentage points. Primary factors that decreased the Company's effective tax rate included significant events such as prior year measurement period adjustments related to 2017 Tax Cuts and Jobs Act (TCJA), prior year resolution of the NRD lawsuit (as described in Note 14), geographical income mix, and increased benefits from the R&D tax credit. These decreases were partially offset by the deconsolidation of the Venezuelan subsidiary and adjustments to uncertain tax positions. In addition, the effective tax rate decreased due to the divestiture of the Company's gas and flame detection business.

 

The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017, after which the SEC staff issued Staff Accounting Bulletin 118, which provided a measurement period of up to one year from the TCJA's enactment date for companies to complete their accounting under ASC 740. During the first quarter of 2018, 3M recognized a measurement period adjustment resulting in an additional tax expense of $217 million to its provisional accounting. Refer to Note 10 in 3M's 2018 Annual Report on Form 10-K for more information on the impact of TCJA.

 

The Company adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, as described in Note 1, on January 1, 2019. The purpose of this ASU was to allow a reclassification to retained earnings of one-time income tax effects stranded in accumulated other comprehensive income (AOCI) arising from the change in the U.S. federal corporate tax rate as a result of TCJA. The effect of this adoption resulted in a reclassification between retained earnings and AOCI, which increased retained earnings by approximately $0.9 billion, with an offsetting increase to accumulated other comprehensive loss for the same amount.

 

NOTE 9.  Marketable Securities

 

The Company invests in asset-backed securities, certificates of deposit/time deposits, commercial paper, and other securities. The following is a summary of amounts recorded on the Consolidated Balance Sheet for marketable securities (current and non-current).

 

(Millions)		September 30, 2019			December 31, 2018
Commercial paper		$	-		$	366
Certificates of deposit/time deposits			27			10
U.S. municipal securities			3			3
Asset-backed securities			-			1
Current marketable securities		$	30		$	380
U.S. municipal securities		$	46		$	37
Non-current marketable securities		$	46		$	37
Total marketable securities		$	76		$	417

 

At September 30, 2019 and December 31, 2018, gross unrealized, gross realized, and net realized gains and/or losses (pre-tax) were not material.

 

The balances at September 30, 2019 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.

 

(Millions)		September 30, 2019
Due in one year or less		$	30
Due after one year through five years			13
Due after five years through ten years			24
Due after ten years			9
Total marketable securities		$	76

 

3M does not currently expect risk related to its holding in asset-backed securities to materially impact its financial condition or liquidity.

 

 

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

 

In February 2019, 3M issued $2.25 billion aggregate principal amount of fixed rate medium-term notes. These were comprised of $450 million of 3-year notes due 2022 with a coupon rate of 2.75%, $500 million of remaining 5-year notes due 2024 with a coupon rate of 3.25%, $800 million of 10-year notes due 2029 with a coupon rate of 3.375%, and $500 million of remaining 29.5-year notes due 2048 with a coupon rate of 4.00%. Issuances of the 5-year and 29.5-year notes were pursuant to a reopening of existing securities issued in September 2018.

 

In August 2019, 3M issued $3.25 billion aggregate principal amount of fixed rate registered notes. These were comprised of $500 million of 3.5-year notes due 2023 with a coupon rate of 1.75%, $750 million of 5.5-year notes due 2025 with a coupon rate of 2.00%, $1.0 billion of 10-year notes due 2029 with a coupon rate of 2.375%, and $1.0 billion of 30-year notes due 2049 with a coupon rate of 3.25%.

 

In September 2019, 3M entered into a credit facility expiring in July 2020 in the amount of 80 billion Japanese yen. At September 30, 2019, 69 billion Japanese yen, or approximately $640 million at September 30, 2019 exchange rates, was drawn and outstanding.

 

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 are restricted from use in 3M's operations and may only be used for the redemption of the Third Lien Notes. These actions, however, do not represent a legal defeasance. Therefore, following the acquisition of Acelity, this debt will be included in current portion of long-term debt and the related trust assets will be included in current assets on the Company's consolidated balance sheet.

 

As of September 30, 2019, the Company had no commercial paper outstanding, compared to $435 million in commercial paper outstanding as of December 31, 2018.

 

In June 2019, 3M repaid $625 million aggregate principal amount of fixed-rate medium-term notes that matured.

 

Future Maturities of Long-term Debt

 

Maturities of long-term debt in the table below reflect the impact of put provisions associated with certain debt instruments and are net of the unaccreted debt issue costs such that total maturities equal the carrying value of long-term debt as of September 30, 2019. The maturities of long-term debt for the periods subsequent to September 30, 2019 are as follows (in millions):

 

Remainder of																		After
2019			2020			2021			2022			2023			2024			2024			Total
$	105		$	1,305		$	1,671		$	1,591		$	1,796		$	1,101		$	11,225		$	18,794

 

 

NOTE 11.  Pension and Postretirement Benefit Plans

 

The 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 the three and nine months ended September 30, 2019 and 2018 follow:

 

Benefit Plan Information

 

		Three months ended September 30,
		Qualified and Non-qualified
		Pension Benefits												Postretirement
		United States						International						Benefits
(Millions)		2019			2018			2019			2018			2019			2018
Net periodic benefit cost (benefit)
Operating expense
Service cost		$	63		$	72		$	32		$	37		$	10		$	13
Non-operating expense
Interest cost		$	155		$	141		$	40		$	40		$	20		$	20
Expected return on plan assets			(260)			(272)			(75)			(78)			(20)			(21)
Amortization of prior service benefit			(6)			(6)			(3)			(4)			(9)			(10)
Amortization of net actuarial loss			91			126			20			29			8			15
Total non-operating expense (benefit)			(20)			(11)			(18)			(13)			(1)			4
Total net periodic benefit cost (benefit)		$	43		$	61		$	14		$	24		$	9		$	17

 

 

		Nine months ended September 30,
		Qualified and Non-qualified
		Pension Benefits												Postretirement
		United States						International						Benefits
(Millions)		2019			2018			2019			2018			2019			2018
Net periodic benefit cost (benefit)
Operating expense
Service cost		$	188		$	216		$	98		$	110		$	32		$	39
Non-operating expense
Interest cost		$	466		$	423		$	118		$	120		$	62		$	60
Expected return on plan assets			(780)			(816)			(225)			(235)			(61)			(63)
Amortization of prior service benefit			(18)			(18)			(9)			(10)			(23)			(30)
Amortization of net actuarial loss			274			378			59			87			25			45
Settlements, curtailments, special termination benefits and other			35			-			1			-			-			-
Total non-operating expense (benefit)			(23)			(33)			(56)			(38)			3			12
Total net periodic benefit cost (benefit)		$	165		$	183		$	42		$	72		$	35		$	51

 

For the nine months ended September 30, 2019 contributions totaling $126 million were made to the Company's U.S. and international pension plans and $3 million to its postretirement plans. For total year 2019, the Company expects to contribute approximately $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 2019. 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.

 

In May 2019 (as part of the 2019 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 one additional year of pension service and one 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 was re-measured in 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.

 

NOTE 12.  Derivatives

 

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.

