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3M Company (96OI)

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Friday 04 November, 2011

3M Company

3rd Quarter Results

RNS Number : 5530R
3M Company
04 November 2011
 



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, 2011

 

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, 2011

Common Stock, $0.01 par value per share


700,844,681 shares

 

This document (excluding exhibits) contains 72 pages.

The table of contents is set forth on page 2.

The exhibit index begins on page 69.

 

 

3M COMPANY

Form 10-Q for the Quarterly Period Ended September 30, 2011

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..............................................................................................


9


 


Note 3.   Goodwill and Intangible Assets...................................................................


11


 


Note 4.   Supplemental Equity and Comprehensive Income Information........................


13


 


Note 5.   Income Taxes...........................................................................................


17


 


Note 6.   Marketable Securities................................................................................


18


 


Note 7.   Long-Term Debt and Short-Term Borrowings................................................


20


 


Note 8.   Pension and Postretirement Benefit Plans...................................................


21


 


Note 9.   Derivatives................................................................................................


22


 


Note 10. Fair Value Measurements...........................................................................


28


 


Note 11. Commitments and Contingencies................................................................


32


 


Note 12. Stock-Based Compensation.......................................................................


41



Note 13. Business Segments...................................................................................


43


 


Report of Independent Registered Public Accounting Firm..............................................


45


 

 






 

ITEM 2.

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




 


Index to Management's Discussion and Analysis:




 


Overview....................................................................................................................


46


 


Results of Operations.................................................................................................


49


 


Performance by Business Segment.............................................................................


52


 


Financial Condition and Liquidity..................................................................................


59


 


Cautionary Note Concerning Factors That May Affect Future Results..............................


64


 






 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk...........................................


65


 






 

ITEM 4.

Controls and Procedures.............................................................................................


65


 






 

PART II

OTHER INFORMATION




 






 

ITEM 1.

Legal Proceedings......................................................................................................


66


 






 

ITEM 1A.

Risk Factors..............................................................................................................


66


 






 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds........................................


67


 






 

ITEM 3.

Defaults Upon Senior Securities..................................................................................


68


 






 

ITEM 4.

Removed and Reserved...............................................................................................


68


 






 

ITEM 5.

Other Information........................................................................................................


68


 






 

ITEM 6.

Exhibits.....................................................................................................................


69


 



 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended September 30, 2011

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)


2011


2010


2011


2010


 

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


$

7,531


$

6,874


$

22,522


$

19,953


 

Operating expenses










 

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


4,027


3,583


11,869


10,256


 

 

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


1,534


1,361


4,648


4,034


 

 

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


389


354


1,191


1,046


 

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


5,950


5,298


17,708


15,336


 

 

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


1,581


1,576


4,814


4,617


 











 

Interest expense and income










 

 

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


48


51


141


151


 

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


(10

)

(11

)

(29

)

(27

)

 

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


38


40


112


124


 











 

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


1,543


1,536


4,702


4,493


 

 

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


440


411


1,319


1,273


 

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


$

1,103


$

1,125


$     3,383



$     3,220













 

Less: Net income attributable to noncontrolling interest


15


19


54


63


 











 

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


$

1,088


$

1,106


$     3,329


$      3,157












 

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


707.7


714.0


710.9


713.4


 

Earnings per share attributable to 3M common

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


$

1.54


$

1.55


$       4.68



$      4.42













 

Weighted average 3M common shares outstanding - diluted


715.5


725.2


722.8


724.8


 

Earnings per share attributable to 3M common

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


$

1.52


$

1.53


$       4.61



$      4.36













 

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


$

   0.55   

  

$

0.525


$       1.65



$     1.575



 

 

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

 



 

3M Company and Subsidiaries
Consolidated Balance Sheet

(Unaudited)

 

(Dollars in millions, except per share amount)


Sept. 30,
2011


Dec. 31,
2010


 

Assets






 

 

Current assets






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


$

3,376


$

3,377


 

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


1,486


1,101


 

 

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


4,259


3,615


 

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






 

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


1,652


1,476


 

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


1,088


950


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


864


729


 

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


3,604


3,155


 

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


944


967


 

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


13,669


12,215


 







 

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


443


540


 

 

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


162


146


 

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


21,038


20,253


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


(13,529

)

(12,974

)

 

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


7,509


7,279


 

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


7,140


6,820


 

 

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


1,952


1,820


 

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


87


74


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


1,153


1,262


 

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


$

32,115


$

30,156


 







 

Liabilities






 

 

Current liabilities






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


$

1,204


$

1,269


 

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


1,689


1,662


 

 

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


654


778


 

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


421


358


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


2,197


2,022


 

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


6,165


6,089


 







 

 

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


4,955


4,183


 

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


1,704


2,013


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


1,879


1,854


 

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


$

14,703


$

14,139


 







 

Commitments and contingencies (Note 11)






 

 







 

Equity






 

3M Company shareholders' equity:






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


$

9


$

9


 

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


3,725


3,468


 

 

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


27,784


25,995


 

Treasury stock, at cost: 243,188,375 shares at Sept. 30, 2011; 232,055,448 shares at Dec. 31, 2010...........................................................................................


(11,211

)

(10,266

)

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


(3,339

)

(3,543

)

 

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


16,968


15,663


 

 

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


444


354


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


$

17,412


$

16,017


 







 

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


$

32,115


$

30,156


 

 

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

 



3M Company and Subsidiaries
Consolidated Statement of Cash Flows

(Unaudited)

 



Nine months ended
September 30,


 

(Millions)


2011


2010


 

Cash Flows from Operating Activities






 

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


$

3,383


$

3,220


 

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






 

 

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


919


837


 

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


(373

)

(431

)

 

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


400


243


 

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


210


228


 

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


(37

)

20


 

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


(52

)

(43

)

 

Changes in assets and liabilities........................................................................






 

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


(557

)

(529

)

 

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


(364

)

(521

)

 

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


(30

)

173


 

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


212


160


 

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


(45

)

44


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


(120

)

142


 

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


3,546


3,543


 







 

Cash Flows from Investing Activities






 

 

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


(862

)

(565

)

 

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


12


7


 

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


(531

)

(48

)

 

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


(2,592

)

(2,947

)

 

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


1,042


1,425


 

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


1,353


1,254


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


(6

)

(3

)

 

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


(1,584

)

(877

)

 







 

Cash Flows from Financing Activities






 

 

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


(13

)

(31

)

 

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


(474

)

(135

)

 

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


1,108


9


 

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


(2,207

)

(415

)

 

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


865


505


 

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


(1,171

)

(1,124

)

 

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


52


43


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


(58

)

(77

)

 

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


(1,898

)

(1,225

)

 







 

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


(65

)

(15

)

 







 

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


(1

)

1,426


 

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


3,377


3,040


 

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


$

3,376


$

4,466


 

 

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 26, 2011 (which updated 3M's 2010 Annual Report on Form 10-K) and 3M's Quarterly Report on Form 10-Q for the period ended March 31, 2011, during the first quarter of 2011 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 13). 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 26, 2011.

