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3M Company (96OI)

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Wednesday 12 August, 2009

3M Company

Form 10-Q Quarterly period en

RNS Number : 2881X
3M Company
11 August 2009
 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTOND.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 June 30, 2009




Commission file number:  1-3285


3M COMPANY

(Exact name of registrant as specified in its charter)


DELAWARE


41-0417775

(State or other jurisdiction of


(I.R.S. Employer

incorporation or organization)


Identification No.)




3M Center, St. PaulMinnesota


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   


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   


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  


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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes □                                 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 June 30, 2009

Common Stock, $0.01 par value per share


   698,320,662 shares


This document (excluding exhibits) contains 65 pages.

The table of contents is set forth on page 2.

The exhibit index begins on page 62.

  3M COMPANY

Form 10-Q for the Quarterly Period Ended June 30, 2009

TABLE OF CONTENTS




BEGINNING



PAGE

PART I

FINANCIAL INFORMATION







ITEM 1.

Financial Statements








Index to Financial Statements:




Consolidated Statement of Income

3



Consolidated Balance Sheet

4



Consolidated Statement of Cash Flows

5



Notes to Consolidated Financial Statements




Note 1.   Significant Accounting Policies

6



Note 2.   Acquisitions 

10



Note 3.   Goodwill and Intangible Assets

11



Note 4.   Restructuring Actions and Exit Activities

12



Note 5.   Supplemental Equity and Comprehensive Income Information

14



Note 6.   Income Taxes

17



Note 7.   Marketable Securities

18



Note 8.   Pension and Postretirement Benefit Plans

19



Note 9  Derivatives 

20



Note 10. Fair Value Measurements

25



Note 11. Commitments and Contingencies

28



Note 12Stock-Based Compensation

35



Note 13. Business Segments

37



Report of Independent Registered Public Accounting Firm

40






ITEM 2. 

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




Index to Management's Discussion and Analysis:




Overview

41



Results of Operations

43



Performance by Business Segment

47



Critical Accounting Estimates -- Update

53



Financial Condition and Liquidity

54



Forward-Looking Statements

57






ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

58






ITEM 4.

Controls and Procedures

58





PART II

OTHER INFORMATION







ITEM 1.

Legal Proceedings

59






ITEM 1A.

Risk Factors

59






ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60






ITEM 3.

Defaults Upon Senior Securities

60






ITEM 4.

Submission of Matters to a Vote of Security Holders

61






ITEM 5.

Other Information

61






ITEM 6.

Exhibits

62


3M COMPANY

FORM 10-Q

For the Quarterly Period Ended June 30, 2009

PART I. Financial Information


Item 1.  Financial Statements.


3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)


 
 
Three months ended
 
Six months ended
 
 
 
 
June 30
 
June 30
 
 
(Millions, except per share amounts)
 
2009
 
2008
 
2009
 
2008
 
 
Net sales.................................................................
 
$
       5,719
 
$
6,739
 
$
10,808
 
 
13,202
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
Cost of sales........................................................
 
2,977
 
3,510
 
5,749
 
6,846
 
 
Selling, general and administrative expenses...........
 
1,242
 
1,394
 
2,433
 
2,669
 
 
Research, development and related expenses..........
 
309
 
363
 
632
 
714
 
 
   (Gain)/loss from sale of businesses.........................
 
 
23
 
 
23
 
 
Total operating expenses....................................
 
4,528
 
5,290
 
8,814
 
10,252
 
 
Operating income.....................................................
 
1,191
 
1,449
 
1,994
 
2,950
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense and income
 
 
 
 
 
 
 
 
 
 
Interest expense...................................................
 
55
 
51
 
110
 
106
 
 
Interest income.....................................................
 
(7
)
(18
)
(18
)
(48
)
 
Total interest expense (income)..........................
 
48
 
33
 
92
 
58
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes......................................
 
1,143
 
1,416
 
1,902
 
2,892
 
 
Provision for income taxes.........................................
 
351
 
453
 
580
 
923
 
 
Net income including noncontrolling interest................
 
$
            792
 
$
963
 
       1,322
 
 
1,969
 
 
 
 
 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interest
 
9
 
18
 
21
 
36
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to 3M....................................
 
$
783
 
$
945
 
$1,301
 
$      1,933
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average 3M common shares outstanding – basic          
 
696.8
 
702.1
 
695.2
 
704.3
 
 
Earnings per share attributable to 3M common
    shareholders – basic.............................................
 
