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3M Company (96OI)

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Tuesday 09 November, 2010

3M Company

3rd Quarter Results

RNS Number : 8363V
3M Company
08 November 2010
 



 

 

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 September 30, 2010

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  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 September 30, 2010

Common Stock, $0.01 par value per share


714,859,083 shares

 

This document (excluding exhibits) contains 65 pages.

The table of contents is set forth on page 2.

The exhibit index begins on page 62.

 



 

3M COMPANY

Form 10-Q for the Quarterly Period Ended September 30, 2010

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.   Significant Accounting Policies

6

 



Note 2.   Acquisitions

8

 



Note 3.   Goodwill and Intangible Assets

10

 



Note 4.   Restructuring Actions and Exit Activities

11

 



Note 5.   Supplemental Equity and Comprehensive Income Information

13

 



Note 6.   Income Taxes

16

 



Note 7.   Marketable Securities

18

 



Note 8.   Long-Term Debt and Short-Term Borrowings

19

 



Note 9.   Pension and Postretirement Benefit Plans

20

 



Note 10. Derivatives

21

 



Note 11. Fair Value Measurements

27

 



Note 12. Commitments and Contingencies

31

 



Note 13. Stock-Based Compensation

37

 



Note 14. Business Segments

39

 



Report of Independent Registered Public Accounting Firm

41

 





 


ITEM 2.

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


 



Index to Management's Discussion and Analysis:


 



Overview

42

 



Results of Operations

45

 



Performance by Business Segment

48

 



Financial Condition and Liquidity

55

 



Forward-Looking Statements

59

 





 


ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

59

 





 


ITEM 4.

Controls and Procedures

59

 





PART II

OTHER INFORMATION


 





 

 


ITEM 1.

Legal Proceedings

60

 





 


ITEM 1A.

Risk Factors

60

 





 


ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

 





 


ITEM 3.

Defaults Upon Senior Securities

62

 





 


ITEM 4.

Removed and Reserved

62

 





 


ITEM 5.

Other Information

62

 





 


ITEM 6.

Exhibits

62

 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended September 30, 2010

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)


2010


2009


2010


2009


 

Net sales.................................................................


$

6,874


$

6,193


$

 19,953


$

17,001


 

Operating expenses










 

Cost of sales........................................................


3,583


3,171


10,256


8,920


 

 

Selling, general and administrative expenses...........


1,361


1,209


4,034


3,642


 

 

Research, development and related expenses..........


354


335


1,046


967


 

Total operating expenses....................................


5,298


4,715


15,336


13,529


 

 

Operating income.....................................................


1,576


1,478


4,617


3,472


 











 

Interest expense and income










 

 

Interest expense...................................................


51


55


151


165


 

Interest income.....................................................


(11

)

(8

)

(27

)

(26

)

 

Total interest expense (income)..........................


40


47


124


139


 











 

Income before income taxes......................................


1,536


1,431


4,493


3,333


 

Provision for income taxes.........................................


411


460


1,273


1,040


 

Net income including noncontrolling interest................


$

1,125


$

971


$    3,220



$    2,293













 

Less: Net income attributable to noncontrolling interest


19


14


63


35


 











 

Net income attributable to 3M....................................


$

1,106


$

957


$    3,157


$     2,258












 

Weighted average 3M common shares outstanding - basic...........................................................................


714.0


702.8


713.4


697.7


 

Earnings per share attributable to 3M common

    shareholders - basic.............................................


$

1.55


$

1.36


$      4.42



$      3.24













 

Weighted average 3M common shares outstanding - diluted


725.2


710.8


724.8


702.3


 

Earnings per share attributable to 3M common

    shareholders - diluted...........................................


$

1.53


$

1.35


$      4.36



$      3.21













 

Cash dividends paid per 3M common share................


$

   0.525   

  

$

0.51


$    1.575



$      1.53



 

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

 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 



Sept. 30,


Dec. 31,


(Dollars in millions, except per share amount)


2010


2009








Assets






Current assets






Cash and cash equivalents...............................................................................


$

4,466


$

3,040


Marketable securities - current.........................................................................


1,387


744


Accounts receivable - net................................................................................


3,869


3,250


Inventories






Finished goods............................................................................................


1,459


1,255


Work in process..........................................................................................


993


815


Raw materials and supplies..........................................................................


763


569


Total inventories..............................................................................................


3,215


2,639


Other current assets........................................................................................


1,111


1,122


Total current assets.....................................................................................


14,048


10,795








Marketable securities - non-current......................................................................


443


825


Investments.......................................................................................................


136


103


Property, plant and equipment.............................................................................


19,738


19,440


Less: Accumulated depreciation.......................................................................


(12,823

)

(12,440

)

Property, plant and equipment - net..............................................................


6,915


7,000


Goodwill............................................................................................................


5,899


5,832


Intangible assets - net........................................................................................


1,279


1,342


Prepaid pension benefits.....................................................................................


104


78


Other assets......................................................................................................


1,241


1,275


Total assets................................................................................................


$

30,065


$

27,250








Liabilities






Current liabilities






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


$

653


$

613


Accounts payable...........................................................................................


1,649


1,453


Accrued payroll...............................................................................................


738


680


Accrued income taxes.....................................................................................


316


252


Other current liabilities.....................................................................................


2,039


1,899


Total current liabilities..................................................................................


5,395


4,897








Long-term debt...................................................................................................


5,105


5,097


Pension and postretirement benefits.....................................................................


1,853


2,227


Other liabilities...................................................................................................


1,879


1,727


Total liabilities.............................................................................................


$

14,232


$

13,948








Commitments and contingencies (Note 12)












Equity






3M Company shareholders' equity:






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


$            9


$           9


   Additional paid-in capital..................................................................................


3,381


3,153


   Retained earnings............................................................................................


25,493


23,753


   Treasury stock, at cost; 229,173,973 shares at Sept. 30, 2010; 233,433,937 shares at   Dec. 31, 2009 .............................................................................


(10,013

)

(10,397

)

   Accumulated other comprehensive income (loss)...............................................


(3,366

)

(3,754

)

       Total 3M Company shareholders' equity........................................................


15,504


12,764


Noncontrolling interest........................................................................................


329


538


Total equity ................................................................................................


$    15,833


$    13,302










       Total liabilities and equity.............................................................................


$    30,065


$    27,250


 

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




Sept. 30,


(Dollars in millions)


2010


2009








Cash Flows from Operating Activities






Net income including noncontrolling interest...................................................


$

3,220


$

2,293


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






Depreciation and amortization....................................................................


837


859


Company pension and postretirement contributions.....................................


(431

)

(285

)

Company pension and postretirement expense............................................


243


162


Stock-based compensation expense..........................................................


228


176


Deferred income taxes..............................................................................


20


194


Excess tax benefits from stock-based compensation...................................


(43

)

(4

)

Changes in assets and liabilities






Accounts receivable..............................................................................


(529

)

(311

)

Inventories............................................................................................


(521

)

469


Accounts payable.................................................................................


173


60


Accrued income taxes (current and long-term).........................................


160


205


Product and other insurance receivables and claims.................................


44


22


   Other - net...............................................................................................


142


57


Net cash provided by operating activities........................................................


3,543


3,897








Cash Flows from Investing Activities






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


(565

)

(629

)

Proceeds from sale of PP&E and other assets...............................................


7


62


Acquisitions, net of cash acquired.................................................................


(48

)

(67

)

Purchases of marketable securities and investments.......................................


(2,947

)

(1,314

)

Proceeds from sale of marketable securities and investments .........................


1,425


532


Proceeds from maturities of marketable securities..........................................


1,254


339


Proceeds from sale of businesses.................................................................