 

Effective with 3M's second-quarter 2011 Form 10-Q, the Company revised the amounts previously presented for cash used in investing activities and cash used in financing activities during the three months ended March 31, 2011 and 2010 by $33 million and $63 million, respectively, related to purchases of additional shares (noncontrolling interest) of non-wholly owned consolidated subsidiaries. These immaterial revisions increased cash used in financing activities and decreased cash used in investing activities by the amounts indicated above for the respective periods.

 

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 (29.7 million average options for the three months ended September 30, 2011; 12.3 million average options for the nine months ended September 30, 2011; 30.2 million average options for the three months ended September 30, 2010; and 30.4 million average options for the nine months ended September 30, 2010). 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 26, 2011, Note 10 to the Consolidated Financial Statements, for more detail). If the conditions for conversion were met, 3M could have chosen to pay in cash and/or common stock; however, if this occurred, the Company had 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. As discussed in Note 7 in this document, in September 2011, 3M redeemed all remaining Convertible Notes, which were otherwise due in 2032. The computations for basic and diluted earnings per share follow:

 



Earnings Per Share Computations

 



Three months ended


Nine months ended




September 30,


September 30,


(Amounts in millions, except per share amounts)


2011


2010


2011


2010


Numerator:










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


$

1,088


$

1,106


$

3,329


$

3,157












Denominator:










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


707.7


714.0


710.9


713.4












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


7.8


11.2


11.9


11.4












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


715.5


725.2


722.8


724.8












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


$

1.54


$

1.55


$

4.68


$

4.42


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


$

1.52


$

1.53


$

4.61


$

4.36
















New Accounting Pronouncements

 

In October 2009, the FASB issued 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 are separated in more circumstances than under pre-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 is 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 is 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 requires 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 was effective beginning January 1, 2011. 3M elected to adopt the provisions of this standard prospectively to new or materially modified arrangements beginning on the effective date. 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 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 scope of software revenue recognition guidance. Pre-existing software revenue recognition guidance required that its provisions be applied to an entire arrangement when the sale of any products or services containing or utilizing software when the software was 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 are accounted for under the multiple-element arrangements revenue recognition guidance rather than under the software revenue recognition guidance. Under the ASU, the following components are 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 was effective beginning January 1, 2011. 3M elected to adopt the provisions of this standard prospectively to new or materially modified arrangements beginning on the effective date. The adoption of this standard did not have a material impact on 3M's consolidated results of operations or financial condition.

 

In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures About Fair Value Measurements, that amends pre-existing disclosure requirements under 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 pre-existing fair value disclosures about the level of disaggregation. For 3M, this ASU was 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 was effective beginning the first quarter of 2011. 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 requires 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 requires disclosure of certain information with respect to arrangements that contain milestones. For 3M, this standard was effective prospectively beginning January 1, 2011. The adoption of this standard did not have a material impact on 3M's consolidated results of operations or financial condition.

 

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This standard clarifies guidance on how to measure fair value and is largely consistent with existing fair value measurement principles. The ASU also expands existing disclosure requirements for fair value measurements and makes other amendments. For 3M, this ASU is effective prospectively beginning January 1, 2012. The adoption of this standard is not expected to have a material impact on 3M's consolidated results of operations or financial condition.

 

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. This standard requires entities to present items of net income and other comprehensive income either in a single continuous statement, or in separate, but consecutive, statements of net income and other comprehensive income. The new requirements do not change which components of comprehensive income are recognized in net income or other comprehensive income, or when an item of other comprehensive income must be reclassified to net income. Also, the earnings-per share computation does not change. However, the current option under existing standards to report other comprehensive income and its components in the statement of changes in equity is eliminated. In addition, the previous option to disclose reclassification adjustments in the notes to the financial statements is also eliminated, as reclassification adjustments will be required to be shown on the face of the statement under the new standard. For 3M, this ASU is effective retrospectively beginning January 1, 2012, with early adoption permitted. Since this standard impacts disclosure requirements only, its adoption will not have a material impact on 3M's consolidated results of operations or financial condition.

 

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. Under this new standard, entities testing goodwill for impairment now have an option of performing a qualitative assessment before having to calculate the fair value of a reporting unit. If an entity determines, on the basis of qualitative factors, that the fair value of the reporting unit is more-likely-than-not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. For 3M, this ASU is effective beginning January 1, 2012, with early adoption permitted under certain conditions. The adoption of this standard will not have a material impact on 3M's consolidated results of operations or financial condition.

 



NOTE 2.  Acquisitions

 

3M makes acquisitions of certain businesses from time to time that the Company feels align with its strategic intent with respect to, among other factors, growth markets and adjacent product lines or technologies.

 

The impact on the consolidated balance sheet of the purchase price allocations related to acquisitions, including adjustments relative to other acquisitions within the allocation period, follows. Adjustments to previous acquisitions were not material and primarily related to changes in the preliminary allocations of purchase price of businesses acquired in the fourth quarter of 2010 and first quarter of 2011. The allocation of purchase price related to acquisitions in the first nine months of 2011, primarily Winterthur Technologie AG (Winterthur), is considered preliminary, largely with respect to certain acquired intangible assets and tax-related assets and liabilities.

 



First Nine Months 2011 Acquisition Activity




 

(Millions)
Asset (Liability)


Winterthur
Technologie AG


Other
Acquisitions


Total




 

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


$

43


$

40


$

83





 

Inventory ................................................


76


27


103




 

 

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


6


3


9




 

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


73


81


154




 

Purchased finite-lived intangible assets .....


226


58


284




 

Purchased goodwill .................................


152


76


228




 

Accounts payable and other liabilities, net of other assets ....................................


(76

)

(30

)

(106

)



 

Interest bearing debt ...............................


(79

)

(7

)

(86

)



Deferred tax asset/(liability) .....................


(60

)

(12

)

(72

)



 











 

Net assets acquired ................................


$

361


$

236


$

597




 

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



(56

)


-



(56

)



 

 

Net assets acquired excluding noncontrolling interest................................................


$

305


$

236


$

541














 

Supplemental information:










 

Cash paid ..............................................


$

327


$

240


$

567




 

Less: Cash acquired ...............................


32


4


36




 

Cash paid, net of cash acquired ...............


$

295


$

236


$

531




 

Non-cash ...............................................


10


-


10




 

Net assets acquired excluding noncontrolling interest................................................


$

305


$

236


$

541




 

 

Goodwill resulting from business combinations is largely attributable to the existing workforce of the acquired businesses and synergies expected to arise after 3M's acquisition of these businesses. In-process research and development associated with these business combinations were not material. Pro forma information related to acquisitions was not included because the impact on the Company's consolidated results of operations was 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.