 

3M adopted ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities as of January 1, 2019. The disclosures contained within this note have been updated to reflect the new guidance, except for prior period amounts presented, as the disclosure changes were adopted prospectively. For derivative instruments that are designated in a cash flow or fair value hedging relationship, the impact of this accounting standard was to remove the requirement to test for ineffectiveness. Prior to the adoption of this ASU, any gain or loss related to hedge ineffectiveness was recognized in current earnings. For any net investment hedges entered into on or after January 1, 2019, amounts 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 the excluded component and the amount amortized into earnings during the period is recorded in cumulative translation within other comprehensive income.

 

Additional information with respect to derivatives is included 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 2018 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 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 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 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 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 as a result of reclassification from accumulated other comprehensive income. Additional information regarding previously issued but 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 14 in 3M's 2018 Annual Report on Form 10-K.

 

As of December 31, 2018, the Company had $700 million of notional amount in outstanding forward starting interest rate swaps as hedges against interest rate volatility with forecasted issuances of fixed rate debt. During the first nine months of 2019, the Company entered into additional forward starting interest rate swaps with a notional amount of $743 million. Concurrent with the issuance of the medium-term notes in February 2019 and the additional issuance of registered notes in August 2019, 3M terminated all outstanding interest rate swaps related to forecasted issuances of debt. These terminations resulted in a net loss of $143 million within accumulated other comprehensive income that will be amortized over the respective lives of the debt.

 

The amortization of gains and losses on forward starting interest rate swaps is included in the tables below as part of the gain/(loss) reclassified from accumulated other comprehensive income into income.

 

As of September 30, 2019, the Company had a balance of $17 million associated with the after-tax net unrealized gain associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This includes a remaining balance of $114 million (after-tax loss) related to the forward starting interest rate swaps, which will be amortized over the respective lives of the notes. Based on exchange rates as of September 30, 2019, 3M expects to reclassify approximately $69 million, $18 million, $63 million of the after-tax net unrealized foreign exchange cash flow hedging gains to earnings over the next 12 months, over the remainder of 2019, and in 2020, respectively, in addition to reclassifying approximately $64 million of the after-tax net unrealized foreign exchange cash flow hedging losses to earnings after 2020 (with the impact offset by earnings/losses from underlying hedged items).

 

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 Other			Pretax Gain (Loss) Reclassified
		Comprehensive			from Accumulated Other
		Income on Derivative			Comprehensive Income into Income
Three months ended September 30, 2019 (Millions)		Amount			Location		Amount
Foreign currency forward/option contracts		$	105		Cost of sales		$	22
Interest rate swap 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 swap contracts			(123)		Interest expense			(2)
Total		$	14				$	48

 

 

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

Portion of Derivative

Comprehensive Income

Recognized in Income

Three months ended September 30, 2018 (Millions)

Amount

Location

Amount

Location

Amount

Foreign currency forward/option contracts

$

12

Cost of sales

$

(37)

Cost of sales

$

-

Interest rate swap contracts

10

Interest expense

-

Interest expense

-

Total

$

22

$

(37)

$

-

 

Nine months ended September 30, 2018 (Millions)		Amount			Location		Amount			Location		Amount
Foreign currency forward/option contracts		$	112		Cost of sales		$	(98)		Cost of sales		$	-
Interest rate swap contracts			10		Interest expense			(1)		Interest expense			-
Total		$	122				$	(99)				$	-

 

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. Additional information regarding designated interest rate swaps can be found in Note 14 in 3M's 2018 Annual Report on Form 10-K.

 

Refer to the section below titled Statement of Income Location and Impact of Cash Flow and Fair Value Derivative Instruments for details on the location within the consolidated statements of income for amounts of gains and losses related to derivative instruments designated as fair value hedges and similar information relative to the hedged items for the the three and nine months ended September 30, 2019.

 

The location in the consolidated statements of income and 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 periods prior to 2019:

 

		Gain (Loss) on Derivative					Gain (Loss) on Hedged Item
		Recognized in Income					Recognized in Income
Three months ended September 30, 2018 (Millions)		Location		Amount			Location		Amount
Interest rate swap contracts		Interest expense		$	-		Interest expense		$	-
Total				$	-				$	-

 

Nine months ended September 30, 2018 (Millions)		Location		Amount			Location		Amount
Interest rate swap contracts		Interest expense		$	(12)		Interest expense		$	12
Total				$	(12)				$	12

 

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, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Short-term borrowings and current portion of long-term debt		$	499		$	596		$	(1)		$	(4)
Long-term debt			771			1,276			26			18
Total		$	1,270		$	1,872		$	25		$	14

 

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. Amounts 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 the excluded component and the amount amortized into earnings during the period is recorded in 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.

 

At September 30, 2019, the total notional amount of foreign exchange forward contracts designated in net investment hedges was approximately 150 million euros and approximately 248 billion South Korean won, along with a principal amount of long-term debt instruments designated in net investment hedges totaling 4.1 billion euros. The maturity dates of these derivative and nonderivative instruments designated in net investment hedges range from 2019 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 no 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.

		Pretax Gain (Loss)
		Recognized as
		Cumulative Translation			Amount Excluded
		within Other			from Effectiveness Testing
		Comprehensive Income			Recognized in Income
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

 

		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
		Instrument			Recognized in Income
Three months ended September 30, 2018 (Millions)		Amount			Location		Amount
Foreign currency denominated debt		$	(14)		Cost of sales		$	-
Foreign currency forward contracts			(3)		Cost of sales			1
Total		$	(17)				$	1

 

Nine months ended September 30, 2018 (Millions)		Amount			Location		Amount
Foreign currency denominated debt		$	157		Cost of sales		$	(2)
Foreign currency forward contracts			14		Cost of sales			1
Total		$	171				$	(1)

 

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 currency forward contracts to offset, in part, the impacts of certain intercompany activities and 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 location in the consolidated statement of income and amounts of gains and losses related to derivative instruments not designated as hedging instruments are as follows:

 

		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, 2018					Nine months ended September 30, 2018
		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		$	11		Cost of sales		$	11
Foreign currency forward contracts		Interest expense			(7)		Interest expense			(98)
Total				$	4				$	(87)

 

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, 2019					Nine months ended September 30, 2019
(Millions)		Cost of sales			Other expense (income), net			Cost of Goods Sold			Other expense (income), net)
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 fair value and cash flow 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 swap 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 swap contracts:
Hedged items		$	-		$	1	$	-		$	(11)
Derivatives designated as hedging instruments			-			(1)		-			11

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 inception date's foreign exchange rate. Additional information with respect to the fair value of derivative instruments is included in Note 13.