-


7


Other investing.............................................................................................


(66

)

(6

)

Net cash used in investing activities...............................................................


(940

)

(1,076

)







Cash Flows from Financing Activities






Change in short-term debt - net....................................................................


(31

(545

)

Repayment of debt (maturities greater than 90 days).......................................


(135

)

(89

)

Proceeds from debt (maturities greater than 90 days) .....................................


9


-


Purchases of treasury stock.........................................................................


(415

)

(10

)

Reissuances of treasury stock......................................................................


505


291


Dividends paid to shareholders......................................................................


(1,124

)

(1,070

)

Excess tax benefits from stock-based compensation......................................


43


4


Other - net..................................................................................................


(14

)

2


Net cash used in financing activities..............................................................


(1,162

)

(1,417

)







Effect of exchange rate changes on cash and cash equivalents .......................


(15

)

(14

)







Net increase (decrease) in cash and cash equivalents.....................................


1,426


1,390


Cash and cash equivalents at beginning of year..............................................


3,040


1,849


Cash and cash equivalents at end of period....................................................


$

4,466


$

3,239


 

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.

 

As described in 3M's Current Report on Form 8-K dated May 17, 2010 (which updated 3M's 2009 Annual Report on Form 10-K) and 3M's Quarterly Report on Form 10-Q for the period ended March 31, 2010, during the first quarter of 2010 the Company made certain product moves between its business segments in its continuing effort to drive growth by aligning businesses around markets and customers (Note 14). Segment information presented herein reflects the impact of these changes for all periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's consolidated financial statements and notes included in its Current Report on Form 8-K dated May 17, 2010.

 

Foreign Currency Translation

 

3M generally considers local currencies as the functional currencies outside the United States. However, under Accounting Standards Codification (ASC) 830, Foreign Currency Matters, the reporting currency of a foreign entity's parent is assumed to be that entity's functional currency when the economic environment of a foreign entity is highly inflationary-generally when its cumulative inflation is approximately 100 percent or more for the three years that precede the beginning of a reporting period. 3M has a subsidiary in Venezuela with operating income representing less than 1.0 percent of 3M's consolidated operating income for both 2009 and the nine-month period ended September 30, 2010. As previously disclosed by the Company in Note 1 to the consolidated financial statements in 3M's Current Report on Form 8-K dated May 17, 2010, 3M determined that the cumulative inflation rate of Venezuela in November 2009 exceeded 100 percent. Accordingly, the financial statements of the Venezuelan subsidiary were remeasured as if its functional currency were that of its parent beginning January 1, 2010.

 

Regulations in Venezuela require the purchase and sale of foreign currency to be made at official rates of exchange that are fixed from time to time by the Venezuelan government. Certain laws in the country, however, provided an exemption for the purchase and sale of certain securities and resulted in an indirect "parallel" market through which companies obtained foreign currency without having to purchase it from Venezuela's Commission for the Administration of Foreign Exchange (CADIVI). In May 2010, the Venezuelan government took control of the previously freely-traded parallel market. The government-controlled rate that emerged under the new Transaction system for Foreign Currency Denominated Securities (SITME) is not as unfavorable as the previous parallel rate in comparison to the official rates. As previously disclosed, as of December 31, 2009 (prior to the change in functional currency of 3M's Venezuelan subsidiary in January 2010), 3M changed to use of the parallel exchange rate for translation of the financial statements of its Venezuelan subsidiary. Beginning January 1, 2010, as discussed above, the financial statements of the Venezuelan subsidiary are remeasured as if its functional currency were that of its parent. This remeasurement utilized the parallel rate through May 2010 and the SITME rate thereafter.

 

The Company continues to monitor circumstances relative to its Venezuelan subsidiary. Other factors notwithstanding, the change in functional currency of this subsidiary and associated remeasurement beginning January 1, 2010 as a result of Venezuela's economic environment will decrease net sales of the Venezuelan subsidiary by approximately two-thirds in 2010 in comparison to 2009 (based on exchange rates at 2009 year-end), but will not otherwise have a material impact on operating income and 3M's consolidated results of operations.

 

Earnings per share

 

The difference in the weighted average 3M shares outstanding for calculating basic and diluted earnings per share attributable to 3M common shareholders is a result of the dilution associated with the Company's stock-based compensation plans. Certain options outstanding under these stock-based compensation plans were not included in the computation of diluted earnings per share attributable to 3M common shareholders because they would not have had a dilutive effect (30.2 million average options for the three months ended September 30, 2010; 30.4 million average options for the nine months ended September 30, 2010; 43.0 million average options for the three months ended September 30, 2009; 62.1 million average options for the nine months ended September 30, 2009). The conditions for conversion related to the Company's "Convertible Notes" were not met (refer to 3M's Current Report on Form 8-K dated May 17, 2010, 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


Nine months ended




Sept. 30,


Sept. 30,


(Amounts in millions, except per share amounts)


2010


2009


2010


2009


Numerator:










Net income attributable to 3M..................


$

1,106


$

957


$

3,157


$

2,258












Denominator:










Denominator for weighted average 3M common shares outstanding - basic ........................


714.0


702.8


713.4


697.7












Dilution associated with the Company's stock-based compensation plans ........................


11.2


8.0


11.4


4.6












Denominator for weighted average 3M common shares outstanding - diluted .......................


725.2


710.8


724.8


702.3












Earnings per share attributable to 3M common shareholders - basic..........................


$

1.55


$

1.36


$

4.42


$

3.24


Earnings per share attributable to 3M common shareholders - diluted.........................


$         1.53


$      1.35


$        4.36


$        3.21


 

New Accounting Standards

 

In June 2009, the Financial Accounting Standards Board (FASB) issued a new standard regarding the accounting for transfers of financial assets amending the existing guidance on transfers of financial assets to, among other things, eliminate the qualifying special-purpose entity concept, include a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarify and change the derecognition criteria for a transfer to be accounted for as a sale, and require significant additional disclosure. For 3M, this standard was effective for new transfers of financial assets beginning January 1, 2010. Because 3M does not have significant transfers of financial assets, the adoption of this standard did not have a material impact on 3M's consolidated results of operations or financial condition.

 

In June 2009, the FASB issued a new standard that revises the consolidation guidance for variable-interest entities. The modifications include the elimination of the exemption for qualifying special purpose entities, a new approach for determining who should consolidate a variable-interest entity, and changes to when it is necessary to reassess who should consolidate a variable-interest entity. For 3M, this standard was effective January 1, 2010. The adoption of this standard did not have a material impact on 3M's consolidated results of operations or financial condition.

 

In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force, that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. For 3M, ASU No. 2009-13 is effective beginning January 1, 2011. 3M may elect to adopt the provisions prospectively to new or materially modified arrangements beginning on the effective date or retrospectively for all periods presented. The Company is currently evaluating the impact of this standard on 3M's consolidated results of operations and financial condition.

 

In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements-a consensus of the FASB Emerging Issues Task Force, that reduces the types of transactions that fall within the current scope of software revenue recognition guidance. Existing software revenue recognition guidance requires that its provisions be applied to an entire arrangement when the sale of any products or services containing or utilizing software when the software is considered more than incidental to the product or service. As a result of the amendments included in ASU No. 2009-14, many tangible products and services that rely on software will be accounted for under the multiple-element arrangements revenue recognition guidance rather than under the software revenue recognition guidance. Under the ASU, the following components would be excluded from the scope of software revenue recognition guidance:  the tangible element of the product, software products bundled with tangible products where the software components and non-software components function together to deliver the product's essential functionality, and undelivered components that relate to software that is essential to the tangible product's functionality. The ASU also provides guidance on how to allocate transaction consideration when an arrangement contains both deliverables within the scope of software revenue guidance (software deliverables) and deliverables not within the scope of that guidance (non-software deliverables). For 3M, ASU No. 2009-14 is effective beginning January 1, 2011. 3M may elect to adopt the provisions prospectively to new or materially modified arrangements beginning on the effective date or retrospectively for all periods presented. However, 3M must elect the same transition method for this guidance as that chosen for ASU No. 2009-13. The Company is currently evaluating the impact of this standard on 3M's consolidated results of operations and financial condition.