 

During the nine months ended September 30, 2011, 3M completed eight business combinations. The purchase price paid for these business combinations (net of cash acquired) and the impact of other matters (net) during the nine months ended September 30, 2011 aggregated to $531 million.

 

(1) In January 2011, 3M (Industrial and Transportation Business) purchased certain assets of Nida-Core Corp., a manufacturer of structural honeycomb core and fiber-reinforced foam core materials based in Port St. Lucie, Florida.

 

(2) In February 2011, 3M (Industrial and Transportation Business) announced that it completed its acquisition of all of the outstanding shares of Alpha Beta Enterprise Co. Ltd., a manufacturer of box sealing tape and masking tape headquartered in Taipei, Taiwan.

 

(3) In February 2011, 3M (Consumer and Office Business) purchased all of the outstanding shares of Hybrivet Systems Inc., a provider of instant-read products to detect lead and other contaminants and toxins, which is based in Natick, Massachusetts.

 

(4) In early March 2011, 3M (Industrial and Transportation Business) acquired a controlling interest in Winterthur via completion of a public tender offer. Winterthur, based in Zug, Switzerland, is a leading global supplier of precision grinding technology serving customers in the area of hard-to-grind precision applications in industrial, automotive, aircraft and cutting tools. As of the settlement date of the tendered shares (the business acquisition date), 3M owned approximately 86 percent of Winterthur shares via the tender and previous open market share purchases. The purchase price paid in the preceding table includes non-cash consideration of $10 million representing the business acquisition date fair value of shares previously owned by 3M as of December 31, 2010 and cash consideration paid, net of cash acquired, of $295 million for subsequently tendered and open market purchased shares through the business acquisition date. Following the business acquisition date, 3M also purchased additional outstanding shares of its consolidated Winterthur subsidiary, increasing 3M's ownership interest to approximately 98 percent as of September 30, 2011 as discussed in Note 4.

 

(5) In April 2011, 3M (Electro and Communications Business) purchased all of the outstanding shares of AP&T Co. Ltd., based in Korea, which provides advanced sputtering and plating services, materials and manufacturing capabilities for flexible circuits for the mobile hand-held, touch-screen panel and display markets.

 

(6) In April 2011, 3M (Display and Graphics Business) purchased all of the outstanding shares of Original Wraps Inc., a company specializing in the creative business development, technology and design of personalization platforms for vehicles and vehicle accessories, which is based in Golden, Colorado.

 

(7) In July 2011, 3M (Industrial and Transportation Business) purchased all of the outstanding shares of Advanced Chemistry & Technology Inc., a manufacturer of quick-cure, light-weight polysulfide sealants for aerospace applications, which is based in Garden Grove, California.

 

(8) In July 2011, 3M (Industrial and Transportation Business) purchased certain assets of Piranha Plastics LLC, based in Santa Clara, California, which provides plastic molding and paint solutions to the automotive aftermarket.

 

Purchased identifiable finite-lived intangible assets related to acquisitions which closed in the first nine months of 2011 totaled $284 million and will be amortized on a straight-line basis over a weighted-average life of 14 years (lives ranging from 3 to 20 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.

 

Subsequent Event:

 

In October 2011, 3M (Consumer and Office Business) acquired the do-it-yourself and professional business of GPI Group. GPI is a manufacturer and marketer of home improvement products such as tapes, hooks, insulation, and floor protection products and accessories, headquartered in France.

 



NOTE 3.  Goodwill and Intangible Assets

 

Purchased goodwill related to the acquisitions which closed in the first nine months of 2011 totaled $230 million, $7 million of which is deductible for tax purposes. The acquisition activity in the following table also includes the net impacts of adjustments to the preliminary allocation of purchase price for prior year acquisitions, which decreased goodwill by $2 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, 2010 and September 30, 2011, follow:

 

Goodwill

 

(Millions)


Dec. 31, 2010
Balance


Acquisition
activity


Translation
and other


Sept. 30, 2011
Balance


 

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


$

1,783


$

209


$

25


$

2,017


 

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


1,506


(1

)

28


1,533


 

 

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


994


4


3


1,001


 

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


187


13


5


205


 

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


1,670


(3

)

21


1,688


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


680


6


10


696


 

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


$

6,820


$

228


$

92


$

7,140


 

 

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 13, effective in the first quarter of 2011, 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 2011, 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, 2011, intangible assets (excluding goodwill) acquired through business combinations increased balances by $284 million. Balances are also impacted by changes in foreign currency exchange rates. The carrying amount and accumulated amortization of acquired finite-lived intangible assets, in addition to the balance of non-amortizable intangible assets, as of September 30, 2011, and December 31, 2010, follow:

 

(Millions)


Sept. 30,
2011


Dec. 31,
2010


 

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


$

568


$

551


 

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


2,329


2,016


 

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


$

2,897


$

2,567


 







 

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


(371

)

(345

)

 

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


(700

)

(527

)

 

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


$

(1,071

)

$

(872

)

 

 









 

Total finite-lived intangible assets - net................................................................


$

1,826


$

1,695










 

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



126



125


 

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


$

1,952


$

1,820


 

 

Amortization expense for acquired intangible assets for the three-month and nine-month periods ended September 30, 2011 and 2010 follows:

 



Three months ended


Nine months ended




September 30,


September 30,


(Millions)


2011


2010


2011


2010


Amortization expense..


$

59


$

44


$

176


$

130


 

The table below shows expected amortization expense for acquired amortizable intangible assets recorded as of September 30, 2011:

 

(Millions)


Last
Quarter
2011


2012


2013


2014


2015


2016


After
2016


Amortization expense


$

59


$

223


$

212


$

189


$

177


$

164


$

802


 

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.  Supplemental Equity and Comprehensive Income Information

 

Consolidated Statement of Changes in Equity

 

3M Company and Subsidiaries

Three months ended September 30, 2011





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, 2011


$

17,742


$

3,692


$

27,110


$

(10,511

)

$

(2,961

)

$

412


 















 

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


1,103




1,088






15


 

 

Cumulative translation adjustment


(490

)







(507

)

17


 

Defined benefit pension and post-retirement plans adjustment


77








77


-


 

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


(2

)







(2

)

-


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


54








54


-


 

Total comprehensive income....


742












 

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


(388

)



(388

)







 

 

Stock-based compensation, net of tax impacts............................


42


42










 

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


(837

)





(837

)





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


111




(26

)

137






 

Balance at Sept. 30, 2011......


$

17,412


$

3,734


$

27,784


$

(11,211

)

$

(3,339

)

$

444


 

 

3M Company and Subsidiaries

Nine months ended September 30, 2011





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 Dec. 31, 2010


$

16,017


$

3,477


$

25,995


$

(10,266

)

$

(3,543

)

$

354


 















 

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


3,383




3,329






54


 

 

Cumulative translation adjustment


(14

)







(34

)

20


 

Defined benefit pension and post- retirement plans adjustment


207








206


1


 

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


(5

)







(5

)

-


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


37








37


-


 

Total comprehensive income.....