 

		Gross			Assets					Liabilities
September 30, 2019		Notional					Fair					Fair
(Millions)		Amount			Location		Value Amount			Location		Value Amount
Derivatives designated as
hedging instruments
Foreign currency forward/option contracts		$	2,235		Other current assets		$	128		Other current liabilities		$	2
Foreign currency forward/option contracts			1,110		Other assets			70		Other liabilities			1
Interest rate swap contracts			500		Other current assets			-		Other current liabilities			1
Interest rate swap contracts			603		Other assets			20		Other liabilities			-
Total derivatives designated as hedging instruments							$	218				$	4
Derivatives not designated as
hedging instruments
Foreign currency forward/option contracts		$	1,931		Other current assets		$	9		Other current liabilities		$	10
Total derivatives not designated as hedging instruments							$	9				$	10
Total derivative instruments							$	227				$	14

 

		Gross			Assets					Liabilities
December 31, 2018		Notional					Fair					Fair
(Millions)		Amount			Location		Value Amount			Location		Value Amount
Derivatives designated as
hedging instruments
Foreign currency forward/option contracts		$	2,277		Other current assets		$	74		Other current liabilities		$	12
Foreign currency forward/option contracts			1,099		Other assets			39		Other liabilities			4
Interest rate swap contracts			1,000		Other current assets			-		Other current liabilities			14
Interest rate swap contracts			1,403		Other assets			19		Other liabilities			17
Total derivatives designated as hedging instruments							$	132				$	47
Derivatives not designated as
hedging instruments
Foreign currency forward/option contracts		$	2,484		Other current assets		$	14		Other current liabilities		$	6
Total derivatives not designated as hedging instruments							$	14				$	6
Total derivative instruments							$	146				$	53

 

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, 2019, 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 covered by these agreements exceeds specified thresholds or if a counterparty's credit rating has been 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, no 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, 2019		Consolidated			Recognized			Cash Collateral			Net Amount of
(Millions)		Balance Sheet			Derivative Liabilities			Received			Derivative Assets
Derivatives subject to master netting agreements		$	227		$	9		$	-		$	218
Derivatives not subject to master netting agreements			-									-
Total		$	227								$	218

 

December 31, 2018
(Millions)
Derivatives subject to master netting agreements		$	146		$	38		$	-		$	108
Derivatives not subject to master netting agreements			-									-
Total		$	146								$	108

 

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, 2019		Consolidated			Recognized			Cash Collateral			Net Amount of
(Millions)		Balance Sheet			Derivative Assets			Pledged			Derivative Liabilities
Derivatives subject to master netting agreements		$	14		$	9		$	-		$	5
Derivatives not subject to master netting agreements			-									-
Total		$	14								$	5

 

December 31, 2018
(Millions)
Derivatives subject to master netting agreements		$	53		$	38		$	-		$	15
Derivatives not subject to master netting agreements			-									-
Total		$	53								$	15

 

Currency Effects

 

3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, increased pre-tax income by approximately $69 million and $190 million for the the three and nine months ended September 30, 2019. These estimates include transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks.

 

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

 

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:

 

Investments

 

Investments include equity securities that are traded in an active market. Closing stock prices are readily available from active markets and are representative of fair value. 3M classifies these securities as Level 1. Investments are included within other assets on the Company's consolidated balance sheet.

 

In addition to the information above, refer to Note 15 in 3M's 2018 Annual Report on Form 10-K for a qualitative discussion of the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis, a description of the valuation methodologies used by 3M, and categorization within the valuation framework of ASC 820.

 

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis.

 

					Fair Value Measurements
Description		Fair Value at			Using Inputs Considered as
(Millions)		September 30, 2019			Level 1			Level 2			Level 3
Assets:
Available-for-sale:
Marketable securities:
Commercial paper		$	-		$	-		$	-		$	-
Certificates of deposit/time deposits			27			-			27			-
U.S. municipal securities			49			-			-			49
Investments			22			22			-			-
Derivative instruments - assets:
Foreign currency forward/option contracts			207			-			207			-
Interest rate swap contracts			20			-			20			-
Liabilities:
Derivative instruments - liabilities:
Foreign currency forward/option contracts			13			-			13			-
Interest rate swap contracts			1			-			1			-

 

					Fair Value Measurements
Description		Fair Value at			Using Inputs Considered as
(Millions)		December 31, 2018			Level 1			Level 2			Level 3
Assets:
Available-for-sale:
Marketable securities:
Commercial paper		$	366		$	-		$	366		$	-
Certificates of deposit/time deposits			10			-			10			-
Asset-backed securities			1			-			1			-
U.S. municipal securities			40			-			-			40
Derivative instruments - assets:
Foreign currency forward/option contracts			127			-			127			-
Interest rate swap contracts			19			-			19			-
Liabilities:
Derivative instruments - liabilities:
Foreign currency forward/option contracts			22			-			22			-
Interest rate swap contracts			31			-			31			-

 

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 3).

 

		Three months ended						Nine months ended
Marketable securities - certain U.S. municipal securities only		September 30,						September 30,
(Millions)		2019			2018			2019			2018
Beginning balance		$	49		$	30		$	40		$	30
Total gains or losses:
Included in earnings			-			-			-			-
Included in other comprehensive income			-			-			-			-
Purchases and issuances			-			-			9			-
Sales and settlements			-			-			-			-
Transfers in and/or out of level 3			-			-			-			-
Ending balance		$	49		$	30		$	49		$	30
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 13 in 3M's 2018 Annual Report on Form 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, but 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 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. There were no material long-lived asset impairments or adjustments to equity securities using the measurement alternative for the three and nine months ended September 30, 2019 and 2018.

 

Fair Value of Financial Instruments:

 

The Company's financial instruments include cash and cash equivalents, marketable securities, accounts receivable, certain investments, accounts payable, borrowings, and derivative contracts. The fair values of cash equivalents, accounts receivable, 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 and investments, in addition to certain derivative instruments, are recorded at fair values as indicated in the preceding disclosures. To estimate fair values (classified as level 2) for its long-term debt, the Company utilized third-party quotes, 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, 2019						December 31, 2018
		Carrying			Fair			Carrying			Fair
(Millions)		Value			Value			Value			Value
Long-term debt, excluding current portion		$	17,479		$	18,573		$	13,411		$	13,586

 

The fair values reflected above consider the terms of the related debt absent the impacts of 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. A number of 3M's fixed-rate bonds were trading at a premium at September 30, 2019 and December 31, 2018 due to lower interest rates and tighter credit spreads compared to issuance levels.

 

NOTE 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 include various products liability (involving products that the Company now or formerly manufactured and sold), intellectual property, commercial claims and lawsuits, and environmental proceedings. Unless otherwise stated, the Company is vigorously defending all such litigation. 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, 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 16 "Commitments and Contingencies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

 

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, 2019, the Company is a named defendant, with multiple co-defendants, in numerous lawsuits in various courts that purport to represent approximately 1,770 individual claimants, compared to approximately 2,320 individual claimants with actions pending at December 31, 2018.

 

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.

 

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, other malignancies, and black lung disease, will represent a greater percentage of total claims than in the past. Over the past twenty years, the Company has prevailed in fourteen of the fifteen cases tried to a jury (including the lawsuits in 2018 described below). In 2018, 3M received a jury verdict in its favor in two lawsuits - one 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 found 3M's 8710 respirators failed to protect two coal miners from coal mine dust and awarded compensatory damages of approximately $2 million and punitive damages totaling $63 million. In August 2018, the trial court entered judgment and the Company has appealed. During March and April 2019, the Company agreed in principle to settle a substantial majority of the coal mine dust lawsuits in Kentucky and West Virginia for $340 million, including the $65 million jury verdict in April 2018 in the Kentucky case mentioned above currently on appeal.

 

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 alleging more serious injuries, including mesothelioma, other malignancies, and black lung disease, are costlier to resolve than the claims of unimpaired persons, and it 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 from the fourth quarter of 2007 until late 2013, other than a case management conference in March 2011. In November 2013, the State filed a motion to bifurcate the lawsuit into separate liability and damages proceedings. At the hearing on the motion, the court declined to bifurcate the lawsuit. No 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 asserts 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 might allocate to each defendant if the case is ultimately tried.

