Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2009

 

Commission file number: 1-3285

 

3M COMPANY

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

41-0417775

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

3M Center, St. Paul, Minnesota

 

55144

(Address of principal executive offices)

 

(Zip Code)

 

(651) 733-1110

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o (Do not check if a smaller reporting company)

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at March 31, 2009

Common Stock, $0.01 par value per share

 

694,383,904 shares

 

This document (excluding exhibits) contains 54 pages.

The table of contents is set forth on page 2.

The exhibit index begins on page 52.

 

 

 



Table of Contents

 

3M COMPANY

Form 10-Q for the Quarterly Period Ended March 31, 2009

TABLE OF CONTENTS

 

 

 

BEGINNING
PAGE

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1.

Financial Statements

 

 

 

 

 

 

 

Index to Financial Statements:

 

 

 

Consolidated Statement of Income

3

 

 

Consolidated Balance Sheet

4

 

 

Consolidated Statement of Cash Flows

5

 

 

Notes to Consolidated Financial Statements

 

 

 

Note 1.   Basis of Presentation

6

 

 

Note 2.   Acquisitions

9

 

 

Note 3.   Goodwill and Intangible Assets

9

 

 

Note 4.   Restructuring Actions and Exit Activities

11

 

 

Note 5.   Supplemental Equity and Comprehensive Income Information

13

 

 

Note 6.   Income Taxes

15

 

 

Note 7.   Marketable Securities

15

 

 

Note 8.   Pension and Postretirement Benefit Plans

17

 

 

Note 9.   Derivatives

17

 

 

Note 10. Fair Value Measurements

22

 

 

Note 11. Commitments and Contingencies

24

 

 

Note 12. Stock-Based Compensation

30

 

 

Note 13. Business Segments

32

 

 

Note 14. Review Report of Independent Registered Public Accounting Firm

33

 

 

Report of Independent Registered Public Accounting Firm

34

 

 

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

Index to Management’s Discussion and Analysis:

 

 

 

Overview

35

 

 

Results of Operations

37

 

 

Performance by Business Segment

39

 

 

Financial Condition and Liquidity

45

 

 

Forward-Looking Statements

48

 

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

49

 

 

 

 

 

ITEM 4.

Controls and Procedures

49

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

50

 

 

 

 

 

ITEM 1A.

Risk Factors

50

 

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

 

 

 

 

ITEM 3.

Defaults Upon Senior Securities

51

 

 

 

 

 

ITEM 4.

Submission of Matters to a Vote of Security Holders

51

 

 

 

 

 

ITEM 5.

Other Information

51

 

 

 

 

 

ITEM 6.

Exhibits

52

 

 

2


 


Table of Contents

 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended March 31, 2009

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

 

 

 

Three months ended

 

 

 

March 31

 

(Millions, except per share amounts)

 

2009

 

2008

 

Net sales

 

$

5,089

 

$

6,463

 

Operating expenses

 

 

 

 

 

Cost of sales

 

2,772

 

3,336

 

Selling, general and administrative expenses

 

1,191

 

1,275

 

Research, development and related expenses

 

323

 

351

 

Total operating expenses

 

4,286

 

4,962

 

Operating income

 

803

 

1,501

 

 

 

 

 

 

 

Interest expense and income

 

 

 

 

 

Interest expense

 

55

 

55

 

Interest income

 

(11

)

(30

)

Total interest expense (income)

 

44

 

25

 

 

 

 

 

 

 

Income before income taxes

 

759

 

1,476

 

Provision for income taxes

 

229

 

470

 

Net income including noncontrolling interest

 

$

530

 

$

1,006

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

12

 

18

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

518

 

$

988

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding - basic

 

693.5

 

706.5

 

Earnings per share attributable to 3M common shareholders - basic

 

$

0.75

 

$

1.40

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding - diluted

 

695.9

 

717.2

 

Earnings per share attributable to 3M common shareholders - diluted

 

$

0.74

 

$

1.38

 

 

 

 

 

 

 

Cash dividends paid per 3M common share

 

$

0.51

 

$

0.50

 

 

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

 

3



Table of Contents

 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

 

 

Mar. 31

 

Dec. 31

 

(Dollars in millions, except per share amount)

 

2009

 

2008

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,632

 

$

1,849

 

Marketable securities - current

 

247

 

373

 

Accounts receivable - net

 

3,099

 

3,195

 

Inventories

 

 

 

 

 

Finished goods

 

1,315

 

1,505

 

Work in process

 

772

 

851

 

Raw materials and supplies

 

573

 

657

 

Total inventories

 

2,660

 

3,013

 

Other current assets

 

1,009

 

1,168

 

Total current assets

 

8,647

 

9,598

 

 

 

 

 

 

 

Marketable securities - non-current

 

253

 

352

 

Investments

 

105

 

111

 

Property, plant and equipment

 

18,562

 

18,812

 

Less: Accumulated depreciation

 

(11,818

)

(11,926

)

Property, plant and equipment - net

 

6,744

 

6,886

 

Goodwill

 

5,533

 

5,753

 

Intangible assets - net

 

1,402

 

1,398

 

Prepaid pension benefits

 

38

 

36

 

Other assets

 

1,616

 

1,659

 

Total assets

 

$

24,338

 

$

25,793

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

Short-term borrowings and current portion of long-term debt

 

$

946

 

$

1,552

 

Accounts payable

 

1,124

 

1,301

 

Accrued payroll

 

564

 

644

 

Accrued income taxes

 

314

 

350

 

Other current liabilities

 

1,780

 

1,992

 

Total current liabilities

 

4,728

 

5,839

 

 

 

 

 

 

 

Long-term debt

 

5,088

 

5,166

 

Pension and postretirement benefits

 

2,811

 

2,847

 

Other liabilities

 

1,570

 

1,637

 

Total liabilities

 

$

14,197

 

$

15,489

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

3M Company shareholders’ equity:

 

 

 

 

 

Common stock par value, $.01 par value, 944,033,056 shares issued

 

$

9

 

$

9

 

Additional paid-in capital

 

3,086

 

3,006

 

Retained earnings

 

22,369

 

22,227

 

Treasury stock, at cost; 249,649,152 shares at Mar. 31, 2009; 250,489,769 shares at Dec. 31, 2008

 

(11,618

)

(11,676

)

Unearned compensation

 

(18

)

(40

)

Accumulated other comprehensive income (loss)

 

(4,091

)

(3,646

)

Total 3M Company shareholders’ equity

 

9,737

 

9,880

 

Noncontrolling interest

 

404

 

424

 

Total equity

 

10,141

 

10,304

 