3,608












 

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


(1,171

)



(1,171

)







 

 

Business combination allocation to noncontrolling interest .............


56










56


 

Purchase and sale of subsidiary shares - net.............................


(42

)

(1

)







(41

)

 

Stock-based compensation, net of tax impacts.............................


258


258










 

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


(2,181

)





(2,181

)





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


867




(369

)

1,236






 

Balance at Sept. 30, 2011......


$

17,412


$

3,734


$

27,784


$

(11,211

)

$

(3,339

)

$

444


 



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, net of tax impacts.............................


45


45










 

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


(11

)





(11

)





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


118




(26

)

144






 

Balance at Sept. 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 Dec. 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, net of tax impacts.............................


221


221










 

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


(415

)





(415

)





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


506




(293

)

799






 

Balance at Sept. 30, 2010......


$

15,833


$

3,390


$

25,493


$

(10,013

)

$

(3,366

)

$

329


 

 



Accumulated Other Comprehensive Income (Loss) Attributable to 3M



Sept. 30,


Dec. 31,


 

(Millions)


2011


2010


 

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


$

340


$

374


 

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


(3,673

)

(3,879

)

 

 

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


(11

)

(6

)

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


5


(32

)

 

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


$

(3,339

)

$

(3,543

)

 

 

 

Consolidated Statement of Comprehensive Income (Loss)













Three months ended

September 30,


Nine months ended

September 30,


(Millions)


2011


2010


2011


2010


Net income including noncontrolling interest


$     1,103


$     1,125


 

$   3,383


 

$    3,220


Other comprehensive income, net of tax:










   Cumulative translation adjustment


(490

)

669


 

(14

 

)

 

216


   Defined benefit pension and postretirement plans adjustment


77


48


207


 

147


   Debt and equity securities, unrealized gain (loss)


(2

)

3


 

(5

 

)

 

5


   Cash flow hedging instruments, unrealized gain (loss)


54


(52

)

 

37


 

11


Total other comprehensive income (loss), net of tax


(361

)

668


 

225


 

379


Comprehensive income (loss) including noncontrolling interest


742


1,793


 

3,608


 

3,599


Comprehensive (income) loss attributable to noncontrolling interest


(32

(37

(75

)

(93

)

Comprehensive income (loss) attributable to 3M


$        710


$     1,756


 

$   3,533


 

$   3,506


 

 

Components of Comprehensive Income (Loss) Attributable to 3M







 



Three months ended 

September 30,


Nine months ended

September 30,


 

(Millions)


2011


2010


2011


2010


 

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


1,088


$

1,106


$

3,329


$

3,157


 











 

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


(489

)

586


(63

)

185


 

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


(18

)

65


29


2


 

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


(507

)

651


(34

)

187


 











 

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


120


75


358


231


 

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


(43

)

(27

)

(152

)

(85

)

 

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


77


48


206


146


 











 

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


(3

)

3


(8

)

7


 

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


1


-


3


(2

 

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


(2

)

3


(5

)

5


 











 

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


85


(84

)

59


16


 

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


(31

)

32


(22

)

(5

 

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


54


(52

)

37


11


 











 

Total comprehensive income (loss) attributable to 3M.................


$

710


$

1,756


$

3,533


$

 

3,506



 

Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income. Reclassifications to earnings from accumulated other comprehensive income including noncontrolling interest that related to pension and postretirement expense in the income statement were $117 million pre-tax ($77 million after-tax) for the three months ended September 30, 2011, $355 million pre-tax ($207 million after-tax) for the nine months ended September 30, 2011, $77 million pre-tax ($48 million after-tax) for the three months ended September 30, 2010, and $231 million pre-tax ($147 million after-tax) for the nine months ended September 30, 2010. These pension and postretirement expense pre-tax amounts (including noncontrolling interest) are shown in the tables in Note 8 as amortization of transition (asset) obligation, amortization of prior service cost (benefit) and amortization of net actuarial (gain) loss. Cash flow hedging instruments reclassifications are provided in Note 9. Reclassifications to earnings from accumulated other comprehensive income for debt and equity securities were not material for the three and nine months ended September 30, 2011 and 2010. Other reclassification adjustments were not material. Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation does include impacts from items such as net investment hedge transactions.

 

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

 

As discussed in Note 2, in early March 2011, 3M acquired a controlling interest in Winterthur Technologie AG (Winterthur), making Winterthur a consolidated subsidiary as of that business acquisition date. Subsequent to this business acquisition date, 3M purchased additional outstanding shares of its Winterthur subsidiary increasing 3M's ownership interest from approximately 86 percent as of the business acquisition date to approximately 98 percent as of September 30, 2011. The $50 million of cash paid in the first nine months of 2011 as a result of these additional purchases of Winterthur shares was classified as other financing activity in the consolidated statement of cash flows. These additional purchases did not result in a material transfer from noncontrolling interest to 3M Company shareholders' equity. In addition, during the first nine months of 2011, 3M sold a noncontrolling interest in a newly formed subsidiary for an immaterial amount, which was also classified as other financing activity in the consolidated statement of cash flows.

 

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 other financing activity in the consolidated statement of cash flows. The remainder of the purchase financed by the note payable to SEI was considered non-cash 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 owned majority owned subsidiary for an immaterial amount during the first half of 2010.

 



The following table summarizes the effects of the 2010 transactions on equity attributable to 3M Company shareholders for the nine months ended September 30, 2010.

 

(Millions)


Nine months ended

Sept. 30, 2010

 

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


$



3,157


Transfers from noncontrolling interest...................................


46

 

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


$         3,203

 

 

NOTE 5.  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 2003.

 

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 protested certain IRS positions within these tax years and 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 protested certain IRS positions for 2008 and entered into the administrative appeals process with the IRS during the second quarter of 2010. During the first quarter of 2011, the IRS completed its field examination of the Company's U.S. federal income tax return for the 2009 year. The Company protested certain IRS positions for 2009 and entered into the administrative appeals process with the IRS during the second quarter of 2011. Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2010 and 2011. It is anticipated that the IRS will complete its examination of the Company for 2010 by the end of the first quarter of 2012, and for 2011 by the end of the first quarter of 2013. As of September 30, 2011, 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. During the second quarter of 2011, the Company received a refund from the IRS for the 2004 tax year. Payments relating to other proposed assessments arising from the 2005 through 2011 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 amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of September 30, 2011 and December 31, 2010, respectively, are $319 million and $394 million.

 

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized in the consolidated statement of income on a gross basis approximately $3 million of benefit and $4 million of expense for the three months ended September 30, 2011 and September 30, 2010, respectively, and had an immaterial impact and approximately $5 million of benefit for the nine months ended September 30, 2011 and September 30, 2010, respectively. At September 30, 2011 and December 31, 2010, accrued interest and penalties in the consolidated balance sheet on a gross basis were $58 million and $52 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.