 

Respirator Mask/Asbestos Liabilities and Insurance Receivables

 

The Company regularly conducts a comprehensive legal review of its respirator mask/asbestos 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 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 the settlements-in-principle of the coal mine dust lawsuits mentioned above, 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), its review of its respirator mask/asbestos liabilities, and 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 2019 for respirator mask/asbestos liabilities by $337 million, of which $313 million pre-tax (or $238 million after tax ($0.40 per diluted share)) was accrued in the first quarter of 2019. In the first nine months of 2019, the Company made payments for legal defense costs and settlements of $390 million related to the respirator mask/asbestos litigation. As of September 30, 2019, the Company had an accrual for respirator mask/asbestos liabilities (excluding Aearo accruals) of $620 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, 2019, the Company's receivable for insurance recoveries related to the respirator mask/asbestos litigation was $4 million. The Company continues 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.

 

Respirator Mask/Asbestos Litigation - Aearo Technologies

 

On April 1, 2008, a subsidiary of the Company purchased 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, 2019, 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, 2019, the Company, through its Aearo subsidiary, had accruals of $24 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. 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.

 

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 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 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.

 

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 perfluorooctanoate ("PFOA"), perfluorooctane sulfonate ("PFOS"), perfluorohexane sulfonate ("PFHxS"), or other per- and polyfluoroalkyl substances (collectively "PFAS"). As a result of its phase-out decision in May 2000, the Company no longer manufactures certain PFAS compounds including PFOA, PFOS, PFHxS, and their pre-cursor compounds. The Company ceased manufacturing and 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 PFAS 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 PFOS 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, which are non-enforceable and non-regulatory, provide information about concentrations of drinking water contaminants at which adverse health effects are not 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-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 one 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 its historic disposal of PFAS-containing waste associated with manufacturing operations at its Decatur, Alabama; Cottage Grove, 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 address the presence of PFAS in the soil at the Company's manufacturing facility in Decatur, Alabama. Pursuant to a permit issued by ADEM, for approximately 20 years, the Company incorporated its wastewater treatment plant sludge containing PFAS in fields at its Decatur facility. After a review of the available options to address the presence of PFAS in the soil, ADEM agreed that the preferred remediation option is to use a multilayer cap over the former sludge incorporation areas on the manufacturing site with subsequent groundwater migration controls and treatment. Implementation of that plan continues, and construction of the cap was substantially completed in 2018.

 

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 PFAS 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 PFAS from these sites and proposing response actions; (ii) providing treatment or alternative drinking water upon identifying any level exceeding a Health Based Value ("HBV") or Health Risk Limit ("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 PFAS for which a HBV and/or HRL exists as a result of contamination from these sites; (iii) remediating identified sources of other PFAS 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. 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 continues at the Cottage Grove site during 2019.

 

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 PFOS and PFOA. 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 two 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 released draft interim recommendations in April 2019, aiming to provide guidance for screening levels and preliminary remediation goals to inform final clean-up levels of contaminated sites.

 

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.

 

In several states, the state legislature or the state environmental agency have been evaluating or have taken actions related to cleanup standards, groundwater values or drinking water values for PFOS, PFOA, and other PFAS.

 

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.

 

Litigation Related to Historical PFAS Manufacturing Operations in Alabama

 

As previously reported, a former employee filed a putative class action lawsuit in 2002 in the Circuit Court of Morgan County, Alabama (the "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 plaintiffs' counsel filed an amended complaint in November 2006, limiting the case to property damage claims on behalf of a putative class of 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 putative class action lawsuit filed by three residents of Morgan County, Alabama, 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 compounds (the "Chandler case") - granted the Company's motion to abate the case, effectively putting the case on hold 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 putative 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 putative 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 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 April 2019, 3M and the Water Authority settled the lawsuit described above for $35 million, which will fund a new water filtration system, with 3M indemnification of 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 3M PFAS. 

 

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 Recovery Act in connection with the disposal of certain PFAS 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 St. John and Tennessee Riverkeeper cases, which relate to the 3M plant in Decatur, are stayed through November 2019.

 

In August 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 Decatur in state court in Lawrence County, Alabama. Plaintiffs are residents of Lawrence, Morgan and other counties who are or have been customers of the Water Authority. They contend defendants have released PFAS that contaminate the Tennessee River and, in turn, their drinking water, causing damage to their health and properties. In January 2017, the court in the St. John case, discussed above, stayed this litigation pending resolution of the St. John case.

 

In January 2017, several hundred plaintiffs sued 3M, its subsidiary Dyneon, and Daikin America in Lawrence and Morgan Counties, Alabama. 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 (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.

 

In November 2017, a putative class action (the "King" case) was filed against 3M, its subsidiary 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. They assert various common law claims, including negligence, nuisance, wantonness, and fraudulent concealment, and they 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 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 chemicals into the Decatur Utilities Dry Creek Wastewater Treatment Plant, which, in turn, discharged 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.

 

In January 2018, certain property owners in Trinity, Alabama filed a lawsuit against 3M, Dyneon, and three unnamed defendants in the U.S. District Court for the Northern District of Alabama. The plaintiffs assert claims for negligence, strict liability, trespass, nuisance, wanton and reckless conduct, and citizen suit claims for violation of the Resource Conservation and Recovery Act. They allege these claims arise from the defendants' contamination of their property by disposal of PFAS in a landfill located on their property. The plaintiffs seek compensatory and punitive damages and a court order directing the defendants to remediate all PFAS contamination on their property. In September 2018, the case was dismissed by stipulation of the parties.

 

In March 2018, an individual plaintiff filed a lawsuit in the U.S. District Court for the Northern District of Alabama raising allegations and claims substantially similar to those asserted by plaintiffs in the King case.

 

In July 2019, 3M announced that it had initiated an investigation into the possible presence of PFAS in three 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.

 

Litigation Related to Historical PFAS Manufacturing Operations in Minnesota

 

In July 2016, the City of Lake Elmo filed a lawsuit in the U.S. District Court for the District of Minnesota against 3M alleging that the City suffered damages from drinking water supplies contaminated with PFAS, including costs to construct alternative sources of drinking water. In April 2019, 3M and the City of Lake Elmo agreed to settle the lawsuit for less than $5 million.

 

State Attorneys General Litigation related to PFAS

 

Minnesota. In December 2010, the State of Minnesota, by its Attorney General, filed a lawsuit in Hennepin County District Court against 3M to recover 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 negligence with respect to the presence of PFAS in the groundwater, surface water, fish or other aquatic life, and sediments (the "NRD Lawsuit"). The State also sought declarations under MERLA that 3M is responsible for all damages the State may suffer in the future for injuries to natural resources from releases of PFAS into the environment, and that 3M is responsible for compensation for future loss or destruction of fish, aquatic life, and other damages under the MWPCA. In September 2017, the State's damages expert submitted a report that contended the State incurred $5 billion in damages. In November 2017, the State of Minnesota filed a motion for leave to amend its complaint to seek punitive damages from 3M, and 3M filed a motion for summary judgment contending, among other things, that the State's claims were barred by the applicable statute of limitations. In December 2017, the court urged the parties to attempt to resolve the litigation before trial, and in January 2018, the court appointed a mediator to facilitate that process. 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 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. The projects will also result in 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.