 

In January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair Value Measurements, that amends existing disclosure requirements under FASB Accounting Standards Codification™ (ASC) 820 by adding required disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchases, sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. For 3M this ASU is effective for the first quarter of 2010, except for the requirement to provide level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which is effective beginning the first quarter of 2011. Additional disclosures required by this standard for 2010 are included in Note 11. Since this standard impacts disclosure requirements only, its adoption did not have a material impact on 3M's consolidated results of operations or financial condition.

 

In April 2010, the FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition-a consensus of the FASB Emerging Issues Task Force that recognizes the milestone method as an acceptable revenue recognition method for substantive milestones in research or development arrangements. This standard would require its provisions be met in order for an entity to recognize consideration that is contingent upon achievement of a substantive milestone as revenue in its entirety in the period in which the milestone is achieved. In addition, this ASU would require disclosure of certain information with respect to arrangements that contain milestones. For 3M this standard would be required prospectively beginning January 1, 2011. The Company is currently evaluating the impact of this standard on 3M's consolidated results of operations and financial condition.

 

NOTE 2.  Acquisitions

 

During the nine months ended September 30, 2010, 3M completed five business combinations. The purchase price paid for these business combinations (net of cash acquired), contingent consideration paid for pre-2009 business combinations, and the impact of other matters (net) during the nine months ended September 30, 2010 aggregated to $48 million. In addition, the Company recorded a financed liability of 1.7 billion Japanese Yen (approximately $18 million based on acquisition date exchange rates) as non-cash investing and financing activity associated with these acquisitions.

 

(1) In January 2010, 3M (Consumer and Office Business) purchased all of the outstanding shares of Incavas Industria de Cabos e Vassouras Ltda., a manufacturer of floor care products based in Rio Grande do Sul, Brazil.

 

(2) In April 2010, 3M (Consumer and Office Business) purchased a majority stake in the A-One branded label business and related operations, which is headquartered in Tokyo, Japan and has manufacturing, distribution and sales locations around Japan. The terms of this acquisition included embedded mirroring put and call options for a fixed price and five-year term with respect to the remaining minority shares. Accordingly, 3M recorded this business combination as an acquisition of all outstanding interests with a corresponding financed liability of 1.7 billion Japanese Yen relative to the embedded put/call option as of the acquisition date.

 

(3) In May 2010, 3M (Health Care Business) purchased certain assets of J.R. Phoenix Ltd., a manufacturer of hand hygiene and skin care products for health care and professional use based in Kitchener, Ontario, Canada.

 

(4) In June 2010, 3M (Industrial and Transportation Business) purchased all of the outstanding shares of MTI PolyFab Inc., a manufacturer of thermal and acoustic insulation for the aerospace industry. MTI PolyFab Inc. is based in Mississauga, Ontario, Canada.

 

(5) In July 2010, 3M (Safety, Security and Protection Services Business) purchased all of the outstanding shares of Dailys Limited, a supplier of non-woven disposable protective clothing, primarily chemical protective coveralls for industrial use. Dailys Limited is based in Ellesmere Port, United Kingdom.

 

Purchased identifiable intangible assets related to the acquisitions that closed in the first nine months of 2010 totaled $64 million and will be amortized on a straight-line basis over a weighted-average life of 9 years (lives ranging from 3 to 17 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.

 

Subsequent Events

 

The following events occurred in October 2010:

 

3M (Health Care Business) purchased all of the outstanding shares of Arizant Inc. for approximately $800 million, net of cash acquired, but inclusive of debt assumed and immediately paid. Arizant Inc., based in Eden Prairie, Minnesota, is a manufacturer of patient warming solutions designed to prevent hypothermia in surgical settings.

 

3M (Safety, Security and Protection Services Business) purchased all of the outstanding shares of Attenti Holdings S.A. for approximately $225 million, net of cash acquired, but inclusive of debt assumed and immediately paid. Attenti Holdings S.A., based in Tel Aviv, Israel, is a supplier of remote people-monitoring technologies used for offender-monitoring applications and to assist eldercare facilities in monitoring and enhancing the safety of patients.

 

3M (Safety, Security and Protection Services Business) acquired a controlling interest in Cogent Inc. (representing 72 percent of outstanding shares on a fully diluted basis) for approximately $535 million, net of cash acquired, via a tender offer. Cogent Inc., based in Pasadena, California, is a provider of finger, palm, face and iris biometric systems for governments, law enforcement agencies, and commercial enterprises. 3M intends to acquire the remaining publicly held shares of Cogent (other than shares as to which appraisal rights are properly exercised) for $10.50 per share (or approximately $265 million assuming no appraisal rights are exercised) in a second-step merger that will be completed following the approval of the merger at a meeting of Cogent shareholders to be held in the fourth quarter of 2010. As a result of the purchase of shares in the tender offer, 3M has sufficient voting power to approve the merger at such meeting without the vote of any other Cogent shareholders. The aggregate purchase price of approximately $800 million (including the portion of the purchase price expected to be paid on completion of the second-step merger), net of cash acquired, reflects approximately $380 million of marketable securities held by Cogent as of the October 2010 date when 3M acquired its controlling interest in Cogent.

 

The purchase price accounting for these October 2010 business combinations has not yet been finalized; thus, certain disclosures are not required. Pro forma information related to these October 2010 business combinations is not included because the impact on the Company's consolidated results of operations is not considered to be material.

 



NOTE 3.  Goodwill and Intangible Assets

 

Purchased goodwill related to the five acquisitions which closed in the first nine months of 2010 totaled $43 million, less than $1 million of which is deductible for tax purposes. The acquisition activity in the following table also includes the impacts of contingent consideration for pre-2009 acquisitions, which increased goodwill by $1 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, 2009 and September 30, 2010, follow:

 

Goodwill



Dec. 31,






Sept. 30,




2009


Acquisition


Translation


2010


(Millions)


Balance


activity


and other


Balance


Industrial and Transportation................


$

1,783


$

8


$

15


$

1,806


Health Care.......................................


1,007


1


(11

997


Consumer and Office..........................


155


24


6


185


Display and Graphics.........................


990


-


4


994


Safety, Security and Protection Services.....................................................


1,220


11


26


1,257


Electro and Communications...............


677


-


(17

660


Total Company...................................


$

5,832


$

44


$

23


$

5,899


 

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

 

As discussed in Note 14, effective in the first quarter of 2010, 3M made certain product moves between its business segments, with the resulting impact reflected in the goodwill balances by business segment above for all periods presented. For any product moves that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact to reporting units. During the first quarter of 2010, 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

For the nine months ended September 30, 2010, intangible assets (excluding goodwill) acquired through business combinations increased balances by $64 million. Balances are also impacted by changes in foreign currency exchange rates. The carrying amount and accumulated amortization of acquired intangible assets as of September 30, 2010, and December 31, 2009, follow:

 



Sept. 30,


Dec. 31,


(Millions)


2010


2009


Patents.......................................................................


$

447


$

457


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


1,562


1,519


Non-amortizable intangible assets (tradenames).............


126


138


Total gross carrying amount..........................................


$

2,135


$

2,114








Accumulated amortization - patents..............................