 

The effective tax rate for the first nine months of 2011 was 28.1 percent, compared to 28.3 percent in the first nine months of 2010, a decrease of 0.2 percent. The first nine months of 2010 includes a one-time income tax charge of $84 million as a result of the March 2010 enactment of the Patient Protection and Affordable Care Act, including modifications made in the Health Care and Education Reconciliation Act of 2010, which increased the first nine months 2010 effective tax rate by approximately 1.8 percent. Since future anticipated retiree health care liabilities and related tax subsidies were 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. Other factors on a combined net basis increased the effective tax rate for the first nine months of 2011 when compared to the first nine months of 2010 by 1.6 percent, with the most significant item related to international taxes. This was due primarily to the one-time 2010 tax benefits resulting from the corporate alignment transactions that allowed the Company to increase its ownership of a foreign subsidiary. These transactions are described in the section of Note 4 entitled "Purchase and Sale of Subsidiary Shares and Transfers of Ownership Interests Involving Non-Wholly Owned Subsidiaries". In addition to the transaction noted above, a corporate reorganization of a wholly owned subsidiary provided a one-time benefit to international taxes in the second quarter of 2011. The Company's effective tax rate also benefited during the first nine months of 2011 from the reinstatement of the research and development credit and adjustments to its income tax reserves.

 

The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exits. As of September 30, 2011 and December 31, 2010, the Company had valuation allowances of $128 million on its deferred tax assets.

 

NOTE 6.  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)


2011


2010


 







 

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


$

257


$

246


 

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


-


52


 

 

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


389


280


 

Commercial paper................................................................................................


138


55


 

Certificates of deposit/time deposits......................................................................


117


29


 

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


-


55


 

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


6


20


 

Asset-backed securities:






 

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


388


253


 

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


144


79


 

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


35


24


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


10


8


 

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


577


364


 

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


2


-


 







 

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


$

1,486


$

1,101


 







 

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


$

132


$

63


 

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


3


3


 

 

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


106


192


 

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


34


44


 

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


3


3


 

Asset-backed securities:






 

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


81


144


 

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


56


70


 

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


23


14


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


160


228


 

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


5


7


 







 

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


$

443


$

540


 







 

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


$

1,929


$

1,641


 

 

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, 2011, gross unrealized losses totaled approximately $11 million (pre-tax), while gross unrealized gains totaled approximately $2 million (pre-tax). At December 31, 2010, gross unrealized losses totaled approximately $9 million (pre-tax), while gross unrealized gains totaled approximately $5 million (pre-tax). Gross realized gains and losses on sales or maturities of marketable securities for the first nine months of 2011 and 2010 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 balances at September 30, 2011 for marketable securities by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

(Millions)


Sept. 30, 2011


 





 

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


$

1,013


 

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


805


 

 

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


96


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


15


 





 

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


$

1,929


 

 

3M has a diversified marketable securities portfolio of $1.929 billion as of September 30, 2011. Within this portfolio, current and long-term asset-backed securities (estimated fair value of $737 million) are primarily comprised of interests in automobile loans and credit cards. At September 30, 2011, the asset-backed securities credit ratings were AAA or A-1+, with the exception of two securities rated A1 or A3 with a fair market value of $7 million.

 

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 is $5 million at September 30, 2011 and $7 million at December 31, 2010. Gross unrealized losses within accumulated other comprehensive income related to auction rate securities totaled $8 million (pre-tax) at September 30, 2011 and $6 million (pre-tax) at December 31, 2010. As of September 30, 2011, 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 10 for a table that reconciles the beginning and ending balances of auction rate securities.

 



NOTE 7.  Long-Term Debt and Short-Term Borrowings

 

As discussed in Note 10 in 3M's Current Report on Form 8-K dated May 26, 2011 (which updated 3M's 2010 Annual Report on Form 10-K), 3M's Convertible Notes were originally issued on November 15, 2002, with partial redemptions in 2005 and 2007. In September 2011, 3M redeemed all remaining Convertible Notes, which were otherwise due in 2032. As a result, in September 2011, 3M paid out cash of approximately $227 million (with no gain or loss on extinguishment). Of this amount, $24 million was classified as cash flows from operating activities (for accretion/accreted interest on debt), with the remainder classified as cash flows from financing activities (repayment of debt).

 

The Company has a "well-known seasoned issuer" shelf registration statement, effective August 5, 2011, which registers an indeterminate amount of debt or equity securities for future sales. The Company intends to use the proceeds from future securities sales off this shelf for general corporate purposes. This replaced 3M's previous shelf registration dated February 17, 2009. In September 2011, in connection with the August 5, 2011 "well-known seasoned issuer" registration statement, 3M established a $3 billion medium-term notes program (Series F), from which 3M issued a five-year $1 billion fixed rate note with a coupon rate of 1.375%. Proceeds will be used for general corporate purposes, including repayment of $800 million (principal amount) of medium-term notes due in November 2011.

 

In August 2011, 3M entered into a $1.5 billion, five-year multi-currency revolving credit agreement, which replaced the existing agreement that was due to expire in April 2012. This credit agreement includes a provision under which 3M may request an increase of up to $500 million, bringing the total facility up to $2 billion (at the lenders' discretion). This facility was undrawn at September 30, 2011. Also, in August 2011, 3M entered into a $200 million, one-year letter of credit agreement with HSBC Bank USA. This agreement replaced the sublimit for letters of credit that was previously encompassed in the $1.5 billion five-year facility. As of September 30, 2011, 3M letters of credit issued under this $200 million facility totaled $121 million. An additional $102 million in U.S. letters of credit was outstanding with other banking partners. These letters of credit are utilized in connection with normal business activities. Under both the $1.5 billion and $200 million credit agreements, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the same period. At September 30, 2011, this ratio was approximately 38 to 1.

 

As disclosed in 3M's Current Report on Form 8-K dated May 26, 2011 (which updated 3M's 2010 Annual Report on Form 10-K), in the fourth quarter of 2010, the Company entered into a 100.5 million Canadian Dollar loan, with four equal installments due in April 2011, July 2011, October 2011 and January 2012. During March 2011, this loan agreement was amended to increase the loan amount to 201 million Canadian Dollars and to allow for repayment of the total loan in July 2012, instead of in four equal installments. However, 3M has the option to repay the principal amount of this loan before July 2012. All other terms and conditions of the loan agreement remain in full force. In the third quarter of 2011, 3M repaid principal of 50.25 million Canadian Dollars, resulting in a remaining principal amount of 150.75 million Canadian Dollars as of September 30, 2011.