$
1.12
 
$
1.35
 
$ 1.87
 
 
2.74
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average 3M common shares outstanding – diluted
 
700.3
 
712.0
 
698.1
 
714.6
 
 
Earnings per share attributable to 3M common
    shareholders – diluted...........................................
 
$
1.12
 
$
1.33
 
$1.86
 
 
2.70
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends paid per 3M common share................
 
$
    0.51    
  
$
0.50
 
$ 1.02
 
 
$      1.00
 
 


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

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)




June 30


Dec. 31


(Dollars in millions, except per share amount)


2009


2008





 


 

Assets



 


 

Current assets



 


 

Cash and cash equivalents


$

2,596

 

$

1,849

 

Marketable securities - current


378

 

373

 

Accounts receivable - net


3,456

 

3,195

 

Inventories



 


 

Finished goods


1,245

 

1,505

 

Work in process


803

 

851

 

Raw materials and supplies


553

 

657

 

Total inventories


2,601

 

3,013

 

Other current assets


867

 

1,168

 

Total current assets


9,898

 

9,598

 




 


 

Marketable securities - non-current


307

 

352

 

Investments


106

 

111

 

Property, plant and equipment


19,187

 

18,812

 

Less: Accumulated depreciation


(12,288

)

(11,926

)

Property, plant and equipment - net


6,899

 

6,886

 

Goodwill


5,734

 

5,753

 

Intangible assets - net


1,386

 

1,398

 

Prepaid pension benefits


39

 

36

 

Other assets


1,726

 

1,659

 

Total assets


$

26,095

 

$

25,793

 




 


 

Liabilities 



 


 

Current liabilities



 


 

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


$

908

 

$

1,552

 

Accounts payable


1,243

 

1,301

 

Accrued payroll


615

 

644

 

Accrued income taxes


501

 

350

 

Other current liabilities


2,051

 

1,992

 

Total current liabilities


5,318

 

5,839

 




 


 

Long-term debt


5,172

 

5,166

 

Pension and postretirement benefits


2,763


2,847


Other liabilities


1,621

 

1,637

 

Total liabilities


$

14,874

 

$

15,489

 




 


 

Commitments and contingencies (Note 11)



 


 




 


 

Equity



 


 

3M Company shareholders' equity:






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


$  9

 

$  9

 

   Additional paid-in capital


3,133

 

3,006

 

   Retained earnings


22,707

 

22,227

 

   Treasury stock, at cost; 245,712,394 shares at June 30, 2009; 250,489,769 shares at    Dec. 31, 2008 

 

(11,341 

(11,676

   Unearned compensation


(22

)

(40

)

   Accumulated other comprehensive income (loss)


(3,683

)

(3,646

)

  Total 3M Company shareholders' equity


10,803


9,880


Noncontrolling interest


418


424


Total equity 


11,221

 

10,304

 

   Total liabilities and equity


$

26,095

 

$

25,793

 


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

3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)




Six months ended




June 30


(Dollars in millions)


2009


2008





 


 

Cash Flows from Operating Activities



 


 

Net income including noncontrolling interest


$

1,322

 

$

1,969

 

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

 

 

 

 

 

Depreciation and amortization


569


553

 

Company pension and postretirement contributions


(205

)

(95

)

Company pension and postretirement expense


109


52

 

Stock-based compensation expense


132

 

122

 

(Gain)/loss from sale of businesses


-


23


Deferred income taxes


(15

)

46


Excess tax benefits from stock-based compensation



(20

)

Changes in assets and liabilities



 


 

Accounts receivable


(222

)

(405

)

Inventories


447


(171

)

Accounts payable


(76

)

30

 

Accrued income taxes


199


(42

)

Product and other insurance receivables and claims


34


129

 

   Other - net


(133

) 

49


Net cash provided by operating activities


2,161

 

2,240

 




 


 

Cash Flows from Investing Activities



 


 

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


(454

)

(632

)

Proceeds from sale of PP&E and other assets


57

 

6

 

Acquisitions, net of cash acquired


(12

)

(549

)

Purchases of marketable securities and investments


(485

)

(1,479

)

Proceeds from sale of marketable securities and investments 

 

330


732 

 

Proceeds from maturities of marketable securities


195

 

427

 

Proceeds from sale of businesses


-


85


Other investing


(6

)

(57

)

Net cash used in investing activities


(375

)

(1,467

)




 


 

Cash Flows from Financing Activities



 


 

Change in short-term debt - net


(552

) 

1,120


Repayment of debt (maturities greater than 90 days)


(88

)

(807

)