(341

)

(339

)

Accumulated amortization - other.................................


(515

)

(433

)

Total accumulated amortization.....................................


(856

)

(772

)

Total intangible assets - net......................................


$

1,279


$

1,342


 

Amortization expense for acquired intangible assets for the three-month and nine-month periods ended September 30, 2010 and 2009 follows:

 



Three months ended


Nine months ended




Sept. 30,


Sept. 30,


(Millions)


2010


2009


2010


2009


Amortization expense..


$

44


$

47


$

130


$

134


 

The table below shows expected amortization expense for acquired amortizable intangible assets recorded as of September 30, 2010:

(Millions)


Last

Quarter

2010


2011


2012


2013


2014


2015


After

2015

 

Amortization expense ...............


$

37


$

142


$

134


$

126


$

115


$

104


$

495

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.

 

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, the actions are probable, and the amounts are estimable. 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 2009/2008 restructuring actions.

 

2009 and 2008 Restructuring Actions:

 

During the fourth quarter of 2008 and the first nine months 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 three quarters 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.

 

·     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).

 

·       During the second quarter of 2009, 3M announced the permanent reduction of approximately 900 positions, the majority of which were concentrated in the United States, Western Europe and Japan. In the United States, another 700 people accepted a voluntary early retirement incentive program offer, which resulted in a $21 million non-cash charge. Of these aggregate employment reductions, about 66 percent were in the United States, 17 percent in the Asia Pacific area, 14 percent in Europe and 3 percent in Latin America and Canada. These restructuring actions in total resulted in a second-quarter 2009 pre-tax charge of $116 million, with $103 million for employee-related items/benefits and $13 million related to fixed asset impairments. The preceding charges were recorded in cost of sales ($68 million), selling, general and administrative expenses ($44 million), and research, development and related expenses ($4 million).

 

·       During the third quarter of 2009, 3M announced the elimination of approximately 200 positions, with the majority of those occurring in Western Europe and, to a lesser extent, the United States. These restructuring actions, including a non-cash charge related to a pension settlement in Japan, resulted in a third-quarter 2009 net pre-tax charge of $26 million for employee-related items/benefits and other, which is net of $7 million of adjustments to prior 2008 and 2009 restructuring actions. The preceding charges were recorded in cost of sales ($25 million) and research, development and related expenses ($1 million).

 

Components of these restructuring actions for the first three quarters of 2009 and a roll-forward of associated balances from December 31, 2009 follow below:

 



Employee-






 

 



Related Items/


Asset




(Millions)


Benefits and Other


Impairments


Total


 









 

Expenses incurred in first quarter 2009:








 

Industrial and Transportation.......................


$

22


$

1


$

23


 

Health Care...............................................


4


-


4


 

 

Consumer and Office..................................


2


-


2


 

Display and Graphics.................................


1


5


6


 

Safety, Security and Protection Services......


4


-


4


 

Electro and Communications......................


3


-


3


Corporate and Unallocated..........................


25


-


25


 

       First quarter 2009 expenses


$

61


$

6


$

67


 












 

Expenses incurred in second quarter 2009:








 

Industrial and Transportation.......................


$

41


$

4


$

45


 

Health Care...............................................


15


-


15


 

 

Consumer and Office..................................


11


-


11


 

Display and Graphics.................................


10


8


18


 

Safety, Security and Protection Services......


12


-


12


 

Electro and Communications......................


7


-


7


Corporate and Unallocated..........................


7


1


8


 

       Second quarter 2009 expenses


$

103


$

13


$

116


 












 

 

Expenses (credits) incurred in third quarter 2009:











 

Industrial and Transportation.......................


$

21


$

-


$

21


Health Care...............................................


1


-


1


 

 

Consumer and Office..................................


-


-


-


 

Display and Graphics.................................


(2

)

-


(2

)

 

Safety, Security and Protection Services......


-


-


-


 

Electro and Communications......................


1


-


1


Corporate and Unallocated..........................


5


-


5


 

       Third quarter 2009 expenses


$

26


$

-


$

26


 












 

 

(Millions)


Employee-
Related
Items/
Benefits
and Other


Asset
Impairments


Total


Accrued liability balance as of December 31, 2009...................


$

76


$

-


$

76


Cash payments in first quarter 2010........................................


(18

)

-


(18

)

Cash payments in second quarter 2010...................................


(13

)

-


(13

)

Cash payments in third quarter 2010.......................................



(7

)


-



(7

)

Accrued liability balance as of September 30, 2010..................


$

38


$

-


$

38


 

The majority of the remaining employee related items and benefits associated with these restructuring actions are expected to be paid out in cash in 2010 and 2011. 

 

 

 

 

 



NOTE 5.  Supplemental Equity and Comprehensive Income Information 

 

Consolidated Statement of Changes in Equity

 

3M Company and Subsidiaries

Three months ended September 30, 2010





3M Company Shareholders




 

(Millions)


Total


Common
Stock and
Additional
Paid-in
Capital


Retained
Earnings


Treasury
Stock


Accumulated
Other
Comprehensive
Income
(Loss)


Non-
controlling
Interest


 

Balance at June 30, 2010..............


$

14,263


$

3,345


$

24,788


$

(10,146

)

$

(4,016

)

$

292


 















 

Net income............................................


1,125




1,106






19


 

 

Cumulative translation adjustment........


669








651


18


 

Defined benefit pension and postretirement plans adjustment......


48








48


-


 

Debt and equity securities - unrealized gain (loss).......................


3








3


-


Cash flow hedging instruments - unrealized gain (loss).......................


(52

)







(52

)

-


 

Total comprehensive income............


1,793












 

Dividends paid......................................


(375

)



(375

)







 

 

Stock-based compensation, including tax impacts.......................................


45


45










 

Reacquired stock..................................


(11

)





(11

)





Issuances pursuant to stock option and benefit plans...................


118




(26

)

144






 

Balance at September 30, 2010..


$

15,833


$

3,390


$

25,493


$

(10,013

)

$

(3,366

)

$

329


 

 

3M Company and Subsidiaries

Nine months ended September 30, 2010





3M Company Shareholders




 

(Millions)


Total


Common
Stock and
Additional
Paid-in
Capital


Retained
Earnings


Treasury
Stock


Accumulated
Other
Comprehensive
Income
(Loss)


Non-
controlling
Interest


 

Balance at December 31, 2009....


$

13,302


$

3,162


$

23,753


$

(10,397

)

$

(3,754

)

$

538


 















 

Net income............................................


3,220




3,157






63


 

 

Cumulative translation adjustment........


216








187


29


 

Defined benefit pension and postretirement plans adjustment......


147








146


1


 

Debt and equity securities - unrealized gain (loss).......................


5








5


-


Cash flow hedging instruments - unrealized gain (loss).......................


11








11


-


 

Total comprehensive income............


3,599












 

Dividends paid......................................


(1,124

)



(1,124

)







 

 

Purchase of subsidiary shares and transfers from noncontrolling interest.............................................


(256

)

7






39


(302

)

 

Stock-based compensation, including tax impacts.......................................


221


221










 

Reacquired stock..................................


(415

)





(415

)





Issuances pursuant to stock option and benefit plans...................


506




(293

)

799






 

Balance at September 30, 2010..