Total liabilities and equity

 

$

24,338

 

$

25,793

 

 

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

 

4



Table of Contents

 

3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

Three months ended

 

 

 

March 31

 

(Dollars in millions)

 

2009

 

2008

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income including noncontrolling interest

 

$

530

 

$

1,006

 

Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

271

 

268

 

Company pension and postretirement contributions

 

(123

)

(49

)

Company pension and postretirement expense

 

42

 

28

 

Stock-based compensation expense

 

83

 

43

 

Deferred income taxes

 

46

 

3

 

Excess tax benefits from stock-based compensation

 

 

(5

)

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

8

 

(264

)

Inventories

 

288

 

(86

)

Accounts payable

 

(165

)

20

 

Accrued income taxes

 

89

 

70

 

Product and other insurance receivables and claims

 

7

 

25

 

Other - net

 

(381

)

(62

)

Net cash provided by operating activities

 

695

 

997

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Purchases of property, plant and equipment (PP&E)

 

(244

)

(298

)

Proceeds from sale of PP&E and other assets

 

15

 

4

 

Acquisitions, net of cash acquired

 

(9

)

(16

)

Purchases of marketable securities and investments

 

(124

)

(622

)

Proceeds from sale of marketable securities and investments

 

241

 

250

 

Proceeds from maturities of marketable securities

 

103

 

218

 

Net cash used in investing activities

 

(18

)

(464

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Change in short-term debt - net

 

(512

)

1,211

 

Repayment of debt (maturities greater than 90 days)

 

(86

)

(89

)

Purchases of treasury stock

 

 

(510

)

Reissuances of treasury stock

 

34

 

79

 

Dividends paid to stockholders

 

(354

)

(353

)

Distributions to noncontrolling interest

 

 

(12

)

Excess tax benefits from stock-based compensation

 

 

5

 

Other - net

 

11

 

(16

)

Net cash provided by (used in) financing activities

 

(907

)

315

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

13

 

(17

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(217

)

831

 

Cash and cash equivalents at beginning of year

 

1,849

 

1,896

 

Cash and cash equivalents at end of period

 

$

1,632

 

$

2,727

 

 

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

 

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3M Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1.  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.

 

Certain amounts presented for prior periods have been reclassified to conform to the current year presentation. As discussed later in Note 1, effective January 1, 2009, 3M adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,”  and FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).”  These accounting pronouncements, which related to noncontrolling interest and convertible debt instruments, respectively, both required retrospective application. In addition, 3M reclassified balance sheet amounts related to life insurance policies from investments to other assets; reclassified current and non-current balance sheet amounts related to income taxes between deferred income taxes and accrued income taxes; and reclassified amounts between unearned compensation and additional paid-in capital, both of which are within stockholders’ equity.

 

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its 2008 Annual Report on Form 10-K. However, as described in Note 13, during the first quarter of 2009, the Company effected certain business segment realignments, which included both product moves between business segments and reporting changes related to revised U.S. performance measures. The Company has begun to report comparative results under the new business segment structure with the filing of this Quarterly Report on Form 10-Q. In the second quarter of 2009, the Company plans to revise its business segment disclosures in its 2008 Annual Report on Form 10-K via a Form 8-K to reflect these impacts.

 

Significant Accounting Policies

 

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 Management Stock Ownership Program (MSOP) options outstanding were not included in the computation of diluted earnings per share attributable to 3M common shareholders because they would not have had a dilutive effect (71.9 million average options for the three months ended March 31, 2009; 28.1 million average options for the three months ended March 31, 2008). The conditions for conversion related to the Company’s “Convertible Notes” were not met (refer to 3M’s 2008 Annual Report on Form 10-K, Note 10 to the Consolidated Financial Statements, for more detail). If the conditions for conversion are met, 3M may choose to pay in cash and/or common stock; however, if this occurs, the Company has the intent and ability to settle this debt security in cash. Accordingly, there was no impact on diluted earnings per share attributable to 3M common shareholders. The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 

 

 

Three months ended

 

 

 

 

 

 

 

March 31

 

 

 

 

 

(Amounts in millions, except per share amounts)

 

2009

 

2008

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

518

 

$

988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding - basic

 

693.5

 

706.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

2.4

 

10.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding - diluted

 

695.9

 

717.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders - basic

 

$

0.75

 

$

1.40

 

 

 

 

 

Earnings per share attributable to 3M common shareholders - diluted

 

0.74

 

1.38

 

 

 

 

 

 

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New Accounting Pronouncements

 

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” SFAS No. 157 established a single definition of fair value and a framework for measuring fair value, set out a fair value hierarchy to be used to classify the source of information used in fair value measurements, and required disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. This statement applies under other accounting pronouncements that require or permit fair value measurements. As disclosed in the notes included in its 2008 Annual Report on Form 10-K, 3M adopted SFAS No. 157, as amended by associated FASB Staff Positions (FSPs), beginning January 1, 2008 on a prospective basis. One of these FSPs, FSP No. 157-2, deferred the effective date for one year relative to nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis.  This deferral applied to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or nonfinancial long-lived asset groups measured at fair value for an impairment assessment.  These remaining aspects of SFAS No. 157 were adopted by the Company prospectively beginning January 1, 2009 and did not have a material impact on 3M’s consolidated results of operations or financial condition.  Refer to Note 10 for additional disclosures of assets and liabilities that are measured at fair value on a nonrecurring basis as a result of this adoption.

 

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which changed the accounting for business acquisitions. SFAS No. 141R, as amended by FSP No. 141-1 issued in April 2009, requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. For 3M, SFAS No. 141R, as amended, was effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. This standard had no immediate impact upon adoption by 3M, and was applied to the business combinations disclosed in Note 2 that were completed post-2008 and to applicable adjustments to acquired entity deferred tax items occurring after December 31, 2008.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” which established new standards governing the accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability (as was previously the case); that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements. For 3M, SFAS No. 160 was effective beginning January 1, 2009. The provisions of the standard were applied to all NCIs prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented. As a result, upon adoption, 3M retroactively reclassified the “Minority interest in subsidiaries” balance previously included in the “Other liabilities” section of the consolidated balance sheet to a new component of equity with respect to NCIs in consolidated subsidiaries. The adoption also impacted certain captions previously used on the consolidated statement of income, largely identifying net income including NCI and net income attributable to 3M.  Additional disclosures required by this standard are also included in Note 5. The adoption of SFAS No. 160 did not have a material impact on 3M’s consolidated financial position or results of operations.