 

As also disclosed in 3M's Current Report on Form 8-K dated May 26, 2011 (which updated 3M's 2010 Annual Report on Form 10-K), 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 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 4. This note was due in three equal installments of 5.8 billion Japanese Yen, with one installment paid on September 30, 2010, one installment paid on March 30, 2011, and the final installment paid on September 30, 2011. Interest accrued on the note based on the three-month Tokyo Interbank Offered Rate (TIBOR) plus 40 basis points.

 



NOTE 8.  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 September 30,


 



Qualified and Non-qualified

Pension Benefits


Postretirement


 



United States


International


Benefits


 

(Millions)


2011


2010


2011


2010


2011


2010


 

Net periodic benefit cost (benefit)














 

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


$

51


$

50


$

27


$

28


$

16


$

13


 

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


157


160


62


62


23


22


 

 

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


(231

)

(233

)

(70

)

(71

)

(20

)

(20

)

 

Amortization of transition (asset) obligation......


-


-


-


-


-


-


 

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


2


4


(3

)

(1

)

(18

)

(23

)

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


83


55


28


21


25


21


 

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


$

62


$

36


$

44


$

39


$

26


$

13


 

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


-


-


-


-


-


-


 

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


$

62


$

36


$

44


$

39


$

26


$

13


 

 

 

 


Nine months ended September 30,


 



Qualified and Non-qualified

Pension Benefits


Postretirement


 



United States


International


Benefits


 

(Millions)


2011


2010


2011


2010


2011


2010


 

Net periodic benefit cost (benefit)














 

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


$

154


$

151


$

83


$

83


$

46


$

41


 

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


470


479


186


187


69


66


 

 

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


(695

)

(697

)

(209

)

(214

)

(59

)

(62

)

 

Amortization of transition (asset) obligation......


-


-


-


1


-


-


 

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


8


10


(10

)

(3

)

(54

)

(70

)

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


250


165


84


64


77


64


 

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


$

187


$

108


$

134


$

118


$

79


$

39


 

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


-


-


-


(22

)

-


-


 

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


$

187


$

108


$

134


$

96


$

79


$

39


 

 

For the nine months ended September 30, 2011, contributions totaling $310 million were made to the Company's U.S. and international pension plans and $63 million to its postretirement plans. For total year 2011, the Company plans to contribute in the range of $500 million to $600 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 2011. Therefore, 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 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.

 

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). In March 2011, over the objections of 3M and six other limited partners of WG Trading Company, the district court judge ruled in favor of the court appointed receiver's proposed distribution plan. In April 2011, the 3M benefit plans received their share under the court-ordered distribution plan. 3M and six other limited partners of WG Trading Company have appealed the court's order to the United States Court of Appeals for the Second Circuit. The benefit plan trustee holdings of WG Trading Company interests were adjusted to reflect the decreased estimated fair market value, inclusive of estimated insurance proceeds, as of the annual measurement dates. The Company has insurance that it believes, based on what is currently known, will result in the recovery of a portion of the decrease in original asset value. As of the 2010 measurement date these holdings represented less than one percent of 3M's fair value of total plan assets. 3M currently believes that the resolution of these events will not have a material adverse effect on the consolidated financial position of the Company.

 

NOTE 9.  Derivatives

 

The Company uses interest rate swaps, currency swaps, commodity price swaps, and forward and option contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. The information that follows explains the various types of derivatives and financial instruments used by 3M, how and why 3M uses such instruments, how such instruments are accounted for, and how such instruments impact 3M's financial position and performance.

 

Additional information with respect to the impacts on other comprehensive income of nonderivative hedging and derivative instruments is included in Note 4. Additional information with respect to the fair value of derivative instruments is included in Note 10. References to information regarding derivatives and/or hedging instruments associated with the Company's long-term debt are also made in Note 10 to the Consolidated Financial Statements in 3M's Current Report on Form 8-K dated May 26, 2011 (which updated 3M's 2010 Annual Report on Form 10-K).

 

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

 

Cash Flow Hedges:

 

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

 

Cash Flow Hedging - Foreign Currency Forward and Option Contracts: The Company enters into foreign exchange forward and option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies 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, 2011 and 2010. 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, 2011, 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, 2011 was approximately $4.2 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, 2011 and 2010. The dollar equivalent gross notional amount of the Company's natural gas commodity price swaps designated as cash flow hedges at September 30, 2011 was $31 million.

 

Cash Flow Hedging - Forecasted Debt Issuance: In August 2011, in anticipation of the September 2011 issuance of $1 billion in five-year fixed rate notes, 3M executed a pre-issuance cash flow hedge on a notional amount of $400 million by entering into a forward-starting five-year floating-to-fixed interest rate swap. Upon debt issuance in September 2011, 3M terminated the floating-to-fixed interest rate swap. The termination of the swap resulted in a $7 million pre-tax loss ($4 million after-tax) that will be amortized over the five-year life of the note. 

 

As of September 30, 2011, the Company had a balance of $5 million associated with the after tax net unrealized gain associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This includes a $4 million balance (loss) related to a floating-to-fixed interest rate swap (discussed in the preceding paragraph), which will be amortized over the five-year life of the note. 3M expects to reclassify a majority of the remaining balance to earnings over the next 12 months (with the impact offset by cash flows from underlying hedged items).

 

The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to derivative instruments designated as cash flow hedges are provided in the following table. Reclassifications of amounts from accumulated other comprehensive income into income include accumulated gains (losses) on dedesignated hedges at the time earnings are impacted by the forecasted transaction.

 

 

Three months ended September 30, 2011

(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.........................................


$

49


Cost of sales


$

(41

)

Cost of sales


$

-


 

Foreign currency forward contracts........


(56

)

Interest expense


(56

)

Interest expense


-


 

 

Commodity price swap contracts...........


2


Cost of sales


-


Cost of sales


-


Interest rate swap contracts..................


(7

)

Interest expense


-


Interest expense


-


 

Total................................................


$

(12

)



$

(97

)



$

-


 

 

 

Nine months ended September 30, 2011

(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.........................................


$

(12

)

Cost of sales


$

(75

)

Cost of sales


$

-


 

Foreign currency forward contracts........


(55

)

Interest expense


(54

)

Interest expense


-


 

 

Commodity price swap contracts...........


-


Cost of sales


(4

)

Cost of sales


-


Interest rate swap contracts..................


(7

)

Interest expense


-


Interest expense


-


 

Total................................................


$

(74

)



$

(133

)



$

-


 

 



 

Three months ended September 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 September 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

)



$

-


 

 

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, 2011 was $1.1 billion.

 

At September 30, 2011, the Company had interest rate swaps designated as fair value hedges of underlying fixed rate obligations. 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 its $800 million, three-year, 4.50% notes issued in October 2008.

 

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 September 30, 2011

(Millions)


Gain (Loss) on Derivative

Recognized in Income


Gain (Loss) on Hedged Item

Recognized in Income


Derivatives in Fair Value Hedging Relationships


Location


Amount


Location


Amount


Interest rate swap contracts..............................