Purchases of treasury stock


(6

)

(1,082

)

Reissuances of treasury stock


225

 

217

 

Dividends paid to stockholders


(709

)

(704

)

Distributions to noncontrolling interest


-


(12

)

Excess tax benefits from stock-based compensation


-

 

20

 

Other - net


3


131


Net cash used in financing activities


(1,127

)

(1,117

)




 


 

Effect of exchange rate changes on cash and cash equivalents 

 

88

 

(5 

)




 


 

Net increase (decrease) in cash and cash equivalents


747


(349

)

Cash and cash equivalents at beginning of year


1,849

 

1,896

 

Cash and cash equivalents at end of period


$

2,596

 

$

1,547

 


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.


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


As described in 3M's Current Report on Form 8-K dated May 13, 2009 (which updated 3M's 2008 Annual Report on Form 10-K) and 3M's Quarterly Report on Form 10-Q for the period ended March 31, 2009, during the first quarter of 2009 the Company reorganized its business segments (Note 13) and as discussed above, also reclassified certain amounts presented for prior periods to conform to the current year presentation. 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 filed May 13, 2009. 


3M has evaluated subsequent events through the date that the financial statements were issued, which was July 31, 2009, the date of 3M's Quarterly Report on Form 10-Q for the period ended June 30, 2009.


Earnings per share

The difference in the weighted average 3M shares outstanding for calculating basic and diluted earnings per share attributable to 3M common shareholders is a result of the dilution associated with the Company's stock-based compensation plans. Certain Management Stock Ownership Program (MSOP) options outstanding were not included in the computation of diluted earnings per share attributable to 3M common shareholders because they would not have had a dilutive effect (71.5 million average options for the three months ended June 30, 200971.7 million average options for the six months ended June 30, 2009; 31.6 million average options for the three months ended June 30, 2008; 29.9 million average options for the six months ended June 30, 2008). The conditions for conversion related to the Company's 'Convertible Notes' were not met (refer to 3M's Current Report on Form 8-K filed May 13, 2009Note 10 to the Consolidated Financial Statements, for more detail). If the conditions for conversion are met, 3M may choose to pay in cash and/or common stock; however, if this occurs, the Company has the intent and ability to settle this debt security in cash. Accordingly, there was no impact on diluted earnings per share attributable to 3M common shareholders. The computations for basic and diluted earnings per share follow:

  Earnings Per Share Computations



Three months ended


Six months ended 




June 30


June 30


(Amounts in millions, except per share amounts)


2009


2008


2009


2008


Numerator:



 


 


 


 

Net income attributable to 3M


$

783

 

$

945

 


1,301

 


1,933

 




 


 


 


 

Denominator:



 


 


 


 

Denominator for weighted average 3M common shares outstanding - basic 

 

696.8 

 

702.1 

 

 695.2

 

704.3

 




 


 


 


 

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

 

3.5

 

9.9 

 

2.9 

 

10.3

 




 


 


 


 

Denominator for weighted average 3M common shares outstanding - diluted 

 

700.3

 

712.0 

 

698.1 

 

714.6

 




 


 


 


 

Earnings per share attributable to 3M common shareholders - basic


$

1.12

 

$

1.35

 


1.87

 


2.74

 

Earnings per share attributable to 3M common shareholders - diluted


1.12

 

1.33

 

1.86

 

2.70

 


New Accounting Pronouncements 


In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, 'Fair Value Measurements.' SFAS No. 157 established a single definition of fair value and a framework for measuring fair value, set out a fair value hierarchy to be used to classify the source of information used in fair value measurements, and required disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. This statement applies under other accounting pronouncements that require or permit fair value measurements. As disclosed in the notes included in 3M's Current Report on Form 8-K filed May 13, 2009, 3M adopted SFAS No. 157, as amended by associated FASB Staff Positions (FSPs), beginning January 1, 2008 on a prospective basis. One of these FSPs, FSP No. FAS 157-2, deferred the effective date for one year relative to nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. This deferral applied to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or nonfinancial long-lived asset groups measured at fair value for an impairment assessment. These remaining aspects of SFAS No. 157 were adopted by the Company prospectively beginning January 1, 2009 and did not have a material impact on 3M's consolidated results of operations or financial condition. Refer to Note 10 for additional disclosures of assets and liabilities that are measured at fair value on a nonrecurring basis as a result of this adoption.