 

In December 2007, the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue No. 07-1, “Accounting for Collaborative Arrangements” that discusses how parties to a collaborative arrangement (which does not establish a legal entity within such arrangement) should account for various activities. The consensus indicates that costs incurred and revenues generated from transactions with third parties (i.e. parties outside of the collaborative arrangement) should be reported by the collaborators on the respective line items in their income statements pursuant to EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent.” Additionally, the consensus provides that income statement characterization of payments between the participants in a collaborative arrangement should be based upon existing authoritative pronouncements; analogy to such pronouncements if not within their scope; or a reasonable, rational, and consistently applied accounting policy election. EITF Issue No. 07-1 was effective for 3M beginning January 1, 2009 and applied retrospectively to all periods presented for collaborative arrangements existing as of the date of adoption. The adoption of EITF Issue No. 07-1 did not have a material impact on 3M’s consolidated results of operations or financial condition.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which requires additional disclosures about an entity’s strategies and objectives for using derivative instruments; the

 

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location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities;” and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. Certain disclosures are also required with respect to derivative features that are credit-risk-related. SFAS No. 161 was effective for 3M beginning January 1, 2009 on a prospective basis. The additional disclosures required by this standard are included in Note 9.

 

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amended the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets.” This guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. Under FSP No. FAS 142-3, entities estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension. For 3M, this FSP required certain additional disclosures beginning January 1, 2009 (which are included in Notes 2 and 3) and application to useful life estimates prospectively for intangible assets acquired after December 31, 2008. The adoption of this standard did not have a material impact on 3M’s consolidated results of operations or financial condition.

 

In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).” This FSP applies to convertible debt securities that, upon conversion by the holder, may be settled by the issuer fully or partially in cash (rather than settled fully in shares) and specifies that issuers of such instruments should separately account for the liability and equity components in a manner that reflects the issuer’s nonconvertible debt borrowing rate when related interest cost is recognized. This FSP was effective for 3M beginning January 1, 2009 with retrospective application to all periods presented. This standard impacted the Company’s “Convertible Notes” (refer to Note 10  to the Consolidated Financial Statements included in 3M’s 2008 Annual Report on Form 10-K for more detail), and required that additional interest expense essentially equivalent to the portion of issuance proceeds be retroactively allocated to the instrument’s equity component and be recognized over the period from the Convertible Notes’ issuance on November 15, 2002 through November 15, 2005 (the first date holders of these Notes had the ability to put them back to 3M). 3M adopted this standard in January 2009.  Its retrospective application had no impact on results of operations for periods following 2005, but on post-2005 consolidated balance sheets, it resulted in an increase of approximately $22 million in previously reported opening additional paid in capital and a corresponding decrease in previously reported opening retained earnings.

 

In November 2008, the FASB ratified the EITF consensus on Issue No. 08-6, “Equity Method Investment Accounting Considerations” (EITF 08-6) which addresses certain effects of SFAS Nos. 141R and 160 on an entity’s accounting for equity-method investments. The consensus indicates, among other things, that transaction costs for an investment should be included in the cost of the equity-method investment (and not expensed) and shares subsequently issued by the equity-method investee that reduce the investor’s ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through earnings. For 3M, EITF 08-6 was effective for transactions occurring after December 31, 2008. The adoption of this standard did not have a material impact on 3M’s consolidated results of operations or financial condition.

 

In November 2008, the FASB ratified the EITF consensus on Issue No. 08-7, “Accounting for Defensive Intangible Assets” (EITF 08-7). The consensus addresses the accounting for an intangible asset acquired in a business combination or asset acquisition that an entity does not intend to use or intends to hold to prevent others from obtaining access (a defensive intangible asset). Under EITF 08-7, a defensive intangible asset needs to be accounted as a separate unit of accounting and would be assigned a useful life based on the period over which the asset diminishes in value. For 3M, EITF 08-7 was effective for transactions occurring after December 31, 2008. The Company considered this standard in terms of intangible assets acquired in business combinations or asset acquisitions that closed after December 31, 2008.

 

In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”. This FSP requires additional disclosures about plan assets for sponsors of defined benefit pension and postretirement plans including expanded information regarding investment strategies, major categories of plan assets, and concentrations of risk within plan assets. Additionally, this FSP requires disclosures similar to those required under SFAS No. 157 with respect to the fair value of plan assets such as the inputs and valuation techniques used to measure fair value and information with respect to classification of plan assets in terms of the hierarchy of the source of information used to determine their value (see Note 10). The disclosures under this FSP are required for annual periods ending after December 15, 2009. 3M is currently evaluating the requirements of these additional disclosures.

 

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Values When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”  This FSP

 

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provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly declined and (2) identifying transactions that are not orderly. The FSP also amends certain disclosure provisions of SFAS No. 157 to require, among other things, disclosures in interim periods of the inputs and valuation techniques used to measure fair value. For 3M, this FSP is effective prospectively beginning April 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on 3M’s consolidated results of operations or financial condition.

 

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP 115-2). This FSP modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The FSP also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the FSP, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). The FSP further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. FSP 115-2 requires entities to initially apply the provisions of the standard to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulated other comprehensive income. For 3M, this FSP is effective April 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on 3M’s consolidated results of operations or financial condition.

 

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This FSP essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the FSP requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. For 3M, these additional disclosures will be required beginning with the quarter ending June 30, 2009. 3M is currently evaluating the requirements of these additional disclosures.

 

NOTE 2.  Acquisitions

 

During the three months ended March 31, 2009, 3M completed two business combinations. The purchase price paid for these business combinations (net of cash acquired) and certain acquisition costs paid for pre-2009 business combinations during the three months ended March 31, 2009 aggregated to $9 million.

 

(1) In January 2009, 3M (Safety, Security and Protection Services Business) purchased 100 percent of the outstanding shares of Alltech Solutions, a provider of water pipe rehabilitation services based in Moncton, New Brunswick, Canada.

 

(2) In February 2009, 3M (Industrial and Transportation Business) purchased the assets of Compac Corp.’s pressure sensitive adhesive tape business, a global leader in providing custom solutions in coating, laminating and converting flexible substrates headquartered in Hackettstown, N.J.

 

Purchased identifiable intangible assets totaled $6 million and will be amortized on a straight-line basis over a weighted-average life of 6 years (lives ranging from 1 to 19 years). Acquired identifiable intangible assets for which significant assumed renewals or extensions of underlying arrangements impacted the determination of their useful lives were not material. Pro forma information related to the above acquisitions is not included because the impact on the Company’s consolidated results of operations is not considered to be material.