Interest expense


$

1


Interest expense


$

(1

)

Total............................................................




$

1




$

(1

)

 

Nine months ended September 30, 2011

(Millions)


Gain (Loss) on Derivative

Recognized in Income


Gain (Loss) on Hedged Item

Recognized in Income


Derivatives in Fair Value Hedging Relationships


Location


Amount


Location


Amount


Interest rate swap contracts..............................


Interest expense


$

(7

)

Interest expense


$

7


Total............................................................




$

(7

)



$

7


 

Three months ended September 30, 2010
(Millions)


Gain (Loss) on Derivative
Recognized in Income


Gain (Loss) on Hedged Item
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 September 30, 2010
(Millions)


Gain (Loss) on Derivative
Recognized in Income


Gain (Loss) on Hedged Item
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


 

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, 2011, there were no cross currency swaps and foreign currency forward contracts designated as net investment hedges.

 

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 September 30, 2011

(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...................


$

85


N/A


$

-


Total............................................................


$

85




$

-


 

Nine months ended September 30, 2011

(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...................


$

(35

)

N/A


$

-


Total............................................................


$

(35

)



$

-


 

Three months ended September 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 September 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




$

-


 

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 preceding Cash Flow Hedges section). 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 $1.1 billion as of September 30, 2011. 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:

 

(Millions)


Three months ended Sept. 30, 2011
Gain (Loss) on Derivative
Recognized in Income


Nine months ended Sept. 30, 2011
Gain (Loss) on Derivative
Recognized in Income


Derivatives Not Designated as Hedging Instruments


Location


Amount


Location


Amount


Foreign currency forward/option contracts..........


Cost of sales


$

32


Cost of sales


$

4


Foreign currency forward contracts....................


Interest expense


6


Interest expense


18


Total........................................................




$

38




$

22


 

(Millions)


Three months ended Sept. 30, 2010
Gain (Loss) on Derivative
Recognized in Income


Nine months ended Sept. 30, 2010
Gain (Loss) on Derivative
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

)

Total........................................................




$

(45

)



$

(30

)

 



Location and Fair Value Amount of Derivative Instruments

 

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

 

September 30, 2011
(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


$

65


Other current liabilities


$

31


Commodity price swap contracts...................


Other current assets


-


Other current liabilities


4


Interest rate swap contracts...........................


Other assets


31


Other liabilities


-


Total derivatives designated as hedging instruments..........................................




$

96




$

35












Derivatives not designated as hedging
instruments










Foreign currency forward/option contracts.......


Other current assets


$

18


Other current liabilities


$

11


Total derivatives not designated as hedging instruments............................




$

18




$

11












Total derivative instruments..........................




$

114




$

46


 

December 31, 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


$

26


Other current liabilities


$

48


Commodity price swap contracts...................


Other current assets


-


Other current liabilities


5


Interest rate swap contracts...........................


Other assets


39


Other liabilities


-


Total derivatives designated as hedging instruments..........................................




$

65




$

53












Derivatives not designated as hedging
instruments
.................................................










Foreign currency forward/option contracts.......


Other current assets


$

12


Other current liabilities


$

34


Total derivatives not designated as hedging instruments............................




$

12




$

34












Total derivative instruments..........................




$

77




$

87


 

Additional information with respect to the fair value of derivative instruments is included in Note 10.

 

Currency Effects and Credit Risk

 

Currency Effects: 3M estimates that year-on-year currency effects, including hedging impacts, increased net income attributable to 3M by approximately $51 million for the three months ended September 30, 2011 and increased net income attributable to 3M by approximately $131 million for the nine months ended September 30, 2011. This estimate includes the effect of translating profits from local currencies into U.S. dollars and the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad. This estimate also includes year-on-year currency effects from transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks, which 3M estimates increased net income attributable to 3M by approximately $18 million for the three months ended September 30, 2011 and decreased net income attributable to 3M by approximately $8 million for the nine months ended September 30, 2011.

 

Credit risk: The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps, currency swaps, commodity price swaps, and forward and option contracts. However, the Company's risk is limited to the fair value of the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counterparties. The Company does not anticipate nonperformance by any of these counterparties. 3M has credit support agreements in place with two of its primary derivatives counterparties. Under these agreements, either party is required to post eligible collateral when the market value of transactions covered by these agreements exceeds specified thresholds, thus limiting credit exposure for both parties.

 

NOTE 10.  Fair Value Measurements

 

3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under the standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

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

 

For 3M, assets and liabilities that are measured at fair value on a recurring basis primarily relate to available-for-sale marketable securities, available-for-sale investments (included as part of investments in the Consolidated Balance Sheet) and certain derivative instruments. Derivatives include cash flow hedges, interest rate swaps and most net investment hedges. The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and liabilities. Separately, there were no material fair value measurements with respect to nonfinancial assets or liabilities that are recognized or disclosed at fair value in the Company's financial statements on a recurring basis for the three and nine month periods ended September 30, 2011 and 2010.

 

3M uses various valuation techniques, which are primarily based upon the market and income approaches, with respect to financial assets and liabilities. Following is a description of the valuation methodologies used for the respective financial assets and liabilities measured at fair value.

 

Available-for-sale marketable securities - except auction rate securities:

 

Marketable securities, except auction rate securities, are valued utilizing multiple sources. A weighted average price is used for these securities. Market prices are obtained for these securities from a variety of industry standard data providers, security master files from large financial institutions, and other third-party sources. These multiple prices are used as inputs into a distribution-curve-based algorithm to determine the daily fair value to be used. 3M classifies U.S. treasury securities as level 1, while all other marketable securities (excluding auction rate securities) are classified as level 2. Marketable securities are discussed further in Note 6.

 

Available-for-sale marketable securities - auction rate securities only:

 

As discussed in Note 6, auction rate securities held by 3M failed to auction since the second half of 2007. As a result, investments in auction rate securities are valued utilizing third-party indicative bid levels in markets that are not active and broker-dealer valuation models that utilize inputs such as current/forward interest rates, current market conditions and credit default swap spreads. 3M classifies these securities as level 3.

 

Available-for-sale investments:

 

Investments include equity securities that are traded in an active market. Closing stock prices are readily available from active markets and are used as being representative of fair value. 3M classifies these securities as level 1.

 

Derivative instruments:

 

The Company's derivative assets and liabilities within the scope of ASC 815, Derivatives and Hedging, are required to be recorded at fair value. The Company's derivatives that are recorded at fair value include foreign currency forward and option contracts, commodity price swaps, interest rate swaps, and net investment hedges where the hedging instrument is recorded at fair value. Net investment hedges that use foreign currency denominated debt to hedge 3M's net investment are not impacted by the fair value measurement standard under ASC 820, as the debt used as the hedging instrument is marked to a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may impact fair value.