 

New York. The State of New York, by its Attorney General, has filed three lawsuits (in June 2018, February 2019, and July 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 three suits was filed in Albany County Supreme Court before being removed to federal court and transferred to the multi-district litigation (MDL) proceedings for AFFF cases, which is discussed further below. The state is seeking compensatory and punitive damages, and injunctive and equitable relief in the form of a monetary fund for the State's reasonably expected future damages, and/or requiring defendants to perform investigative and remedial work in response to the threats and/or injuries they have caused.

 

Ohio. In December 2018, the State of Ohio, by its Attorney General, filed a lawsuit in the Common 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 remediation costs and alleged injury to Ohio natural resources from AFFF manufacturers. This case was removed to federal court and transferred to the MDL.

 

New Jersey. In March 2019, the New Jersey Attorney General filed two actions against 3M, DuPont, and Chemours on behalf of the New Jersey Department of Environmental Protection (NJDEP), the NJDEP's commissioner, and the New Jersey Spill Compensation Fund regarding alleged discharges at two 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, where they remain pending in the 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 two 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 pending in state court in early stages of litigation.

 

Vermont. In June 2019, the Vermont Attorney General filed two 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 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 remains pending in state court in early stages of litigation.

 

Michigan. In July 2018, the now former governor of Michigan requested that the now former Michigan Attorney General file a lawsuit against 3M and others related to PFAS in a public letter. In May 2019, the new Michigan Attorney General issued a request for proposal seeking outside legal expertise in pursuing claims against manufacturers, distributors, and other responsible parties related to PFAS.

 

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.

 

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, 2019, 130 putative class action and other lawsuits 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 generals. In these cases, plaintiffs typically allege that certain PFAS used in AFFF contaminated the soil and groundwater where AFFF was used and seek damages for loss of use and enjoyment of properties, diminished property values, investigation costs, remediation costs, and in some cases, personal injury and funds for medical monitoring. 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 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, 2019, there were 125 cases in the MDL, 119 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 eight 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. Although two of these cases have been removed to federal court and transferred to the AFFF MDL, six cases remain pending in state courts where they are in early stages of litigation.

 

In September 2019, an individual plaintiff filed an AFFF lawsuit against 3M, together with the State of Alaska, Chemguard, Tyco Fire Equipment Co., DuPont, Chemours and other co-defendants, in state court in Alaska. Plaintiff in this case seeks property damages and medical monitoring on behalf of a putative class. Also in September 2019, 3M was named a defendant, together with Tyco Fire Products, Chemguard, Buckeye Fire Protection and other co-defendants, in an AFFF action filed by individual plaintiffs in state court of New York. Plaintiffs in the New York case seek damages for alleged property damage and personal injuries, as well as injunctive relief in the form of medical monitoring and property testing and remediation.

 

 

Other PFAS-related Environmental Litigation

 

3M manufactured and sold products containing various perfluorooctanyl compounds (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., E.I. DuPont De Nemours and Co., and various carpet manufacturers.

 

In New York, 3M is defending 47 individual cases and one putative class action filed in the U.S. District Court for the Northern District of New York and four 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 Company. 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. 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. Plaintiffs seek unstated compensatory, consequential, and punitive damages, as well as attorneys' fees and costs.

 

In Michigan, one 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 drinking water sources after disposal. In addition to the one consolidated federal court putative class action, as of September 30, 2019, 3M has been named as a defendant in 254 private individual actions in Michigan state court based on similar allegations. Four of these cases have been selected for bellwether trials beginning in 2020. Wolverine also filed a third-party complaint against 3M in a suit by the State of Michigan 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 2019, the parties (including 3M as third-party defendant) engaged in mediation, but resolution of the case was not reached. 3M and Wolverine have scheduled further mediation in late October 2019. 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. Defendants have moved to dismiss certain claims in the complaint, and the parties have begun discovery on the remaining claims.

 

In Alabama, 3M is defending two lawsuits filed in state court by local public water suppliers 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 PFOA and PFOS into the surface water and groundwater, contaminating drinking water supplies of cities located downstream along the Coosa River.

 

In Delaware, 3M is defending one 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. 3M removed the case from state court to federal court, and plaintiffs have filed a motion to remand.

 

In Maine, 3M is defending one individual action in state court relating to contamination of drinking water and dairy farm operations by PFAS from wastewater sludge. Plaintiffs contend that PFAS entered the wastewater via discharge from another company's facility in Kennebunk, Maine.

 

In New Jersey, 3M is defending an action brought in federal court by Middlesex Water Company, alleging PFAS contamination of its water wells. The case is currently in the early stages of discovery. 3M has moved to dismiss the complaint and, separately, moved to transfer the case to the AFFF MDL. On a separate matter, 3M was dismissed without prejudice from a class action that was previously pending in federal court in New Jersey, relating to the DuPont Chambers Works plant.

 

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 denied the defendants' motion.

 

In March 2019, the New Jersey Department of Environmental Protection (NJDEP) issued a directive, information request and notice to Solvay, DuPont, Chemours, and 3M relating to PFAS. The NJDEP, in its effort to obtain a "full understanding" of Respondents' historical and current "development, manufacture, transport, use, storage, release, discharge, and/or disposal of PFAS in New Jersey," requested information from each respondent and a collective meeting with the NJDEP to discuss costs to "investigate, test, treat, cleanup, and remove" PFAS from New Jersey's environment.

 

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 the Company's manufacturing and distribution of PFAS products. The Company is cooperating with this request. In September 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 operates under a 2009 consent order issued under the federal Toxic Substances Control Act (TSCA) for the manufacture and use of two 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 capturing 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 cooperate with the EPA and ADEM in their investigations and will work with the regulatory authorities to demonstrate full compliance with the release restrictions.

 

The Company is authorized to discharge wastewater from its Decatur plant pursuant to the terms of a Clean Water Act National Pollutant Discharge Elimination System (NPDES) permit issued by ADEM. The NPDES permit requires the Company to report on a monthly and quarterly basis the quality and quantity of pollutants discharged to the Tennessee River. In June 2019, the Company voluntarily disclosed to the EPA and ADEM that it had included incorrect values in certain of its monthly and quarterly reports. The Company has submitted the corrected values to both EPA and ADEM.

 

As part of the ongoing work with EPA and ADEM to address compliance matters at the Decatur facility, the Company announced in September 2019 that it had elected to temporarily idle certain other manufacturing processes at 3M Decatur. The Company is reviewing its operations at the plant as it works to re-start the idled processes and ensure operations are in compliance with environmental regulatory requirements and Company policies and procedures. The Company is also reviewing operations at its other plants with similar manufacturing processes, such as those in Cordova, Illinois and Cottage Grove, Minnesota, to ensure those operations are in compliance with applicable environmental regulatory requirements and Company policies and procedures. 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.

 

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 20(a) of the Securities and Exchange Act of 1934 against the individual defendants. The suit is in the early stages of litigation.