 

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

 

NOTE 3.  Goodwill and Intangible Assets

 

As discussed in Note 13, 3M made certain changes to its business segments effective in the first quarter of 2009, which resulted in no material changes to the goodwill balances by business segment. For those changes that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact to reporting units. SFAS No. 142 requires that goodwill be tested for impairment at least annually and when reporting units are changed. During the first quarter of 2009, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.

 

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Purchased goodwill related to the two acquisitions which closed in the first three months of 2009 totaled $3 million, $1 million of which is deductible for tax purposes. The acquisition activity in the following table also includes the impacts of adjustments to the preliminary allocation of purchase price and certain acquisition costs for pre-2009 acquisitions, which reduced goodwill by $55 million. The amounts in the “Translation and other” column in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balance by business segment as of December 31, 2008 and March 31, 2009, follow:

 

Goodwill

 

 

 

Dec. 31,

 

 

 

 

 

Mar. 31,

 

 

 

 

 

2008

 

Acquisition

 

Translation

 

2009

 

 

 

(Millions)

 

Balance

 

activity

 

and other

 

Balance

 

 

 

Industrial and Transportation

 

$

1,692

 

$

(5

)

$

(46

)

$

1,641

 

 

 

Health Care

 

988

 

(4

)

(40

)

944

 

 

 

Consumer and Office

 

155

 

1

 

(21

)

135

 

 

 

Safety, Security and Protection Services

 

1,202

 

6

 

(16

)

1,192

 

 

 

Display and Graphics

 

1,042

 

(48

)

(19

)

975

 

 

 

Electro and Communications

 

674

 

(2

)

(26

)

646

 

 

 

Total Company

 

$

5,753

 

$

(52

)

$

(168

)

$

5,533

 

 

 

 

Acquired Intangible Assets

 

For the three months ended March 31, 2009, acquired intangible asset activity through business combinations increased balances by $71 million, of which approximately $65 million relates to adjustments to preliminary allocations of purchase price on pre-2009 acquisitions. The carrying amount and accumulated amortization of acquired intangible assets as of March 31, 2009, and December 31, 2008, follow:

 

 

 

Mar. 31

 

Dec. 31

 

 

 

 

 

(Millions)

 

2009

 

2008

 

 

 

 

 

Patents

 

$

454

 

$

475

 

 

 

 

 

Other amortizable intangible assets (primarily tradenames and customer related intangibles)

 

1,444

 

1,381

 

 

 

 

 

Non-amortizable intangible assets (tradenames)

 

131

 

130

 

 

 

 

 

Total gross carrying amount

 

$

2,029

 

$

1,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization — patents

 

(318

)

(318

)

 

 

 

 

Accumulated amortization — other

 

(309

)

(270

)

 

 

 

 

Total accumulated amortization

 

(627

)

(588

)

 

 

 

 

Total intangible assets — net

 

$

1,402

 

$

1,398

 

 

 

 

 

 

Amortization expense for acquired intangible assets for the three-months ended March 31, 2009 and 2008 follows:

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

Mar. 31

 

 

 

 

 

 

 

 

 

(Millions)

 

2009

 

2008

 

 

 

 

 

 

 

 

 

Amortization expense

 

$

39

 

$

24

 

 

 

 

 

 

 

 

 

 

The table below shows expected amortization expense for acquired intangible assets recorded as of March 31, 2009:

 

 

 

Last 3

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters

 

 

 

 

 

 

 

 

 

After

 

(Millions)

 

2009

 

2010

 

2011

 

2012

 

2013

 

2013

 

Amortization expense

 

$

112

 

$

141

 

$

133

 

$

126

 

$

121

 

$

638

 

 

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

 

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NOTE 4.  Restructuring Actions and Exit Activities

 

Restructuring actions and exit activities generally include significant actions involving employee-related severance charges, contract termination costs, and impairment of assets associated with such actions.

 

Employee-related severance charges are largely based upon distributed employment policies and substantive severance plans and are reflected in the quarter in which management approves the associated actions. Severance amounts for which affected employees were required to render service in order to receive benefits at their termination dates were measured at the date such benefits were communicated to the applicable employees and recognized as expense over the employees’ remaining service periods.

 

Contract termination and other charges primarily reflect costs to terminate a contract before the end of its term (measured at fair value at the time the Company provided notice to the counterparty) or costs that will continue to be incurred under the contract for its remaining term without economic benefit to the Company. Asset impairment charges related to intangible assets and property, plant and equipment reflect the excess of the assets’ carrying values over their fair values.

 

The following provides information concerning the Company’s first-quarter 2009 restructuring actions and fourth-quarter 2008 restructuring actions.

 

2008 and 2009 Restructuring Actions:

 

During the fourth quarter of 2008 and the first quarter of 2009, management approved and committed to undertake certain restructuring actions. Due to the rapid decline in global business activity in the fourth quarter of 2008 and into the first quarter of 2009, 3M aggressively reduced its cost structure and rationalized several facilities, including manufacturing, technical and office facilities. These actions included all geographies, with particular attention in the developed areas of the world that have and are experiencing large declines in business activity, and included the following:

 

·                  During the fourth quarter of 2008, 3M announced the elimination of more than 2,400 positions.  Of these employment reductions, about 31 percent were in the United States, 29 percent in Europe, 24 percent in Latin America and Canada, and 16 percent in the Asia Pacific area. These restructuring actions resulted in a fourth-quarter 2008 pre-tax charge of $229 million, with $186 million for employee-related items/benefits and other, and $43 million related to fixed asset impairments. The preceding charges were recorded in cost of sales ($84 million), selling, general and administrative expenses ($135 million), and research, development and related expenses ($10 million).  Cash payments in 2008 related to this restructuring were not material. Refer to 3M’s Annual Report on Form 10-K, Note 4, for additional information on these 2008 restructuring actions.

 

·                  During the first quarter of 2009, 3M announced the elimination of approximately 1,200 positions. Of these employment reductions, about 43 percent were in the United States, 36 percent in Latin America, 16 percent in Europe and 5 percent in the Asia Pacific area. These restructuring actions resulted in a first-quarter 2009 pre-tax charge of $67 million, with $61 million for employee-related items/benefits and $6 million related to fixed asset impairments. The preceding charges were recorded in cost of sales ($17 million), selling, general and administrative expenses ($47 million), and research, development and related expenses ($3 million).