$

15,833


$

3,390


$

25,493


$

(10,013

)

$

(3,366

)

$

329


 

 



Consolidated Statement of Changes in Equity

 

3M Company and Subsidiaries

Three months ended September 30, 2009

 






3M Company Shareholders




 






Common








Accumulated




 






Stock and








Other




 






Additional






Unearned


Comprehensive


Non-


 

 






Paid-in


Retained


Treasury


Comp-


Income


controlling



(Millions)


Total


Capital


Earnings


Stock


ensation


(Loss)


Interest


 


  Balance at June 30, 2009


$11,221


$3,142


$22,707


$(11,341

)

$(22

)

$(3,683

)

$418


 


















 


Net income             


971




957








14


 

 


Cumulative translation adjustment          


328










303


25



Defined benefit pension and         postretirement plans adjustment


 

48

 

 









 

43

 

 

5


 


Debt and equity securities -
















 

 


  unrealized gain (loss)


3










3





Cash flow hedging instruments -
















 


  unrealized gain (loss)


(24 

)









 (24

)



 


  Total comprehensive income


1,326














 


Dividends paid


(361 

)



(361

)









 


Transfer to noncontrolling interest


-


(87

)







(10

)

97


 


Amortization of unearned compensation


22








22






 

 


Stock-based compensation, including
















 


   tax impacts


43


43












 


Reacquired stock


(4

)





(4

)








Issuances pursuant to stock option
















 


  and benefit plans


672




(51

)

723








 


  Balance at September 30, 2009


$12,919


$3,098


$23,252


$(10,622

)

$-


$(3,368

)

$559


 


















 

 

3M Company and Subsidiaries

Nine months ended September 30, 2009






3M Company Shareholders




 






Common








Accumulated




 






Stock and








Other




 






Additional






Unearned


Comprehensive


Non-


 

 






Paid-in


Retained


Treasury


Comp-


Income


controlling



(Millions)


Total


Capital


Earnings


Stock


ensation


(Loss)


Interest


 


  Balance at December 31, 2008


 $10,304  


$3,015


$22,227


$(11,676

)

$(40

)

$(3,646

)

$424


 


















 


Net income


2,293




2,258








35


 

 


Cumulative translation adjustment


336










338


(2

)


Defined benefit pension and     postretirement plans adjustment


 

48










43


5


 


Debt and equity securities -
















 

 


  unrealized gain (loss)


8










8





Cash flow hedging instruments -
















 


  unrealized gain (loss)


(101 

)









(101

)



 


  Total comprehensive income


2,584














 


Dividends paid


(1,070

)



(1,070

)









 


Transfer to noncontrolling interest


-


(87

)







(10

)

97


 


Amortization of unearned compensation


40








40






 

 


Stock-based compensation, including
















 


   tax impacts


170


170













Reacquired stock


(9

)





(9

)







 

 


Issuances pursuant to stock option

















  and benefit plans


900




(163

)

1,063








 


  Balance at September 30, 2009


$12,919


$3,098


$23,252


$(10,622

)

$-


$(3,368

)

$559


 


















 

 



Consolidated Statement of Comprehensive Income (Loss)













Three months ended Sept. 30,


Nine months ended Sept. 30,


(Millions)


2010


2009


2010


2009


Net income including noncontrolling interest


$    1,125


$       971


 

$   3,220


 

$   2,293


Other comprehensive income, net of tax:










   Cumulative translation adjustment


669


328


216


336


   Defined benefit pension and postretirement plans adjustment


48


48


147


48


   Debt and equity securities, unrealized gain (loss)


3


3


5


8


   Cash flow hedging instruments, unrealized gain (loss)


(52

)

(24

)

11


(101

)

Total other comprehensive income (loss), net of tax


668


355


379


291


Comprehensive income (loss) including noncontrolling interest


1,793


1,326


3,599


2,584


Comprehensive (income) loss attributable to noncontrolling interest


(37

(44

(93

)

(38

)

Comprehensive income (loss) attributable to 3M


$    1,756


$    1,282


 

$   3,506


 

$   2,546


 

Accumulated Other Comprehensive Income (Loss) Attributable to 3M

 



Sept. 30,


Dec. 31,


(Millions)


2010


2009


Cumulative translation adjustment...........................................


$

356


$

122


Defined benefit pension and postretirement plans adjustment


(3,693

)

(3,831

)

Debt and equity securities, unrealized gain (loss) ....................


(4

)

(9

)

Cash flow hedging instruments, unrealized gain (loss) .............


(25

)

(36

)

Total accumulated other comprehensive income (loss)..............


$

(3,366

)

$

(3,754

)

 

Components of Comprehensive Income (Loss) Attributable to 3M







 



Three months ended 

Sept. 30,


Nine months ended

Sept. 30,


 

(Millions)


2010


2009


2010


2009


 

Net income attributable to 3M.........................................


$

1,106


$

957


$

3,157


$

2,258


 











 

Cumulative translation........................................................


586


237


185


311


 

Tax effect..........................................................................


65


66


2


27


 

Cumulative translation - net of tax..................................


651


303


187


338


 











 

Defined benefit pension and postretirement plans adjustment.


75


62


231


57


 

Tax effect..........................................................................


(27

)

(19

)

(85

)

(14

)

 

Defined benefit pension and postretirement plans adjustment - net of tax.................................................


48


43


146


43


 











 

Debt and equity securities, unrealized gain (loss).................


3


5


7


13


 

Tax effect..........................................................................


-


(2

)

(2

(5

 

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


3


3


5


8


 











 

Cash flow hedging instruments, unrealized gain (loss)...........


(84

)

(38

)

16


(163

)

 

Tax effect..........................................................................


32


14


(5

)

62


 

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


(52)


(24

)

11


(101

)

 











 

Comprehensive income (loss) attributable to 3M.............


$

1,756


$

1,282


$

3,506


$

 

2,546



 

Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income. 3M had no material reclassification adjustments attributable to noncontrolling interest. As disclosed in Note 9, for the three and nine months ended September 30, 2010, $77 million pre-tax ($48 million after tax) and $231 million pre-tax ($146 million after tax), respectively, were reclassified to earnings from accumulated other comprehensive income attributable to 3M to pension and postretirement expense in the income statement. For the three and nine months ended September 30, 2009, $36 million pre-tax ($23 million after tax) and $106 million pre-tax ($68 million after tax), respectively, were reclassified to earnings. These pension and postretirement expense amounts are shown in the table in Note 9 as amortization of transition (asset) obligation, amortization of prior service cost (benefit) and amortization of net actuarial (gain) loss. In addition, reclassification adjustments include the third quarter 2009 Japan pension settlement as discussed in Note 9. Reclassifications to earnings from accumulated other comprehensive income for debt and equity securities, which primarily include marketable securities, were not material for the three and nine months ended September 30, 2010 and 2009. Refer to Note 10 for a table that recaps pre-tax cash flow hedging instruments reclassifications. Income taxes are not provided for foreign currency 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.

 

Purchase of Subsidiary Shares and Transfers of Ownership Interests Involving Non-Wholly Owned Subsidiaries 

 

During the second half of 2009 and the first half of 2010, 3M effected a purchase of subsidiary shares and transfers of ownership interests to align activities in Japan and to simplify the Company's ownership structure. As a result of these activities, beginning in June 2010 the Company has a wholly owned subsidiary in the region in addition to its majority owned Sumitomo 3M Limited entity (Sumitomo 3M). Because the Company retained its controlling interest in the subsidiaries involved, these activities resulted in changes to 3M Company shareholders' equity and noncontrolling interest. These activities included the following:

 

•     During the second half of 2009, a wholly owned subsidiary that, in turn, owned a portion of the Company's majority owned Sumitomo 3M, was transferred to another subsidiary (referred to herein as 3M HC) that was majority, rather than wholly, owned. Sumitomo 3M also owned a portion of 3M HC. As a result of the transaction, 3M's effective ownership in Sumitomo 3M was reduced from 75 percent to 71.5 percent. The transfer resulted in a decrease in 3M Company shareholders' equity and an increase in noncontrolling interest of $81 million in the second half of 2009.