 

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 eight 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 eight 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 two 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 environmental matters and litigation described above, unless otherwise stated, no liability has been recorded as the Company believes 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 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 four 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) or $186 million after tax ($0.32 per diluted share) in the first quarter of 2019. As of September 30, 2019, the Company had recorded liabilities of $241 million for "other environmental liabilities." This accrual represents the Company's best estimate of the probable loss: (i) to implement the Settlement Agreement and Consent Order with the MPCA (including the best estimate of the probable liability under the settlement of the NRD Lawsuit with the State of Minnesota for interim treatment of municipal and private wells), (ii) the remedial action agreement with ADEM, (iii) mitigation plans for the presence of PFAS in the soil and groundwater at two former disposal sites in Washington County, Minnesota (Oakdale and Woodbury), (iv) to cover certain environmental matters and litigation in which 3M is a defendant related to the manufacture and disposal of PFAS at five 3M facilities, including three in the United States and two in Europe. 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, 2019, the Company had recorded liabilities of $20 million for estimated non-PFAS related "environmental remediation liabilities" costs to 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 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.

 

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.

 

The Company 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 September 30, 2019, the Company's receivable for insurance recoveries related to the environmental matters and litigation was $33 million. The Company increased its receivable for insurance recoveries by $25 million in the first quarter of 2019. The insurance receivable was not changed in the third quarter of 2019. Various factors could affect the timing and amount of recovery of this and future expected increases in the receivable, including (i) delays in or avoidance of 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.

 

Product Liability Litigation

 

As of September 30, 2019, the Company is a named defendant in two lawsuits involving two plaintiffs (compared to approximately 5,015 plaintiffs at December 31, 2018) who allege the Bair Hugger™ patient warming system caused a surgical site infection. 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 Bair Hugger™ product line was acquired by 3M as part of the 2010 acquisition of Arizant, Inc., a manufacturer of patient warming solutions designed to prevent hypothermia and maintain normal body temperature in surgical settings). The plaintiffs 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.

 

The U.S. Judicial Panel on Multidistrict Litigation (JPML) granted the plaintiffs' motion to transfer and consolidate all cases pending in federal courts to the U.S. District Court for the District of Minnesota to be managed in a multi-district litigation (MDL) proceeding. At a joint hearing before the U.S. District Court and the Minnesota State court, on the parties' motion to exclude each other's experts, and 3M's motion for summary judgment with respect to general causation, the federal court did not exclude the plaintiffs' experts and denied 3M's motion for summary judgment on general causation. In June 2019, the MDL judge heard oral arguments on 3M's motion for reconsideration. In July 2019, the U.S. District Court reconsidered that decision, excluded several of the plaintiffs' causation experts, and granted summary judgment for 3M in all cases pending in the MDL. Plaintiffs have appealed that decision to the U.S. Court of Appeals for the Eighth Circuit. Plaintiffs also previously appealed a May 2018 jury verdict in favor of 3M in the first bellwether trial in the MDL and the dismissal of another bellwether case.

 

In January 2018, the Minnesota state court, after hearing the same arguments, excluded plaintiffs' experts and granted 3M's motion for summary judgment on general causation, dismissing all 61 cases pending before the state court in Minnesota. Plaintiffs appealed that ruling and the state court's punitive damages ruling. In January 2019, the Minnesota Court of Appeals affirmed the Minnesota state court orders in their entirety. The Minnesota Supreme Court denied plaintiffs' petition for review. Final dismissal was entered in April 2019, effectively ending the Minnesota state court cases.

 

3M has been defending one active state court action in Hidalgo County, Texas, which combines Bair Hugger product liability claims with medical malpractice claims. In August 2019, the U.S. District Court managing the MDL entered an order enjoining the individual plaintiff from pursuing his claims in Texas state court because he had previously filed and dismissed a claim in the MDL. The plaintiff has appealed the order to the U.S. Court of Appeals for the Eighth Circuit.

 

During the third quarter of 2019, 3M also defended four actions filed in Missouri state court. 3M removed these cases to federal court and moved to transfer them to the MDL. Three cases have been transferred to the MDL. Plaintiffs opposed transfer to the MDL and have filed motions to remand the cases to Missouri state court.

 

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.

 

No liability has been recorded for the Bair Hugger™ litigation because the Company believes that any such liability is not probable and estimable at this time.

 

In September 2011, 3M Oral Care launched Lava Ultimate CAD/CAM dental restorative material. The product was originally indicated for inlay, onlay, veneer, and crown applications. In June 2015, 3M Oral Care voluntarily removed crown applications from the product's instructions for use, following reports from dentists of patients' crowns debonding, requiring additional treatment. The product remains on the market for other applications. 3M communicated with the U.S. Food 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. In May 2018, 3M reached a preliminary settlement for an amount that did not have a material impact to the Company of the lawsuit pending in the U.S. District Court for the District of Minnesota that sought certification of a class of dentists in the United States and its territories. In September 2019, the court issued an order granting final approval of the settlement.

 

Aearo Technologies sold Dual-Ended Combat Arms - Version 2 earplugs starting in about 2003. 3M acquired Aearo Technologies in 2008 and sold these earplugs from 2008 through 2015, when the product was 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 fraudulent misrepresentation and concealment. The plaintiff seeks various damages, including medical and related expenses, loss of income, and punitive damages. As of September 30, 2019, the Company is a named defendant in approximately 2,245 lawsuits (including 13 putative class actions) in various state and federal courts that purport to represent approximately 11,297 individual claimants making similar allegations. In April 2019, the U.S. Judicial Panel on Multidistrict Litigation granted motions to transfer and consolidate all cases pending in federal courts to the U.S. District Court for the Northern District of Florida to be managed in a multi-district litigation (MDL) proceeding to centralize pre-trial proceedings. The court conducted a case management conference in June 2019 on a discovery plan and scheduling. Discovery is underway.

 

For product liability litigation 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. 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.

 

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.

 

NOTE 15.  Leases

 

The Company adopted ASU No. 2016-02 and related standards (collectively ASC 842, Leases), which replaced previous lease accounting guidance, on January 1, 2019 using the modified retrospective method of adoption. 3M elected the transition method expedient which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, prior periods have not been restated. Due to the cumulative net impact of adopting ASC 842, the January 1, 2019 balance of retained earnings was increased by $14 million, primarily relating to previously deferred gains from sale-leaseback transactions. In addition, adoption of the new standard resulted in the recording of right of use assets and associated lease liabilities of $0.8 billion each as of January 1, 2019. The Company's accounting for finance leases (previously called capital leases) remains substantially unchanged. ASC 842 did not have a material impact on 3M's consolidated income statement. 3M elected the package of practical expedients permitted under the transition guidance within ASC 842, which includes not reassessing lease classification of existing leases. The Company did not elect the hindsight practical expedient.

 

3M determines if an arrangement is a lease upon inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used. 3M determines certain service agreements that contain the right to use an underlying asset are not leases because 3M does not control how and for what purpose the identified asset is used. Examples of such agreements include master supply agreements, product processing agreements, warehouse and distribution services agreements, power purchase agreements, and transportation purchase agreements.

 

Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The discount rate used to calculate present value is 3M's incremental borrowing rate or, if available, the rate implicit in the lease. 3M determines the incremental borrowing rate for each lease based primarily on its lease term and the economic environment of the applicable country or region.

 

As a lessee, the Company leases distribution centers, office space, land, and equipment. Certain 3M lease agreements include rental payments adjusted annually based on changes in an inflation index. 3M's leases do not contain material residual value guarantees or material restrictive covenants. Lease expense is recognized on a straight-line basis over the lease term.