 

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Components of these restructuring actions and a roll-forward of associated balances are summarized as follows:

 

 

 

Employee-

 

 

 

 

 

 

 

Related Items/

 

Asset

 

 

 

(Millions)

 

Benefits

 

Impairments

 

Total

 

 

 

 

 

 

 

 

 

Expense incurred in fourth quarter 2008

 

$

186

 

$

43

 

$

229

 

Non-cash charges in 2008

 

$

 

$

(43

)

$

(43

)

 

 

 

 

 

 

 

 

Expense incurred in first quarter 2009:

 

 

 

 

 

 

 

Industrial and Transportation

 

22

 

1

 

23

 

Health Care

 

4

 

 

4

 

Consumer and Office

 

2

 

 

2

 

Safety, Security and Protection Services

 

4

 

 

4

 

Display and Graphics

 

1

 

5

 

6

 

Electro and Communications

 

3

 

 

3

 

Corporate and Unallocated

 

25

 

 

25

 

First quarter 2009 expense

 

$

61

 

$

6

 

$

67

 

 

 

 

 

 

 

 

 

Non-cash charges in 2009

 

$

 

(6

)

$

(6

)

Cash payments

 

$

(107

)

 

$

(107

)

Accrued liability balance at Mar. 31, 2009

 

$

140

 

$

 

$

140

 

 

The majority of the remaining employee related items and benefits associated with these actions are expected to be paid out in cash through the remainder of 2009.

 

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Table of Contents

 

NOTE 5.  Supplemental Equity and Comprehensive Income Information

 

Consolidated Statement of Changes in Equity

 

3M Company and Subsidiaries

Three months ended Mar. 31, 2009

 

 

 

 

 

3M Company Shareholders

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Comprehensive

 

Non-

 

 

 

 

 

Paid-in

 

Retained

 

Treasury

 

Unearned

 

Income

 

controlling

 

(Millions)

 

Total

 

Capital

 

Earnings

 

Stock

 

Compensation

 

(Loss)

 

Interest

 

Balance at December 31, 2008

 

$

10,304

 

$

3,015

 

$

22,227

 

$

(11,676

)

$

(40

)

$

(3,646

)

$

424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

530

 

 

 

518

 

 

 

 

 

 

 

12

 

Cumulative translation adjustment

 

(452

)

 

 

 

 

 

 

 

 

(420

)

(32

)

Defined benefit pension and postretirement plans adjustment

 

(21

)

 

 

 

 

 

 

 

 

(21

)

 

 

Debt and equity securities - unrealized gain (loss)

 

1

 

 

 

 

 

 

 

 

 

1

 

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

(5

)

 

 

 

 

 

 

 

 

(5

)

 

 

Total comprehensive income

 

53

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(354

)

 

 

(354

)

 

 

 

 

 

 

 

 

Amortization of unearned compensation

 

22

 

 

 

 

 

 

 

22

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

80

 

80

 

 

 

 

 

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

36

 

 

 

(22

)

58

 

 

 

 

 

 

 

Balance at March 31, 2009

 

$

10,141

 

$

3,095

 

$

22,369

 

$

(11,618

)

$

(18

)

$

(4,091

)

$

404

 

 

Consolidated Statement of Changes in Equity

 

3M Company and Subsidiaries

Three months ended Mar. 31, 2008

 

 

 

 

 

3M Company Shareholders

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Comprehensive

 

Non-

 

 

 

 

 

Paid-in

 

Retained

 

Treasury

 

Unearned

 

Income

 

controlling

 

(Millions)

 

Total

 

Capital

 

Earnings

 

Stock

 

Compensation

 

(Loss)

 

Interest

 

Balance at December 31, 2007

 

$

12,072

 

$

2,798

 

$

20,295

 

$

(10,520

)

$

(79

)

$

(747

)

$

325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

1,006

 

 

 

988

 

 

 

 

 

 

 

18

 

Cumulative translation adjustment

 

387

 

 

 

 

 

 

 

 

 

361

 

26

 

Defined benefit pension and postretirement plans adjustment

 

31

 

 

 

 

 

 

 

 

 

31

 

 

 

Debt and equity securities - unrealized gain (loss)

 

4

 

 

 

 

 

 

 

 

 

4

 

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

(4

)

 

 

 

 

 

 

 

 

(4

)

 

 

Total comprehensive income

 

1,424

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(365

)

 

 

(353

)

 

 

 

 

 

 

(12

)

Amortization of unearned compensation

 

21

 

 

 

 

 

 

 

21

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

42

 

42

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(496

)

 

 

 

 

(496

)

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

94

 

 

 

(22

)

116

 

 

 

 

 

 

 

Balance at March 31, 2008

 

$

12,792

 

$

2,840

 

$

20,908

 

$

(10,900

)

$

(58

)

$

(355

)

$

357

 

 

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Table of Contents

 

Consolidated Statement of Comprehensive Income (Loss)

 

 

 

Three months ended March 31

 

 

 

(Millions)

 

2009

 

2008

 

 

 

Net income including noncontrolling interest

 

$

530

 

$

1,006

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(452

)

387

 

 

 

Defined benefit pension and postretirement plans adjustment

 

(21

)

31

 

 

 

Debt and equity securities, unrealized gain (loss)

 

1

 

4

 

 

 

Cash flow hedging instruments, unrealized gain (loss)

 

(5

)

(4

)

 

 

Total other comprehensive income (loss), net of tax

 

(477

)

418

 

 

 

Comprehensive income (loss) including noncontrolling interest

 

53

 

1,424

 

 

 

Comprehensive (income) loss attributable to noncontrolling interest

 

20

 

(44

)

 

 

Comprehensive income (loss) attributable to 3M

 

$

73

 

$

1,380

 

 

 

 

Accumulated Other Comprehensive Income (Loss) Attributable to 3M

 

 

 

Mar. 31,

 

Dec. 31,

 

 

 

(Millions)

 

2009

 

2008

 

 

 

Cumulative translation adjustment

 

$

(566

)

$

(146

)

 

 

Defined benefit pension and postretirement plans adjustment

 

(3,546

)

(3,525

)

 

 

Debt and equity securities, unrealized gain (loss)

 

(18

)

(19

)

 

 

Cash flow hedging instruments, unrealized gain (loss)

 

39

 

44

 

 

 

Total accumulated other comprehensive income (loss)

 

$

(4,091

)

$

(3,646

)

 

 

 

Components of Comprehensive Income (Loss) Attributable to 3M

 

 

 

Three-months ended Mar. 31,

 

 

 

(Millions)

 

2009

 

2008

 

 

 

Net income attributable to 3M

 

$

518

 

$

988

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation

 

(363

)

282

 

 

 

Tax effect

 

(57

)

79

 

 

 

Cumulative translation - net of tax

 

(420

)

361

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension and postretirement plans adjustment

 

(40

)

49

 

 

 

Tax effect

 

19

 

(18

)

 

 

Defined benefit pension and postretirement plans adjustment - net of tax

 

(21

)