 

•     During the first quarter of 2010, majority owned 3M HC which, as a result of the transfer above owned a portion of the Company's majority owned Sumitomo 3M, transferred this interest to Sumitomo 3M. In addition, Sumitomo 3M purchased a portion of its shares held by its noncontrolling interest, Sumitomo Electric Industries, Ltd. (SEI), by paying cash of 5.8 billion Japanese Yen and entering into a note payable to SEI of 17.4 billion Japanese Yen (approximately $63 million and $188 million, respectively, based on applicable exchange rates at that time). As a result of these transactions, 3M's effective ownership in Sumitomo 3M was increased from 71.5 percent to 75 percent. The cash paid as a result of the purchase of Sumitomo 3M shares from SEI was classified as an investing activity in the consolidated statement of cash flows. The remainder of the purchase financed by the note payable to SEI was considered non-cash investing and financing activity in the first quarter of 2010. These transactions resulted in an increase in 3M Company shareholders' equity of $22 million and a decrease in noncontrolling interest of $278 million in the first quarter of 2010.

 

•     During the second quarter of 2010, majority owned Sumitomo 3M transferred its interest in 3M HC to 3M HC. As a result of this transaction, 3M HC became wholly owned by the Company. The transfer resulted in an increase in 3M Company shareholders' equity and a decrease in noncontrolling interest of $24 million in the second quarter of 2010.

 

Additionally, 3M acquired the remaining noncontrolling interest of a previously majority owned subsidiary for an immaterial amount during the first half of 2010.  The following table summarizes the effects of these transactions on equity attributable to 3M Company shareholders for the respective periods.

 



Three months ended 

Sept. 30,


Nine months ended

Sept. 30,

 

(Millions)


2010


2009


2010


2009

 

Net income attributable to 3M.............................................


$

1,106


$

957


$

3,157


$

2,258











 

Transfer from (to) noncontrolling interest...............................


-


(97)


46


(97)

 

Change in 3M Company shareholders' equity from net income attributable to 3M and transfers from (to) noncontrolling interest


$    1,106


$         860


$   3,203


$    2,161

 

 

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 IRS completed its field examination of the Company's U.S. federal income tax returns for the years 2005 through 2007 in the fourth quarter of 2009. The Company has protested certain IRS positions within these tax years and has entered into the administrative appeals process with the IRS during the first quarter of 2010. During the first quarter of 2010, the IRS completed its field examination of the Company's U.S. federal income tax return for the 2008 year. The Company has protested certain IRS positions within this tax year and has entered into the administrative appeals process with the IRS during the second quarter of 2010. Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2009 and 2010. It is anticipated that the IRS will complete its examination of the Company for 2009 by the end of the first quarter of 2011, and for 2010 by the end of the first quarter of 2012. As of September 30, 2010, the IRS has not proposed any significant adjustments to the Company's tax positions for which the Company is not adequately reserved.

 

During the first quarter of 2010, the Company paid the agreed upon assessments for the 2005 tax year. During the second quarter of 2010, the Company paid the agreed upon assessments for the 2008 tax year. Payments relating to other proposed assessments arising from the 2005 through 2010 examinations may not be made until a final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also limited audit activity in several U.S. state and foreign jurisdictions.

 

3M anticipates changes to the Company's uncertain tax positions due to the closing of the various audit years mentioned above. 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 income tax authority examinations. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of September 30, 2010 and December 31, 2009, respectively, are $391 million and $425 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 $4 million and $13 million of expense for the three months ended September 30, 2010 and September 30, 2009, respectively, and approximately $5 million of benefit and $19 million expense for the nine months ended September 30, 2010 and September 30, 2009, respectively. At September 30, 2010 and December 31, 2009, accrued interest and penalties in the consolidated balance sheet on a gross basis were $52 million and $53 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.

 

Under a Federal program that was established to encourage companies to provide retiree prescription drug coverage, many companies, including 3M, received a tax-advantaged subsidy. The tax advantage of the subsidy was eliminated by the Patient Protection and Affordable Care Act (H.R. 3590), including modifications included in the Health Care and Education Reconciliation Act of 2010 (collectively, the "Act'), which were enacted in March 2010. Although the elimination of this tax advantage does not take effect until 2013 under the Act, 3M was required to recognize the full accounting impact in its financial statements in the period in which the Act was signed. Because future anticipated retiree health care liabilities and related tax subsidies are already reflected in 3M's financial statements, the change in law resulted in a reduction of the value of the company's deferred tax asset related to the subsidy. This reduction in value resulted in a one-time non-cash income tax charge to 3M's earnings in the first quarter of 2010 of approximately $84 million, or 11 cents per diluted share.

 

While the preceding item increased the effective tax rate, the most significant item that decreased the effective tax rate in the first, second, and third quarters of 2010 related to international taxes. This was due primarily to the 2010 tax benefits resulting from the corporate alignment transactions that allowed the Company to increase its ownership of a foreign subsidiary. The transactions are described in the section of Note 5 entitled "Purchase of Subsidiary Shares and Transfers of Ownership Interest Involving Non-Wholly Owned Subsidiaries".

 

The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exists. As of September 30, 2010 and December 31, 2009, the ending balance of the Company's valuation allowance on its deferred tax assets totaled $98 million and $23 million, respectively.



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).

 



Sept. 30,


Dec. 31,


 

(Millions)


2010


2009


 







 

U.S. government agency securities...........................................


$

478


$

326


 

 

Foreign government agency securities.......................................



46



-


Corporate debt securities.........................................................


299


154


 

 

Commercial paper………………………………………………………..


30


-


 

U.S. treasury securities…………………………………………………


55


-


 

U.S. municipal securities………………………………………………..


11


-


 

Asset-backed securities:






 

Automobile loan related........................................................


235


198


 

Credit card related................................................................


143


9


 

Equipment lease related.......................................................


43


41


Other..................................................................................


8


8


 

Asset-backed securities total...................................................


429


256


 

Other securities......................................................................


39


8


 







 

Current marketable securities...............................................


$

1,387


$

744


 







 

U.S. government agency securities...........................................


$

81


$

165


 

Foreign government agency securities.......................................


3


-


 

 

Corporate debt securities.........................................................


107


112


 

U.S. treasury securities...........................................................


14


94


 

Asset-backed securities:






 

Automobile loan related........................................................


167


317


 

Credit card related................................................................


41


98


 

Equipment lease related.......................................................


23


29


Other..................................................................................


1


5


 

Asset-backed securities total...................................................


232


449


 

Auction rate securities.............................................................


6


5


 







 

Non-current marketable securities........................................


$

443


$

825


 







 

Total marketable securities..................................................


$

1,830


$

1,569


 

 

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 September 30, 2010, gross unrealized losses totaled approximately $9 million (pre-tax), while gross unrealized gains totaled approximately $6 million (pre-tax). At December 31, 2009, gross unrealized losses totaled approximately $12 million (pre-tax), while gross unrealized gains totaled approximately $3 million (pre-tax). Gross realized gains and losses on sales or maturities of marketable securities for the first nine months of 2010 and 2009 were not material. Cost of securities sold use the first in, first out (FIFO) method. Since these marketable securities are classified as available-for-sale securities, changes in fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into earnings upon sale or "other-than-temporary" impairment.

 

3M reviews impairments associated with its marketable securities in accordance with the measurement guidance provided by ASC 320, Investments-Debt and Equity Securities, when determining the classification of the impairment as "temporary" or "other-than-temporary". A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income component of shareholders' equity. Such an unrealized loss does not reduce net income attributable to 3M for the applicable accounting period because the loss is not viewed as other-than-temporary. The factors evaluated to differentiate between temporary and other-than-temporary include the projected future cash flows, credit ratings actions, and assessment of the credit quality of the underlying collateral, as well as other factors.