 

Certain leases include one or more options to renew, with terms that can extend the lease term up to five years. 3M includes options to renew the lease as part of the right of use lease asset and liability when it is reasonably certain the Company will exercise the option. In addition, certain leases contain fair value purchase and termination options with an associated penalty. In general, 3M is not reasonably certain to exercise such options.

 

For the measurement and classification of its lease agreements, 3M groups lease and non-lease components into a single lease component for all underlying asset classes. Variable lease payments primarily include payments for non-lease components, such as maintenance costs, payments for leased assets used beyond their noncancelable lease term as adjusted for contractual options to terminate or renew, and payments for non-components such as sales tax. Certain 3M leases contain immaterial variable lease payments based on number of units produced.

 

The components of lease expense are as follows:

		Three months ended			Nine months ended
(Millions)		September 30, 2019			September 30, 2019
Operating lease cost		$	78		$	229
Finance lease cost:
Amortization of assets			5			15
Interest on lease liabilities			-			1
Variable lease cost			26			68
Total net lease cost		$	109		$	313

 

Income related to sub-lease activity is immaterial for the Company.

 

 

Supplemental balance sheet information related to leases is as follows:

		Location on Face of		As of:
(Millions unless noted)		Balance Sheet		September 30, 2019
Operating leases:
Operating lease right of use assets		Operating lease right of use assets		$	834
Current operating lease liabilities		Operating lease liabilities - current		$	241
Noncurrent operating lease liabilities		Operating lease liabilities			584
Total operating lease liabilities				$	825
Finance leases:
Property and equipment, at cost		Property, plant and equipment		$	235
Accumulated amortization		Property, plant and equipment (accumulated depreciation)			(99)
Property and equipment, net				$	136
Current obligations of finance leases		Other current liabilities		$	18
Finance leases, net of current obligations		Other liabilities			116
Total finance lease liabilities				$	134
Weighted average remaining lease term (in years):
Operating leases					5.7
Finance leases					9.2
Weighted average discount rate:
Operating leases					3.3	%
Finance leases					3.8	%

 

Supplemental cash flow and other information related to leases is as follows:

		Nine months ended
(Millions)		September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	231
Operating cash flows from finance leases			1
Financing cash flows from finance leases			12
Right of use assets obtained in exchange for lease liabilities:
Operating leases			288
Finance leases			58
Gain on sale leaseback transactions, net			59

 

In the first quarter of 2019, 3M sold and leased-back certain recently constructed machinery and equipment in return for municipal securities, which in aggregate, were recorded as a finance lease asset and obligation of approximately $9 million. In the third quarter of 2019, the Company sold an office location involving a leaseback resulting in a $59 million gain. Refer to Note 9 in 3M's 2018 Annual Report on Form 10-K for additional non-cash details associated with prior activity.

 

 

Maturities of lease liabilities were as follows:

		September 30, 2019
(Millions)		Finance Leases			Operating Leases
Remainder of 2019		$	8		$	73
2020			20			241
2021			16			168
2022			15			123
2023			15			85
After 2023			67			211
Total		$	141		$	901
Less: Amounts representing interest			(7)			(76)
Present value of future minimum lease payments			134			825
Less: Current obligations			18			241
Long-term obligations		$	116		$	584

 

As of September 30, 2019, the Company has additional operating lease commitments that have not yet commenced of approximately $29 million. These commitments pertain to 3M's right of use buildings.

 

Disclosures related to periods prior to adoption of new lease standard:

 

Capital and Operating Leases:
Rental expense under operating leases was $393 million in 2018, $343 million in 2017 and $318 million in 2016. It is 3M's practice to secure renewal rights for leases, thereby giving 3M the right, but not the obligation, to maintain a presence in a leased facility. 3M has the following primary capital leases:

·      In 2003, 3M recorded a capital lease asset and obligation of approximately 34 million British Pound (GBP), or approximately $43 million at December 31, 2018, exchange rates, for a building in the United Kingdom (with a lease term of 22 years).

·      3M sold and leased-back certain recently constructed machinery and equipment in return for municipal securities, which in aggregate, were recorded as a capital lease asset and obligation of approximately $13 million in 2018, $13 million in 2017, and $12 million in 2016, with an average remaining lease term remaining of 15 years at December 31, 2018.

 

Minimum lease payments under capital and operating leases with non-cancelable terms in excess of one year as of December 31, 2018, were as follows:

					Operating
(Millions)		Capital Leases			Leases
2019		$	18		$	283
2020			16			208
2021			14			153
2022			12			122
2023			12			92
After 2023			32			253
Total		$	104		$	1,111
Less: Amounts representing interest			12
Present value of future minimum lease payments			92
Less: Current obligations under capital leases			17
Long-term obligations under capital leases		$	75

 

 

NOTE 16.  Stock-Based Compensation

 

The 3M 2016 Long-Term Incentive Plan 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. As of September 30, 2019, the remaining shares available for grant under the LTIP Program are 22.1 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 compensation expense recognition when an employee is eligible to retire. Employees are considered eligible to retire at age 55 and after having completed ten years of service. This retiree-eligible population represents 37 percent of the annual grant stock-based compensation expense; therefore, higher stock-based compensation expense is recognized in the first 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, 2019 and 2018.

 

Stock-Based Compensation Expense

 

		Three months ended						Nine months ended
		September 30,						September 30,
(Millions)		2019			2018			2019			2018
Cost of sales		$	8		$	8		$	39		$	40
Selling, general and administrative expenses			33			35			151			177
Research, development and related expenses			7			7			40			41
Stock-based compensation expenses		$	48		$	50		$	230		$	258
Income tax benefits		$	(12)		$	(20)		$	(120)		$	(137)
Stock-based compensation expenses (benefits), net of tax		$	36		$	30		$	110		$	121

 

Stock Option Program

 

The following table summarizes stock option activity during the nine months ended September 30, 2019:

 

							Weighted
							Average
				Weighted			Remaining		Aggregate
		Number of		Average			Contractual		Intrinsic Value
(Options in thousands)		Options		Exercise Price			Life (months)		(millions)
Under option -
January 1		34,569		$	138.98
Granted:
Annual		3,457			200.80
Exercised		(3,390)			90.13
Forfeited		(96)			198.89
September 30		34,540		$	149.80		66		$	910
Options exercisable
September 30		27,295		$	135.36		56		$	910

 

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, 2019, there was $79 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 22 months. The total intrinsic values of stock options exercised were $368 million and $411 million during the nine months ended September 30, 2019 and 2018, respectively. Cash received from options exercised was $304 million and $270 million for the nine months ended September 30, 2019 and 2018, respectively. The Company's actual tax benefits realized for the tax deductions related to the exercise of employee stock options were $77 million and $87 million for the nine months ended September 30, 2019 and 2018, respectively.

 

For the primary 2019 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

 

		Annual
		2019
Exercise price		$	201.12
Risk-free interest rate			2.6	%
Dividend yield			2.5	%
Expected volatility			20.4	%
Expected life (months)			79
Black-Scholes fair value		$	34.19

 

Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. For the 2019 annual grant date, the Company estimated the expected volatility based upon the following three volatilities of 3M stock: the median of the term of the expected life rolling volatility; the median of the most recent term of the expected life volatility; and the implied volatility on the grant date. The expected term assumption is based on the weighted average of historical grants.