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


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


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


In March 2008, the FASB issued SFAS No. 161, 'Disclosures about Derivative Instruments and Hedging Activities,' which requires additional disclosures about an entity's strategies and objectives for using derivative instruments; the location and amounts of derivative instruments in an entity's financial statements; how derivative instruments and related hedged items are accounted for under SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities;' and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. Certain disclosures are also required with respect to derivative features that are credit-risk-related. SFAS No. 161 was effective for 3M beginning January 1, 2009 on a prospective basis. The additional disclosures required by this standard are included in Note 9.


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


In May 2008, the FASB issued FSP No. APB 14-1, 'Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).' This FSP applies to convertible debt securities that, upon conversion by the holder, may be settled by the issuer fully or partially in cash (rather than settled fully in shares) and specifies that issuers of such instruments should separately account for the liability and equity components in a manner that reflects the issuer's nonconvertible debt borrowing rate when related interest cost is recognized. This FSP was effective for 3M beginning January 1, 2009 with retrospective application to all periods presented. This standard impacted the Company's 'Convertible Notes' (refer to Note 10 to the Consolidated Financial Statements included in 3M's Current Report on Form 8-K filed May 13, 2009 for more detail), and required that additional interest expense essentially equivalent to the portion of issuance proceeds be retroactively allocated to the instrument's equity component and be recognized over the period from the Convertible Notes' issuance on November 15, 2002 through November 15, 2005 (the first date holders of these Notes had the ability to put them back to 3M). 3M adopted this standard in January 2009. Its retrospective application had no impact on results of operations for periods following 2005, but on post-2005 consolidated balance sheets, it resulted in an increase of approximately $22 million in previously reported opening additional paid in capital and a corresponding decrease in previously reported opening retained earnings.


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


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


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


In April 2009, the FASB issued FSP No. FAS 157-4, 'Determining Fair Values When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.' This FSP provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly declined and (2) identifying transactions that are not orderly. The FSP also amends certain disclosure provisions of SFAS No. 157 to require, among other things, disclosures in interim periods of the inputs and valuation techniques used to measure fair value as well as disclosure of the hierarchy of the source of underlying fair value information on disaggregated basis by specific major category of investment. For 3M, this FSP was effective prospectively beginning April 1, 2009. The adoption of this standard did not have a material impact on 3M's consolidated results of operations or financial condition. The additional disclosures required by this standard are included in Note 10.


In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, 'Recognition and Presentation of Other-Than-Temporary Impairments' (FSP 115-2). This FSP modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The FSP also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the FSP, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security's entire amortized cost basis (even if the entity does not intend to sell). The FSP further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security's fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. FSP 115-2 requires entities to initially apply the provisions of the standard to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulated other comprehensive income. For 3M, this FSP was effective beginning April 1, 2009. The adoption of this standard did not have a material impact on 3M's consolidated results of operations or financial condition. Additional disclosures required by this standard are included in Note 7.


In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, 'Interim Disclosures about Fair Value of Financial Instruments.'  This FSP essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the FSP requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. This FSP was effective for 3M beginning April 1, 2009 on a prospective basis. The additional disclosures required by this standard are included in Note 10.


In May 2009, the FASB issued SFAS No. 165, 'Subsequent Events.' This standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under SFAS No.165, as under previous practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. This standard added an additional required disclosure relative to the date through which subsequent events have been evaluated and whether that is the date on which the financial statements were issued. For 3M, this standard was effective beginning April 1, 2009. The additional disclosures required by this standard are included in Note 1.


In June 2009, the FASB issued SFAS No. 166, 'Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140,' amending the guidance on transfers of financial assets to, among other things, eliminate the qualifying special-purpose entity concept, include a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarify and change the derecognition criteria for a transfer to be accounted for as a sale, and require significant additional disclosure. For 3M, this standard is effective for new transfers of financial assets beginning January 1, 2010. Because 3M historically does not have significant transfers of financial assets, 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 2009, the FASB issued SFAS No. 167, 'Amendments to FASB Interpretation No. 46(R),' which revised the consolidation guidance for variable-interest entities. The modifications include the elimination of the exemption for qualifying special purpose entities, a new approach for determining who should consolidate a variable-interest entity, and changes to when it is necessary to reassess who should consolidate a variable-interest entity. For 3M, this standard is effective January 1, 2010. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on 3M's consolidated results of operations or financial condition.


In June 2009, the FASB issued SFAS No. 168, 'The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162,' and approved the FASB Accounting Standards CodificationTM (Codification) as the single source of authoritative nongovernmental US GAAP. The Codification does not change current US GAAP, but is intended to simplify user access to all authoritative US GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. For 3M, the Codification is effective July 1, 2009 and will require future references to authoritative US GAAP to coincide with the appropriate section of the Codification. Accordingly, this standard will not have an impact on 3M's consolidated results of operations or financial condition.