31

 

 

 

 

 

 

 

 

 

 

 

Debt and equity securities, unrealized gain (loss)

 

2

 

7

 

 

 

Tax effect

 

(1

)

(3

)

 

 

Debt and equity securities, unrealized gain (loss) - net of tax

 

1

 

4

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments, unrealized gain (loss)

 

(11

)

(6

)

 

 

Tax effect

 

6

 

2

 

 

 

Cash flow hedging instruments, unrealized gain (loss) - net of tax

 

(5

)

(4

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss) attributable to 3M

 

$

73

 

$

1,380

 

 

 

 

Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income. 3M had no reclassification adjustments attributable to noncontrolling interest. As disclosed in Note 8, for the three months ended March 31, 2009, $36 million pre-tax ($23 million after tax) was reclassified to earnings from accumulated other comprehensive income attributable to 3M to pension and postretirement expense in the income statement. These pension and postretirement expense amounts are shown in the table in Note 8 as amortization of transition (asset) obligation, amortization of prior service cost (benefit) and amortization of net actuarial (gain) loss. Reclassifications to earnings from accumulated other comprehensive income for debt and equity securities, which primarily include marketable securities, were not material for the three-months ended March 31, 2009. Refer to Note 9 for a table that recaps pre-tax cash flow hedging instruments reclassifications. Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation do include impacts from items such as net investment hedge transactions.

 

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Table of Contents

 

NOTE 6.  Income Taxes

 

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002.

 

The Internal Revenue Service (IRS) completed its examination of the Company’s U.S. federal income tax returns for the years 2002 through 2004 in the first quarter of 2008. The outcome of the 2002 through 2004 audit cycle impacted the 2001 tax year, which was settled in the second quarter of 2008. Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2005 through 2008. It is anticipated that the IRS will complete its examination of the Company for these years by the end of the first quarter of 2010. As of March 31, 2009, the IRS has not proposed any significant adjustments to the Company’s tax positions. Currently, the Company is not able to reasonably estimate the amount by which the liability for unrecognized tax benefits will increase or decrease during the next 12 months as a result of the ongoing IRS audit. However, the Company does not anticipate any adjustments that would result in a material change to its financial position. Payments relating to any proposed assessments arising from the 2005 through 2007 audit may not be made until a final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also limited audit activity in several U.S. state and foreign jurisdictions. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2009 and December 31, 2008, respectively, are $343 million and $334 million.

 

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized in the consolidated statement of income on a gross basis approximately $3 million for the three months ended March 31, 2009, and for the three months ended March 31, 2008 the amount was not material. At March 31, 2009 and December 31, 2008, accrued interest and penalties in the consolidated balance sheet on a gross basis were $50 million and $47 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

 

NOTE 7.  Marketable Securities

 

The Company invests in agency securities, corporate securities, asset-backed securities, treasury securities and other securities. The following is a summary of amounts recorded on the Consolidated Balance Sheet for marketable securities (current and non-current).

 

 

 

March 31,

 

Dec. 31,

 

 

 

(Millions)

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Agency securities

 

$

105

 

$

180

 

 

 

Corporate securities

 

98

 

145

 

 

 

Asset-backed securities:

 

 

 

 

 

 

 

Credit cards related

 

19

 

 

 

 

Automobile loans related

 

3

 

24

 

 

 

Other

 

9

 

11

 

 

 

Asset-backed securities total

 

31

 

35

 

 

 

Other securities

 

13

 

13

 

 

 

 

 

 

 

 

 

 

 

Current marketable securities

 

$

247

 

$

373

 

 

 

 

 

 

 

 

 

 

 

Agency securities

 

$

92

 

$

200

 

 

 

Corporate securities

 

56

 

62

 

 

 

Treasury securities

 

53

 

12

 

 

 

Asset-backed securities:

 

 

 

 

 

 

 

Automobile loans related

 

25

 

25

 

 

 

Credit cards related

 

17

 

40

 

 

 

Other

 

10

 

11

 

 

 

Asset-backed securities total

 

52

 

76

 

 

 

Auction rate and other securities

 

 

2

 

 

 

 

 

 

 

 

 

 

 

Non-current marketable securities

 

$

253

 

$

352

 

 

 

 

 

 

 

 

 

 

 

Total marketable securities

 

$

500

 

$

725

 

 

 

 

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Classification of marketable securities as current or non-current is dependent upon management’s intended holding period, the security’s maturity date and liquidity considerations based on market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current. At March 31, 2009, gross unrealized losses totaled approximately $26 million (pre-tax), while gross unrealized gains totaled approximately $4 million (pre-tax). At December 31, 2008, gross unrealized losses totaled approximately $30 million (pre-tax), while gross unrealized gains were not material. Gross unrealized losses related to auction rate securities totaled $17 million and $16 million (pre-tax) as of March 31, 2009 and December 31, 2008, respectively. Gross realized gains and losses on sales or maturities of marketable securities for the first three months of 2009 and 2008 were not material. Cost of securities sold or reclassified use the first in, first out (FIFO) method. Since these marketable securities are classified as available-for-sale securities, changes in fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into earnings upon sale or “other-than-temporary” impairment.

 

3M has a diversified marketable securities portfolio of $500 million as of March 31, 2009. Within this portfolio, current and long-term asset-backed securities (estimated fair value of $83 million) are primarily comprised of interests in automobile loans and credit cards. At March 31, 2009, the asset-backed securities credit ratings were AAA or A-1+, with the exception of one security rated BBB with a fair market value of less than $2 million. Historically, 3M’s marketable securities portfolio included auction rate securities that represented interests in investment grade credit default swaps, however, these have been written down to zero as of March 31, 2009. Since the second half of 2007, these auction rate securities failed to auction due to sell orders exceeding buy orders. Liquidity for these auction-rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 7, 28, 35, or 90 days. The funds associated with failed auctions will not be accessible until a successful auction occurs or a buyer is found outside of the auction process. Based upon an analysis of “temporary” and “other-than-temporary” impairment factors, auction rate securities with an original par value of approximately $34 million were written-down to an estimated fair value of $1 million as of December 31, 2008 and zero as of March 31, 2009. There are $17 million (pre-tax) of temporary impairments associated with auction rate securities at March 31, 2009, which were recorded as unrealized losses within other comprehensive income. As of March 31, 2009, these investments have been in a loss position for approximately 18 months. 3M recorded “other-than-temporary” impairment charges that reduced pre-tax income by approximately $1 million in the first quarter of 2008. Refer to Note 10 for a table that reconciles the beginning and ending balances of auction rate securities.