 

3M has determined that foreign currency forwards and commodity price swaps will be considered level 1 measurements as these are traded in active markets which have identical asset or liabilities, while currency swaps, foreign currency options, interest rate swaps and cross-currency swaps will be considered level 2. For level 2 derivatives, 3M uses inputs other than quoted prices that are observable for the asset. These inputs include foreign currency exchange rates, volatilities, and interest rates. The level 2 derivative positions are primarily valued using standard calculations/models that use as their basis readily observable market parameters. Industry standard data providers are 3M's primary source for forward and spot rate information for both interest rates and currency rates, with resulting valuations periodically validated through third-party or counterparty quotes and a net present value stream of cash flows model.

 

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

 



Fair Value








 

(Millions)


at
Sept. 30,


Fair Value Measurements
Using Inputs Considered as


 

Description


2011


Level 1


Level 2


Level 3


 

Assets:










 

Available-for-sale:










 

 

Marketable securities:










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


$

389


$

-


$

389


$

-


 

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


3


-


3


-


 

 

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


495


-


495


-


 

Certificates of deposit/time deposits........................


117


-


117


-


 

Commercial paper..................................................


138


-


138


-


 

Asset-backed securities:










 

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


469


-


469


-


 

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


200


-


200


-


 

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


58


-


58


-


 

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


10


-


10


-


 

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


34


34


-


-


 

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


9


-


9


-


 

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


5


-


-


5


 

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


2


-


2


-


 

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


5


5


-


-


 

Derivative instruments - assets:










 

Foreign currency forward/option contracts....................


83


76


7


-


 

Interest rate swap contracts.......................................


31


-


31


-


 











 

Liabilities:










 

Derivative instruments - liabilities:










 

Foreign currency forward/option contracts....................


42


42


-


-


 

Commodity price swap contracts................................


4


4


-


-


 



 

 



Fair Value








(Millions)


at
Dec. 31,


Fair Value Measurements
Using Inputs Considered as


 

Description


2010


Level 1


Level 2


Level 3


 

Assets:










 

Available-for-sale:










 

 

Marketable securities:










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


$

309


$

-


$

309


$

-


 

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


55


-


55


-


 

 

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


472


-


472


-


 

Certificates of deposit/time deposits........................


29


-


29


-


 

Commercial paper..................................................


55


-


55


-


 

Asset-backed securities:










 

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


397


-


397


-


 

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


149


-


149


-


 

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


38


-


38


-


 

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


8


-


8


-


 

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


99


99


-


-


 

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


23


-


23


-


 

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


7


-


-


7


 

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


21


21


-


-


 

Derivative instruments - assets:










 

Foreign currency forward/option contracts....................


38


36


2


-


 

Interest rate swap contracts.......................................


39


-


39


-


 











 

Liabilities:










 

Derivative instruments - liabilities:










 

Foreign currency forward/option contracts....................


82


82


-


-


 

Commodity price swap contracts................................


5


5


-


-


 

The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3).

 

(Millions)


Three months ended 

September 30,


Nine months ended

September 30,

 

Marketable securities - auction rate securities only


2011


2010


2011


2010

 

Beginning balance.............................................................


$

8


$

7


$

7


$

5


Total gains or losses:









 

    Included in earnings.......................................................


-


-


-


-

 

    Included in other comprehensive income..........................


(3

)

(1

)

(2

)

1

 

Purchases, issuances, and settlements..............................


-


-


-


-

 

Transfers in and/or out of Level 3


-


-


-


-

 

Ending balance (September 30)..........................................


5


6


5


6

 










 

Additional losses included in earnings due to reclassifications from other comprehensive income for:









 

    Securities sold during the period ended September 30......


-


-


-


-

 

    Securities still held at September 30...............................


-


-


-


-

 

 

In addition, the plan assets of 3M's pension and postretirement benefit plans are measured at fair value on a recurring basis (at least annually). Refer to Note 11 in 3M's Current Report on Form 8-K dated May 26, 2011 (which updated 3M's 2010 Annual Report on Form 10-K).

 

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

 

Disclosures are required for certain assets and liabilities that are measured at fair value, but are recognized and disclosed at fair value on a nonrecurring basis in periods subsequent to initial recognition. For 3M, such measurements of fair value relate primarily to long-lived asset impairments. There were no material long-lived asset impairments for the three and nine months ended September 30, 2011 and 2010.

Fair Value of Financial Instruments:

 

The Company's financial instruments include cash and cash equivalents, marketable securities, accounts receivable, certain investments, accounts payable, borrowings, and derivative contracts. The fair values of cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings and current portion of long-term debt approximated carrying values because of the short-term nature of these instruments. Available-for-sale marketable securities and investments, in addition to certain derivative instruments, are recorded at fair values as indicated in the preceding disclosures. The Company utilized third-party quotes to estimate fair values for its long-term debt. Information with respect to the carrying amounts and estimated fair values of these financial instruments follow:

 



September 30, 2011


Dec. 31, 2010


(Millions)


Carrying
Amount


Fair
Value


Carrying
Amount


Fair
Value


Long-term debt, excluding current portion


$       4,955


$       5,305


$       4,183


$       4,466


 

The fair values reflected above consider the terms of the related debt absent the impacts of derivative/hedging activity. The carrying amount of long-term debt referenced above is impacted by certain fixed-to-floating interest rate swaps that are designated as fair value hedges and by the designation of fixed rate Eurobond securities issued by the Company as hedging instruments of the Company's net investment in its European subsidiaries. 3M's fixed-rate bonds were trading at a premium at September 30, 2011 and December 31, 2010 due to the low interest rates and tightening of 3M's credit spreads.

 



NOTE 11.  Commitments and Contingencies

 

Legal Proceedings:

 

The Company and some of its subsidiaries are involved in numerous claims and lawsuits, principally in the United States, and regulatory proceedings worldwide. These include various products liability (involving products that the Company now or formerly manufactured and sold), intellectual property, and commercial claims and lawsuits, including those brought under the antitrust laws, and environmental proceedings. Unless otherwise stated, the Company is vigorously defending all such litigation. Additional information can be found in Note 14 "Commitments and Contingencies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, as updated by the Company's Current Report on Form 8-K dated May 26, 2011, including information about the Company's process for disclosure and recording of liabilities and insurance receivables related to legal proceedings.

The following table shows the major categories of significant legal matters - respirator mask/asbestos litigation (including Aearo), environmental remediation and other environmental liabilities -- for which the Company has been able to estimate its probable liability and for which the Company has taken reserves and the related insurance receivables:

 

Liability and Receivable Balances


Sept. 30,


Dec. 31,


 

(Millions)


2011


2010


 







 

Respirator mask/asbestos liabilities.....................................................


$

105


$

126


 

Respirator mask/asbestos insurance receivables...................................


119


122


 

 







Environmental remediation liabilities.....................................................


$

29