NOTE 2. Acquisitions 


During the six months ended June 30, 2009, 3M completed three business combinations. The purchase price paid for these business combinations (net of cash acquired) and certain acquisition costs paid for pre-2009 business combinations during the six months ended June 30, 2009 aggregated to $12 million.


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


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


(3) In April 2009, 3M (Industrial and Transportation Business) purchased 100% of the outstanding shares of Meguiar's International, UK, a distributor of Meguiar's Inc. products in the United Kingdom based in DaventryUnited Kingdom.


Purchased identifiable intangible assets related to the three acquisitions which closed in the first six months of 2009 totaled $7 million and will be amortized on a straight-line basis over a weighted-average life of 6 years (lives ranging from 3 to 11 years). Acquired identifiable intangible assets for which significant assumed renewals or extensions of underlying arrangements impacted the determination of their useful lives were not material. Pro forma information related to the above acquisitions is not included because the impact on the Company's consolidated results of operations is not considered to be material. 


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


Subsequent Events

On July 8, 2009, 3M (Consumer and Office Business) announced that it completed its acquisition of ACE Bandage, a manufacturer and distributor of branded elastic health supports in the U.S. and Canada, headquartered in Franklin LakesNew Jersey.

 

NOTE 3. Goodwill and Intangible Assets

Purchased goodwill related to the three acquisitions which closed in the first six months of 2009 totaled $6 million, $1 million of which is deductible for tax purposes. The acquisition activity in the following table also includes the impacts of adjustments to the preliminary allocation of purchase price and certain acquisition costs for pre-2009 acquisitions, which reduced goodwill by $52 million. The amounts in the 'Translation and other' column in the following table primarily relate to changes in foreign currency exchange ratesThe goodwill balance by business segment as of December 31, 2008 and June 30, 2009, follow:


Goodwill



Dec. 31,






June 30,




2008


Acquisition


Translation


2009


(Millions)


Balance


activity


and other


Balance


Industrial and Transportation


$

1,692

 

$

(4

)

$

17

 

$

1, 705

 

Health Care


988

 

1

 

(1

) 

988

 

Consumer and Office


155

 

1

 

(17

) 

139

 

Safety, Security and Protection Services


1,202

 

6

 

44


1,252

 

Display and Graphics


1,042

 

(48

)

(13

)

981

 

Electro and Communications


674

 

(2

)

(3

) 

669

 

Total Company


$

5,753

 

$

(46)

 

$

27

 

$

5,734

 


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


As discussed in Note 10, in June 2009, 3M tested the long lived assets grouping associated with the UK passport production activity of 3M's Security Systems Division for recoverability. This circumstance required the Company to also test goodwill for impairment at the reporting unit (Security Systems Division) level. 3M completed its assessment of potential goodwill impairment for this reporting unit and determined that no goodwill impairment existed as of June 30, 2009.


Acquired Intangible Assets

For the six months ended June 30, 2009, acquired intangible asset activity through business combinations increased balances by $72 million, of which approximately $65 million related to adjustments to preliminary allocations of purchase price on pre-2009 acquisitions. The carrying amount and accumulated amortization of acquired intangible assets as of June 30, 2009, and December 31, 2008, follow:




June 30


Dec. 31


(Millions)


2009


2008


Patents


$

463

 

$

475

 

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

 

1,481 

 

1,381 

 

Non-amortizable intangible assets (tradenames)


131

 

130

 

Total gross carrying amount


$

2,075

 

$

1,986

 




 


 

Accumulated amortization - patents


(331

)

(318

)

Accumulated amortization - other


(358

)

(270

)

Total accumulated amortization


(689

)

(588

)

Total intangible assets - net


$

1,386

 

$

1,398

 


Amortization expense for acquired intangible assets for the six-months ended June 30, 2009 and 2008 follows:




Three months ended


Six months ended




June 30


June 30


(Millions)


2009


2008


2009


2008


Amortization expense


$

48

 

$

32

 

$

87

 

$

56

 




The table below shows expected amortization expense for acquired intangible assets recorded as of June 30, 2009:


(Millions)


Last 2
Quarter
s
2009


2010


2011


2012


2013


After
201
3


Amortization expense


$

87

 

$

156

 

$

129

 

$

122

 

$

117

 

$

644

 


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


NOTE 4. Restructuring Actions and Exit Activities

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


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


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


The following provides information concerning the Company's first-six months of 2009 restructuring actions and fourth-quarter 2008 restructuring actions.