 

3M reviews impairments associated with the above in accordance with Emerging Issues Task Force (EITF) 03-1 and FSP SFAS 115-1 and 124-1, “The Meaning of Other-Than-Temporary-Impairment and Its Application to Certain Investments,” as well as EITF 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets,” and related interpretations to determine the classification of the impairment as “temporary” or “other-than-temporary.” A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income component of equity. Such an unrealized loss does not reduce net income for the applicable accounting period because the loss is not viewed as other-than-temporary. The Company believes that a portion of the impairment of its auction rate securities investments is temporary and a portion is other-than-temporary. The factors evaluated to differentiate between temporary and other-than-temporary include the projected future cash flows, credit ratings actions, and assessment of the credit quality of the underlying collateral.

 

The balances at March 31, 2009 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.

 

 

 

March 31,

 

(Millions)

 

2009

 

 

 

 

 

Due in one year or less

 

$

176

 

Due after one year through three years

 

214

 

Due after three years through five years

 

97

 

Due after five years

 

13

 

 

 

 

 

Total marketable securities

 

$

500

 

 

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NOTE 8.  Pension and Postretirement Benefit Plans

 

Components of net periodic benefit cost and other supplemental information for the three months ended March 31 follow:

 

Benefit Plan Information

 

 

 

Three months ended March 31

 

 

 

Qualified and Non-qualified
Pension Benefits

 

Postretirement

 

 

 

United States

 

International

 

Benefits

 

(Millions)

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

46

 

$

48

 

$

24

 

$

31

 

$

13

 

$

13

 

Interest cost

 

155

 

149

 

56

 

66

 

24

 

26

 

Expected return on plan assets

 

(227

)

(222

)

(62

)

(80

)

(23

)

(26

)

Amortization of transition (asset) obligation

 

 

 

1

 

1

 

 

 

Amortization of prior service cost (benefit)

 

4

 

4

 

(1

)

(1

)

(20

)

(21

)

Amortization of net actuarial (gain) loss

 

25

 

14

 

10

 

10

 

17

 

16

 

Net periodic benefit cost (benefit)

 

$

3

 

$

(7

)

$

28

 

$

27

 

$

11

 

$

8

 

Settlements, curtailments and special termination benefits

 

 

 

 

 

 

 

Net periodic benefit cost (benefit) after settlements, curtailments and special termination benefits

 

$

3

 

$

(7

)

$

28

 

$

27

 

$

11

 

$

8

 

 

For the three months ended March 31, 2009, contributions totaling $111 million were made to the Company’s U.S. and international pension plans and $12 million to its postretirement plans. In 2009, the Company expects to contribute up to $850 million to its U.S. and international pension plans and $130 million to its postretirement plans. The Company does not have a required minimum pension contribution obligation for its U.S. plans in 2009. Therefore, the amount of the anticipated discretionary pension contribution could vary significantly depending on the U.S. plans’ funding status as of the 2009 measurement date and the anticipated tax deductibility of the contribution. The Company would consider whether to make these pension contributions to its U.S. plans either in cash or shares of its common stock, subject to applicable requirements. 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 April 2009, the Company offered 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 accept the offer and retire by June 1, 2009 will receive an enhanced pension benefit. Pension benefits will be enhanced by adding one additional year of pension service and one additional year of age for certain benefit calculations.

 

3M was informed during the first quarter of 2009 that the general partners of WG Trading Company, in which 3M’s benefit plans hold limited partnership interests, are the subject of a criminal investigation as well as civil proceedings by the SEC and CFTC (Commodity Futures Trading Commission). As of December 31, 2008 those limited partnership interests represented less than two percent of 3M’s fair value of total plan assets. The court appointed receiver has taken control of WG Trading Company and other entities controlled by its general partners, and further redemptions of limited partnership interests are restricted pending court proceedings. 3M currently believes that the resolution of these events will not have a material adverse effect on the consolidated financial position of the Company. The Company has insurance that it believes, based on what is currently known, is applicable to this potential loss.

 

NOTE 9.  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.

 

Additional information with respect to the impacts on other comprehensive income of nonderivative hedging and derivative instruments is included in Note 5. Additional information with respect to the fair value of derivative instruments is included in Note 10.  References to information regarding derivatives and/or hedging instruments associated with the Company’s long-term debt are also made in Note 10 to the Consolidated Financial Statements in 3M’s 2008 Annual Report on Form 10-K.

 

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Types of Derivatives/Hedging Instruments and Inclusion in Income/Other Comprehensive Income

 

Cash Flow Hedges:

 

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings.  Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

 

Cash Flow Hedging — Foreign Currency Forward and Option Contracts: The Company enters into foreign exchange forward and option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies and certain intercompany financing transactions. 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. Generally, 3M dedesignates 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 accumulated in other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction occurs.  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.  Hedge ineffectiveness and the amount excluded from effectiveness testing recognized in income on cash flow hedges were not material for the three-month periods ended March 31, 2009 and 2008. The maximum length of time over which 3M hedges its exposure to the variability in future cash flows for a majority of the forecasted transactions is 12 months and, accordingly, at March 31, 2009, the majority of the Company’s open foreign exchange forward and option contracts had maturities of one year or less.  The dollar equivalent gross notional amount of the Company’s foreign exchange forward and option contracts designated as cash flow hedges at March 31, 2009 was approximately $2.5 billion.

 

Cash Flow Hedging — Commodity Price Management: The Company manages commodity price risks through negotiated supply contracts, price protection agreements and forward physical contracts. The Company uses commodity price swaps relative to natural gas as cash flow hedges of forecasted transactions to manage price volatility. The related mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of sales in the period during which the hedged transaction affects earnings. 3M has hedged its exposure to the variability of future cash flows for certain forecasted transactions through 2009. No significant commodity cash flow hedges were discontinued and hedge ineffectiveness was not material for the three-month period ended March 31, 2009 and 2008. The dollar equivalent gross notional amount of the Company’s natural gas commodity price swaps designated as cash flow hedges at March 31, 2009 was $56 million.

 

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 as follows.  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 transaction.

