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Leases | 3 Months Ended
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Mar. 31, 2019
Leases |
Leases | 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 |
(Millions) |  | March 31, 2019 |
Operating lease cost |  | $ | 72 |
Finance lease cost: |  |  |  |
Amortization of assets |  |  | 4 |
Interest on lease liabilities |  |  | — |
Variable lease cost |  |  | 20 |
Total net lease cost |  | $ | 96 |
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 |  | March 31, 2019 |
Operating leases: |  |  |  |  |  |
Operating lease right of use assets |  | Operating lease right of use assets |  | $ | 797 |
Current operating lease liabilities |  | Operating lease liabilities - current |  | $ | 255 |
Noncurrent operating lease liabilities |  | Operating lease liabilities |  |  | 531 |
Total operating lease liabilities |  |  |  | $ | 786 |
Finance leases: |  |  |  |  |  |
Property and equipment, at cost |  | Property, plant and equipment |  | $ | 191 |
Accumulated amortization |  | Property, plant and equipment (accumulated depreciation) |  |  | (89) |
Property and equipment, net |  |  |  | $ | 102 |
Current obligations of finance leases |  | Other current liabilities |  | $ | 16 |
Finance leases, net of current obligations |  | Other liabilities |  |  | 84 |
Total finance lease liabilities |  |  |  | $ | 100 |
Weighted average remaining lease term (in years): |  |  |  |  |  |
Operating leases |  |  |  |  | 4.7 |
Finance leases |  |  |  |  | 8.5 |
Weighted average discount rate: |  |  |  |  |  |
Operating leases |  |  |  |  | 3.0 | %
Finance leases |  |  |  |  | 4.9 | %
Supplemental cash flow and other information related to leases is as follows:
|  | Three months ended |
(Millions) |  | March 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |
Operating cash flows from operating leases |  | $ | 75 |
Operating cash flows from finance leases |  |  | 3 |
Financing cash flows from finance leases |  |  | — |
Right of use assets obtained in exchange for lease liabilities: |  |  |  |
Operating leases |  |  | 48 |
Finance leases |  |  | 9 |
Gain on sale leaseback transactions, net |  |  | — |
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. 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:
|  | March 31, 2019 |
(Millions) |  | Finance Leases |  | Operating Leases |
Remainder of 2019 |  | $ | 17 |  | $ | 209 |
2020 |  |  | 15 |  |  | 211 |
2021 |  |  | 11 |  |  | 137 |
2022 |  |  | 11 |  |  | 100 |
2023 |  |  | 11 |  |  | 71 |
After 2023 |  |  | 40 |  |  | 121 |
Total |  | $ | 105 |  | $ | 849 |
Less: Amounts representing interest |  |  | (5) |  |  | (63) |
Present value of future minimum lease payments |  |  | 100 |  |  | 786 |
Less: Current obligations |  |  | 16 |  |  | 255 |
Long-term obligations |  | $ | 84 |  | $ | 531 |
As of March 31, 2019, the Company has additional operating and finance lease commitments associated with real estate that have not yet commenced of approximately $143 million and $40 million, respectively. 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 |  |  |  |

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