 

The balance at September 30, 2010 for marketable securities and short-term investments 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.

 

 



Sept. 30,


(Millions)


2010






Due in one year or less.........................................


$

959


Due after one year through three years...................


767


Due after three years through five years..................


71


Due after five years...............................................


33






Total marketable securities....................................


$

1,830


 

3M has a diversified marketable securities portfolio of $1.830 billion as of September 30, 2010. Within this portfolio, current and long-term asset-backed securities (estimated fair value of $661 million) are primarily comprised of interests in automobile loans and credit cards. At September 30, 2010, the asset-backed securities credit ratings were AAA or A‑1.

 

3M's marketable securities portfolio includes auction rate securities that represent interests in investment grade credit default swaps; however, currently these holdings comprise less than one percent of this portfolio. The estimated fair value of auction rate securities are $6 million and $5 million as of September 30, 2010 and December 31, 2009, respectively. Gross unrealized losses within accumulated other comprehensive income related to auction rate securities totaled $7 million (pre-tax) and $8 million (pre-tax) as of September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010, auction rate securities associated with these balances have been in a loss position for more than 12 months. 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. Refer to Note 11 for a table that reconciles the beginning and ending balances of auction rate securities.

 

NOTE 8.  Long-Term Debt and Short-Term Borrowings

 

During the first quarter of 2010, the Company entered into a floating rate note payable of 17.4 billion Japanese Yen (approximately $188 million based on applicable exchange rates at that time) in connection with the purchase of additional interest in the Company's Sumitomo 3M Limited subsidiary as discussed in Note 5. This note is due in three equal installments of 5.8 billion Japanese Yen, with one installment paid on September 30, 2010, and the remaining installments due March 30, 2011 and September 30, 2011. Interest accrues on the note based on the three-month Tokyo Interbank Offered Rate (TIBOR) plus 40 basis points.

 

During the second quarter of 2010, the Company recorded a five-year financed liability of 1.7 billion Japanese Yen (approximately $18 million based on applicable exchange rates at that time) as part of the consideration associated with 3M's acquisition of the A-One branded label business and related operations discussed in Note 2. The Company records interest on this liability at an annual rate of approximately 1%.

 

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. In August 2010, the Company terminated 150 million Euros of the notional amount of this swap. As a result, the notional amount remaining after the partial termination is 250 million Euros. The termination of a portion of this swap did not impact the terms of the remaining portion.

 



NOTE 9.  Pension and Postretirement Benefit Plans

 

Components of net periodic benefit cost and other supplemental information for the three-month and nine-month periods ended September 30 follow:

 

Benefit Plan Information

 



Three months ended Sept. 30,




Qualified and Non-qualified








Pension Benefits


Postretirement




United States


International


Benefits


(Millions)


2010


2009


2010


2009


2010


2009


Net periodic benefit cost (benefit)














Service cost..............................................


$

50


$

45


$

28


$

23


$

13


$

12


Interest cost..............................................


160


154


62


56


22


24


Expected return on plan assets...................


(233

)

(226

)

(71

)

(62

)

(20

)

(23

)

Amortization of transition (asset) obligation..


-


-


-


1


-


-


Amortization of prior service cost (benefit)....


4


4


(1

)

(2

)

(23

)

(20

)

Amortization of net actuarial (gain) loss.......


55


25


21


11


21


17


Net periodic benefit cost (benefit)....................


$

    36


$

2


$

39


$

27


$

13


$

10


Settlements, curtailments and special termination benefits ...................................


-


1


-


13


-


-


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


$

36


$

3


$

39


$

40


$

13


$

10


 

 



Nine months ended Sept. 30,




Qualified and Non-qualified








Pension Benefits


Postretirement




United States


International


Benefits


(Millions)


2010


2009


2010


2009


2010


2009


Net periodic benefit cost (benefit)














Service cost..............................................


$

151


$

137


$

83


$

71


$

41


$

38


Interest cost..............................................


479


464


187


167


66


72


Expected return on plan assets...................


(697

)

(679

)

(214

)

(185

)

(62

)

(69

)

Amortization of transition (asset) obligation..


-


-


1


2


-


-


Amortization of prior service cost (benefit)....


10


12


(3

)

(4

)

(70

)

(60

)

Amortization of net actuarial (gain) loss.......


165


74


64


32


64


50


Net periodic benefit cost (benefit)....................


$

   108


$

8


$

118


$

83


$

39


$

31


Settlements, curtailments and special termination benefits ...................................


-


26


(22

)

14


-


-


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


$

108


$

34


$

96


$

97


$

39


$

31


 

For the nine months ended September 30, 2010, the Company contributed $392 million to its U.S. and international pension plans and $39 million to its postretirement plans. During the fourth quarter of 2010, the Company expects to contribute approximately $100 million to its U.S. and international pension and postretirement plans. The Company does not have a required minimum pension contribution obligation for its U.S. plans in 2010. However, the Company is considering making an additional discretionary contribution of $700 million in cash to its pension plans in either the fourth quarter of 2010 or first quarter of 2011, assuming that both September 30, 2010 discount rates hold and that September-to-date 2010 asset rate of return performance levels hold. The actual contribution may differ. If rates of return or discount rates become more favorable, 3M would likely contribute much less than this amount. The amount of the anticipated discretionary pension contribution could vary significantly depending on the U.S. plans' funded status and the anticipated tax deductibility of the contribution. Future contributions will also 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 the fourth quarter of 2010, the Company approved and communicated various changes to its U.S. postretirement benefit plans.  The Company will be providing eligible participants with a savings account benefits-based plan, which replaces the current 3M Retiree Medical Plan. The savings account benefits-based plan can be used to help pay for medical premiums or qualified medical expenses. These changes become effective beginning January 1, 2013, for all Medicare eligible retirees and their Medicare eligible dependents and January 1, 2015, for all non-Medicare eligible retirees and their eligible dependents. These changes are expected to increase the 2010 accumulated benefit obligation by $65 million.

 

In June 2010, 3M's Brazilian subsidiary received approval from the government in Brazil to freeze its defined benefit pension plan. Effective March 31, 2010, participants in this subsidiary's pension plan no longer accrue additional pension benefits. As a result, the Company recorded a $22 million curtailment gain in the second quarter of 2010. 

 

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 accepted the offer and retired by June 1, 2009 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 700 participants accepted the offer and retired by June 1, 2009. As a result the Company incurred a $21 million charge related to these special termination benefits in the second quarter of 2009.

 

During 2009, 3M Sumitomo (Japan) experienced a higher number of retirements than normal, largely due to early retirement incentive programs, which required eligible employees who elected to leave the Company to retire by September 2009. Participants in the Japan pension plan had the option of receiving cash lump sum payments when exiting the plan, which a number of participants exiting the pension plan elected to receive. In accordance with ASC 715, Compensation - Retirement Benefits, settlement accounting is required when the lump sum distributions in a year are greater than the sum of the annual service and interest costs. Due to the large number of lump sum payment elections, the Company incurred a $13 million settlement charge in the third quarter of 2009. The Company remeasured the funded status of the Japan pension plan as of September 30, 2009.

 

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, 2009 these holdings represented less than 2 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. The amount that 3M's benefit plans may recover from their investments in WG Trading Company may be lower than the value estimated on the last annual pension and postretirement measurement date of December 31, 2009. If this occurs, the primary impact of any changes in the asset valuation will be recognized on the next annual pension and postretirement measurement date of December 31, 2010. 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 a portion of this potential decrease in asset value.