 

Three months ended Mar. 31, 2009

(Millions)

 

Pretax Gain (Loss) Recognized in Other Comprehensive Income on Effective Portion of Derivative

 

Pretax Gain (Loss) on Effective Portion of Derivative Reclassified from Accumulated Other Comprehensive Income into Income

 

Ineffective Portion of Gain (Loss) on Derivative and Amount Excluded from Effectiveness Testing Recognized in Income

 

Derivatives in Cash Flow Hedging Relationships

 

Amount

 

Location

 

Amount

 

Location

 

Amount

 

Foreign currency forward/option contracts

 

$

33

 

Cost of sales

 

$

(44

)

Cost of sales

 

$

 

Foreign currency forward contracts

 

9

 

Interest expense

 

(3

)

Interest expense

 

 

Commodity price swap contracts

 

(15

)

Cost of sales

 

9

 

Cost of sales

 

 

Total

 

$

27

 

 

 

$

(38

)

 

 

$

 

 

As of March 31, 2009, the Company had a balance of $39 million associated with the after tax net unrealized gain associated with cash flow hedging instruments recorded in accumulated other comprehensive income.  3M expects to reclassify to earnings over the next 12 months a majority of this balance (with the impact offset by cash flows from underlying hedged items).

 

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Table of Contents

 

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 dollar equivalent gross notional amount of the Company’s interest rate swaps at March 31, 2009 was $952 million.

 

At March 31, 2009, the Company had interest rate swaps designated as fair value hedges of underlying fixed rate obligations. In November 2006, the Company entered into a $400 million fixed-to-floating interest rate swap concurrent with the issuance of the three-year medium-term note due in 2009. Also, in July 2007, in connection with the issuance of a seven-year Eurobond for an amount of 750 million Euros, the Company completed a fixed-to-floating interest rate swap on a notional amount of 400 million Euros as a fair value hedge of a portion of the fixed interest rate Eurobond obligation. 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 on the underlying debt instrument, which also is recorded in interest expense. These fair value hedges are 100 percent effective and, thus, there is no impact on earnings due to hedge ineffectiveness.

 

Fair Value Hedging — Foreign Currency: In November 2008, the Company entered into foreign currency forward contracts to purchase Japanese Yen, Pound Sterling, and Euros with a notional amount of $255 million at the contract rates. These contracts were designated as fair value hedges of a U.S. dollar tax obligation. These fair value hedges matured in early January 2009. The mark-to-market of these forward contracts was recorded as gains or losses in tax expense and was offset by the gain or loss on the underlying tax obligation, which also was recorded in tax expense. The fair value of these contracts as of December 31, 2008 was $25 million.  Changes in the value of these contracts in 2009 through their maturity were not material.

 

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:

 

Three months ended Mar. 31, 2009

 

Gain (Loss) on Derivative

 

Gain (Loss) on Hedged Item

 

(Millions)

 

Recognized in Income

 

Recognized in Income

 

Derivatives in Fair Value Hedging Relationships

 

Location

 

Amount

 

Location

 

Amount

 

Interest rate swap contracts

 

Interest expense

 

$

14

 

Interest expense

 

$

(14

)

Total

 

 

 

$

14

 

 

 

$

(14

)

 

Net Investment Hedges:

 

As circumstances warrant, the Company uses cross currency swaps, forwards and foreign currency denominated debt to hedge portions of the Company’s net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in cumulative translation within other comprehensive income. The remainder of the change in value of such instruments is recorded in earnings. 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. The dollar equivalent gross notional amount of the Company’s cross currency swaps and foreign currency forward contracts designated as net investment hedges at March 31, 2009 was $500 million.

 

In November 2006, the Company entered into a three-year floating-to-floating cross currency swap with a notional amount of $200 million. This transaction is a partial hedge of the Company’s net investment in its European subsidiaries. This swap converts U.S. dollar-based variable interest payments to Euro-based variable interest payments associated with the notional amount.

 

In September 2006, the Company entered into a three-year floating-to-floating cross currency swap with a notional amount of $300 million. This transaction is a partial hedge of the Company’s net investment in its Japanese subsidiaries. This swap converts U.S. dollar-based variable interest payments to yen-based variable interest payments associated with the notional amount.

 

In addition to the derivative instruments used as hedging instruments in net investment hedges, 3M also uses foreign currency denominated debt as nonderivative hedging instruments in certain net investment hedges.  In July and December 2007, the Company issued seven-year fixed rate Eurobond securities for amounts of 750 million Euros and

 

19



Table of Contents

 

275 million Euros, respectively. 3M designated each of these Eurobond issuances as hedging instruments of the Company’s net investment in its European subsidiaries.

 

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 period presented in the table below.

 

Three months ended Mar. 31, 2009

(Millions)

Derivative and Nonderivative Instruments in

 

Pretax Gain (Loss) Recognized as Cumulative Translation within Other Comprehensive Income on Effective Portion of Instrument

 

Ineffective Portion of Gain (Loss) on Instrument and Amount Excluded from Effectiveness Testing Recognized in Income

 

Net Investment Hedging Relationships

 

Amount

 

Location

 

Amount

 

Cross currency swap contracts

 

$

 

38

 

Interest expense

 

$

31

 

Foreign currency denominated debt

 

 

 

95

 

N/A

 

 

Total

 

$

 

133

 

 

 

$

31

 

 

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 and commodity price swaps to offset, in part, the impacts of certain intercompany activities (primarily associated with intercompany licensing arrangements) and fluctuations in costs associated with the use of certain precious metals, respectively.  These derivative instruments are not designated in hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings.  The dollar equivalent gross notional amount of these forward, option and swap contracts not designated as hedging instruments totaled $732 million as of March 31, 2009.  The Company does not hold or issue derivative financial instruments for trading purposes.

 

The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments not designated as hedging instruments are as follows:

 

Three months ended Mar. 31, 2009

 

Gain (Loss) on Derivative

 

 

 

 

 

(Millions)

 

Recognized in Income

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments

 

Location

 

Amount

 

 

 

 

 

Foreign currency forward/option contracts

 

Cost of sales

 

$

13

 

 

 

 

 

Commodity price swap contracts

 

Cost of sales

 

(1

)

 

 

 

 

Total

 

 

 

$

12

 

 

 

 

 

 

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Table of Contents

 

Location and Fair Value Amount of Derivative Instruments

 

The following table summarizes the fair value of 3M’s derivative instruments, excluding nonderivative instruments used as hedging instruments, and their location in the consolidated balance sheet.

 

March 31, 2009

 

 

 

 

 

(Millions)

 

Assets

 

Liabilities

 

Fair Value of Derivative Instruments

 

Location

 

Amount

 

Location

 

Amount

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

Other current assets

 

$

132

 

Other current liabilities

 

$

77

 

Commodity price swap contracts

 

Other current assets

 

1

 

Other current liabilities

 

22

 

Interest rate swap contracts

 

Other current assets

 

6

 

Other current liabilities

 

 

Interest rate swap contracts

 

Other assets

 

53

 

Other liabilities

 

 

Cross currency swap contracts

 

Other current assets

 

 

Other current liabilities

 

62

 

Total derivatives designated as hedging instruments

 

 

 

$

192