 

Restricted Stock and Restricted Stock Units

 

The following table summarizes restricted stock and restricted stock unit activity during the nine months ended September 30, 2019:

 

				Weighted
				Average
		Number of		Grant Date
(Shares in thousands)		Shares		Fair Value
Nonvested balance -
As of January 1		1,789		$	180.02
Granted
Annual		564			200.41
Other		13			181.09
Vested		(686)			148.24
Forfeited		(50)			190.88
As of September 30		1,630		$	200.12

 

As of September 30, 2019, there was $90 million of compensation expense that has yet to be recognized related to non-vested restricted stock and restricted stock units. This expense is expected to be recognized over the remaining weighted-average vesting period of 23 months. The total fair value of restricted stock and restricted stock units that vested during the nine months ended September 30, 2019 and 2018 was $136 million and $154 million, respectively. The Company's actual tax benefits realized for the tax deductions related to the vesting of restricted stock and restricted stock units was $26 million and $29 million for the nine months ended September 30, 2019 and 2018, 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 no 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 no 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 2019 performance criteria for these performance shares (organic volume growth, return on invested capital, free cash flow conversion, and earnings 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 performance share 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.

 

The following table summarizes performance share activity during the nine months ended September 30, 2019:

 

				Weighted
				Average
		Number of		Grant Date
(Shares in thousands)		Shares		Fair Value
Undistributed balance -
As of January 1		562		$	188.96
Granted		162			207.49
Distributed		(210)			162.16
Performance change		(72)			206.51
Forfeited		(22)			209.93
As of September 30		420		$	205.34

 

As of September 30, 2019, there was $20 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 19 months. The total fair value of performance shares that were distributed were $45 million and $48 million for the nine months ended September 30, 2019 and 2018, respectively. The Company's actual tax benefits realized for the tax deductions related to the distribution of performance shares were $9 million and $11 million for the nine months ended September 30, 2019 and 2018, respectively.

 

NOTE 17.  Business Segments

 

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 four business segments: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. 3M's four 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 operating income information shown. The difference between operating income and pre-tax income relates to other expense (income), which is not allocated to business segments. Further information about which is included in Note 6.

 

Effective in the second quarter of 2019, to enable the Company to better serve global customers and markets, the Company made the following changes to its business segments:

 

Realignment of the Company's business segments from five to four 

 

The Company realigned its former five business segments into four: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. Existing divisions were largely realigned to this new structure. In addition, certain retail auto care product lines formerly in the Automotive Aftermarket Division (now within the Safety and Industrial business segment) were moved to the Construction and Home Improvement Division (within the Consumer business segment). Also, product lines relating to the refrigeration filtration business, formerly included in the Separation and Purification Sciences Division (now within the Health Care business segment) were moved to Other Safety and Industrial (within the Safety and Industrial business segment). 3M business segment reporting measures include dual credit to business segments for certain sales and operating income. Dual credit, which is based on which business segment provides customer account activity with respect to a particular product sold in a specific country, was reduced as a result of the closer alignment between customer account activity and their respective markets. The four business segments are as follows:

Safety and Industrial: This segment includes businesses that serve the global industrial, electrical and safety markets. This business segment consists of personal safety, adhesives and tapes, abrasives, closure and masking systems, electrical markets, automotive aftermarket, and roofing granules. This segment also includes the Communication Markets Division (which was substantially sold in 2018) and the refrigeration filtration product lines (within Other Safety and Industrial).

Transportation and Electronics: This segment includes businesses that serve global transportation and electronic original equipment manufacturer (OEM) customers. This business segment consists of electronics (display materials and systems, electronic materials solutions), automotive and aerospace, commercial solutions, advanced materials, and transportation safety.

Health Care: This business segment serves the global healthcare industry and includes medical solutions, oral care, separation and purification sciences, health information systems, drug delivery systems, and food safety.

Consumer: This business serves global consumers and consists of home improvement, stationery and office supplies, home care, and consumer health care. This segment also includes, within the Construction and Home Improvement Division, certain retail auto care product lines.

 

 

In addition, as part of 3M's continuing effort to improve the alignment of its businesses around markets and customers, the Company made the following changes, effective in the first quarter of 2019, and other revisions impacting business segment reporting:

 

Continued alignment of customer account activity

·      As part of 3M's regular customer-focus initiatives, the Company realigned certain customer account activity ("sales district") to correlate with the primary divisional product offerings in various countries and reduce complexity for customers when interacting with multiple 3M businesses. This largely impacted the amount of dual credit certain business segments receive as a result of sales district attribution. 3M business segment reporting measures include dual credit to business segments for certain sales and operating income. This dual credit is based on which business segment provides customer account activity with respect to a particular product sold in a specific country.

 

Creation of Closure and Masking Systems Division and Medical Solutions Division

·      3M created the Closure and Masking Systems Division, which combines the masking tape, packaging tape and personal care portfolios formerly within Industrial Adhesives and Tapes Division in the former Industrial business segment into a separate division also within the former Industrial business segment. 3M created the Medical Solutions Division in the Health Care business segment, which combines the former Critical and Chronic Care Division and Infection Prevention Division (which were also both within the Health Care business segment).

 

Additional actions impacting business segment reporting

·      The business associated with certain safety products sold through retail channels in the Asia Pacific region was realigned from the Personal Safety Division within the former Safety and Graphics business segment to the Construction and Home Improvement Division within the Consumer business segment. In addition, certain previously non-allocated costs related to manufacturing and technology of centrally managed material resource centers of expertise within Corporate and Unallocated are now reflected as being allocated to the business segments.

 

The financial information presented herein reflects the impact of the preceding changes for all periods presented.

 

Business Segment Information

 

		Three months ended						Nine months ended
		September 30,						September 30,
(Millions)		2019			2018			2019			2018
Net Sales
Safety and Industrial		$	2,849		$	3,021		$	8,796		$	9,542
Transportation and Electronics			2,503			2,619			7,312			7,665
Health Care			1,721			1,643			5,290			5,118
Consumer			1,324			1,302			3,821			3,819
Corporate and Unallocated			28			35			98			47
Elimination of Dual Credit			(434)			(468)			(1,292)			(1,371)
Total Company		$	7,991		$	8,152		$	24,025		$	24,820
Operating Income
Safety and Industrial		$	765		$	697		$	2,062		$	2,753
Transportation and Electronics			631			726			1,746			2,051
Health Care			459			475			1,406			1,443
Consumer			308			300			809			811
Corporate and Unallocated			(40)			(57)			(858)			(1,293)
Elimination of Dual Credit			(112)			(125)			(316)			(341)
Total Company		$	2,011		$	2,016		$	4,849		$	5,424

 

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. Corporate and Unallocated also includes sales, costs, and income from contract manufacturing, transition services and other arrangements with the acquirer of all of the Communication Markets Division following its divestiture in 2018. Because this category includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.

 

3M business segment reporting measures include dual credit to business segments for certain sales and related operating income. Management evaluates each of its four business segments based on net sales and operating income performance, including dual credit reporting to further incentivize 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 is provided by a different business segment. This additional dual credit is largely reflected at the division level. For example, privacy screen protection products are primarily sold by the Display Materials and Systems Division within the Transportation and Electronics business segment; however, certain sales districts within the Consumer business segment provide the customer account activity for sales of the product to particular customers. In this example, the non-primary selling segment (Consumer) would also receive credit for the associated net sales initiated through 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 in total are unchanged.