 

NOTE 10.  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 11.  References to information regarding derivatives and/or hedging instruments associated with the Company's long-term debt are also made in Note 8 herein and in Note 10 to the Consolidated Financial Statements in 3M's Current Report on Form 8-K dated May 17, 2010.

 

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 and nine month periods ended September 30, 2010 and 2009. 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 September 30, 2010, 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 September 30, 2010 was approximately $3.5 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. Generally, the length of time over which 3M hedges its exposure to the variability in future cash flows for its forecasted natural gas transactions is 12 months. No significant commodity cash flow hedges were discontinued and hedge ineffectiveness was not material for the three and nine month periods ended September 30, 2010 and 2009. The dollar equivalent gross notional amount of the Company's natural gas commodity price swaps designated as cash flow hedges at September 30, 2010 was $39 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 Sept. 30, 2010

(Millions)


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


Pretax Gain (Loss) Recognized in Income on Effective Portion of Derivative as a Result of Reclassification from Accumulated Other Comprehensive 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


$

(76

)

Cost of sales


$

5


Cost of sales


$

-


Foreign currency forward contracts


108


Interest expense


108


Interest expense


-


Commodity price swap contracts


(6

)

Cost of sales


(3

)

Cost of sales


-


Total


$

26




$

110




$

-


 

Nine months ended Sept. 30, 2010

(Millions)


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


Pretax Gain (Loss) Recognized in Income on Effective Portion of Derivative as a Result of Reclassification from Accumulated Other Comprehensive 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


$

(25

)

Cost of sales


$

(48

)

Cost of sales


$

-


Foreign currency forward contracts


41


Interest expense


41


Interest expense


-


Commodity price swap contracts


(13

)

Cost of sales


(6

)

Cost of sales


-


Total


$

3




$

(13

)



$

-


 

 

Three months ended Sept. 30, 2009

(Millions)


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


Pretax Gain (Loss) Recognized in Income on Effective Portion of Derivative as a Result of Reclassification from Accumulated Other Comprehensive 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


$

(28

)

Cost of sales


$

28


Cost of sales


$

-


Foreign currency forward contracts


42


Interest expense


38


Interest expense


-


Commodity price swap contracts


7


Cost of sales


(10

)

Cost of sales


-


Total


$

21




$

56




$

-


 

 

 

Nine months ended Sept. 30, 2009

(Millions)


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


Pretax Gain (Loss) Recognized in Income on Effective Portion of Derivative as a Result of Reclassification from Accumulated Other Comprehensive 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


$

(62

)

Cost of sales


$

123


Cost of sales


$

-


Foreign currency forward contracts


64


Interest expense


54


Interest expense


-


Commodity price swap contracts


(17

)

Cost of sales


(29

)

Cost of sales


-


Total


$

(15

)



$

148




$

-


 

As of September 30, 2010, the Company had a balance of $25 million associated with the after tax net unrealized loss 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).

 

Fair Value Hedges:

 

For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivatives as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.

 

Fair Value Hedging - Interest Rate Swaps:The Company manages interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains or losses in interest expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest expense. These fair value hedges are highly effective and, thus, there is no impact on earnings due to hedge ineffectiveness. The dollar equivalent (based on inception date foreign currency exchange rates) gross notional amount of the Company's interest rate swaps at September 30, 2010 was $1.1 billion.

 

At September 30, 2010, 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. 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. In August 2010, the Company terminated 150 million Euros of the notional amount of this swap. As a result, a gain of 18 million Euros, recorded as part of the balance of the underlying debt, will be amortized over this debt's remaining life. The Company also has two fixed-to-floating interest rate swaps with an aggregate notional amount of $800 million designated as fair value hedges of the fixed interest rate obligation under the existing $800 million, three-year, 4.50% notes issued in October 2008.

 

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. 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 Sept. 30, 2010


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


$

(16

)

Interest expense


$

16


Total




$

(16

)



$

16


 

Nine months ended Sept. 30, 2010


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


$

(6

)

Interest expense


$

6


Total




$

(6

)



$

6


 

Three months ended Sept. 30, 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


$

8


Interest expense


$

(8

)

Total




$

8




$

(8

)

 

Nine months ended Sept. 30, 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


$

12


Interest expense


$

(12

)

Total




$

12




$

(12

)

 

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. At September 30, 2010, there were no cross currency swaps and foreign currency forward contracts designated as net investment hedges.

 

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 was a partial hedge of the Company's net investment in its European subsidiaries. This swap converted U.S. dollar-based variable interest payments to Euro-based variable interest payments associated with the notional amount. This swap matured in November 2009.

 

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 was a partial hedge of the Company's net investment in its Japanese subsidiaries. This swap converted U.S. dollar-based variable interest payments to yen-based variable interest payments associated with the notional amount. This swap matured in September 2009.

 

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 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 periods presented in the table below.

 

 

 

 

 

 

 

 

 

Three months ended Sept. 30, 2010

(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


Foreign currency denominated debt


$


(148

)

N/A


$                       -


Total


$


(148

)



$

-


 

Nine months ended Sept. 30, 2010

(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


Foreign currency denominated debt


$


77


N/A


$                       -


Total


$


77




$

-


 

Three months ended Sept. 30, 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


$


(27

)

Interest expense


$

-


Foreign currency denominated debt




(70

)

N/A


-


Total


$


(97

)



$

-


 

Nine months ended Sept. 30, 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


$


(8

)

Interest expense


$

-


Foreign currency denominated debt




(50

)

N/A


-


Total


$


(58

)



$

-


 

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 $961 million as of September 30, 2010. 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 Sept. 30, 2010


Nine months ended Sept. 30, 2010


 

 



Gain (Loss) on Derivative


Gain (Loss) on Derivative


(Millions)


Recognized in Income


Recognized in Income


 

Derivatives Not Designated as Hedging Instruments


Location


Amount


Location


Amount


 

Foreign currency forward/option contracts


Cost of sales


$

(38

)

Cost of sales


$                     (12

)

 

Foreign currency forward contracts


Interest expense


(7

)

Interest expense


(18

)

 

Commodity price swap contracts


Cost of sales


-


Cost of sales


-


 

Total




$

(45

)



$                     (30

)

 

 



Three months ended Sept. 30, 2009


Nine months ended Sept. 30, 2009


 

 



Gain (Loss) on Derivative


Gain (Loss) on Derivative


(Millions)


Recognized in Income


Recognized in Income


 

Derivatives Not Designated as Hedging Instruments


Location


Amount


Location


Amount


 

Foreign currency forward/option contracts


Cost of sales


$

(60

)

Cost of sales


$                     (39

)

 

Foreign currency forward contracts


Interest expense


(4

)

Interest expense


8


 

Commodity price swap contracts


Cost of sales


3


Cost of sales


2


 

Total




$

(61

)



$                     (29

)

 

 

 

 



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. 

 

September 30, 2010






 

(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


$

80


Other current liabilities


$

51


 

Commodity price swap contracts


Other current assets


-


Other current liabilities


8


 

 

Interest rate swap contracts


Other assets


47


Other liabilities


-


Total derivatives designated as hedging instruments




$

127




$

59


 











 

 

Derivatives not designated as hedging instruments










Foreign currency forward/option contracts


Other current assets


$

18


Other current liabilities


$

30


 

Total derivatives not designated as hedging instruments




$

18




$

30


 











 

Total derivative instruments




$

145




$

89


 

 

December 31, 2009
(Millions)


Assets


Liabilities


 

Fair Value of Derivative Instruments


Location


Amount


Location


Amount


 











 

Derivatives designated as hedging instruments..