2008 and 2009 Restructuring Actions:

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


  • During the fourth quarter of 2008, 3M announced the elimination of more than 2,400 positions.  Of these employment reductions, about 31 percent were in the United States, 29 percent in Europe, 24 percent in Latin America and Canada, and 16 percent in the Asia Pacific area. These restructuring actions resulted in a fourth-quarter 2008 pre-tax charge of $229 million, with $186 million for employee-related items/benefits and other, and $43 million related to fixed asset impairments. The preceding charges were recorded in cost of sales ($84 million), selling, general and administrative expenses ($135 million), and research, development and related expenses ($10 million). Cash payments in 2008 related to this restructuring were not material. Refer to 3M's Current Report on Form 8-K filed May 13, 2009, Note 4, for additional information on these 2008 restructuring actions.


  • During the first quarter of 2009, 3M announced the elimination of approximately 1,200 positions. Of these employment reductions, about 43 percent were in the United States36 percent in Latin America, 16 percent in Europe and 5 percent in the Asia Pacific area. These restructuring actions resulted in a first-quarter 2009 pre-tax charge of $67 million, with $61 million for employee-related items/benefits and $6 million related to fixed asset impairments. The preceding charges were recorded in cost of sales ($17 million), selling, general and administrative expenses ($47 million), and research, development and related expenses ($3 million).


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

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




Employee-








Related Items/


Asset




(Millions)


Benefits/other


Impairments


Total










Expense incurred in fourth quarter 2008


$                     186


 $                      43


 $                     229


Non-cash charges in fourth quarter 2008


$                          -


$                     (43

)

$                      (43

)









Expense incurred in first quarter 2009:








Industrial and Transportation


$

22


$

1


$

23


Health Care


4


-


4


Consumer and Office


2


-


2


Safety, Security and Protection Services


4


-


4


Display and Graphics


1


5


6


Electro and Communications


3


-


3


Corporate and Unallocated


25


-


25


   First quarter 2009 expense


$

61


$

6


$

67













  Non-cash charges in first quarter 2009 


$

-


$

(6

)

$

(6

)

  Cash payments in first quarter 2009 



(107

)


-



(107

)

  Accrued liability balance at Mar. 31, 2009


$

140


$

-


$

140









Expense incurred in second quarter 2009:







Industrial and Transportation


$

40


$

4


$

44

Health Care


15


-


15

Consumer and Office


11


-


11

Safety, Security and Protection Services


13


-


13

Display and Graphics


10


8


18

Electro and Communications


7


-


7

Corporate and Unallocated


7


1


8

  Second quarter 2009 expense


$

103


$

13


$

116











  Non-cash charges in second quarter 2009 


$

(21

)

$

(13

)

$

(34

)

  Cash payments in second quarter 2009



(67

)


-



(67

)

  Accrued liability balance at June 30, 2009


$

155


$

-


$

155


The majority of the remaining employee related items and benefits associated with these actions are expected to be paid out in cash through the remainder of 2009.  As discussed in Note 8, a $21 million non-cash charge related to special termination benefits was recorded that related to the approximately 700 participants who accepted the voluntary early retirement incentive program offer.






  NOTE 5.  Supplemental Equity and Comprehensive Income Information


Consolidated Statement of Changes in Equity 


3M Company and Subsidiaries

 

 

 














Three months ended June 30, 2009




3M Company Shareholders









Common








Accumulated









Stock and








Other









Additional






Unearned


Comprehensive


Non-







Paid-in


Retained


Treasury


Comp-


Income


controlling



(Millions)

 

Total

 

Capital


Earnings


Stock


ensation


(Loss)


Interest



  Balance at March 31, 2009

 

$10,141

 

$3,095


$22,369


$(11,618

)

$(18

)

$(4,091

)

$404




















Net income including

















  noncontrolling interest


792




783








9



Cumulative translation adjustment


460 










455


5



Defined benefit pension and postretirement plans adjustment



21












21






Debt and equity securities -

















  unrealized gain (loss)


4










4





Cash flow hedging instruments - 

















  unrealized gain (loss)

 

(72

)









 (72

)




  Total comprehensive income

 

1,205















Dividends paid


(355

)



(355

)










Amortization of unearned compensation


(4 

)







(4

)






Stock-based compensation, net of

















  tax impacts


47


47













Reacquired stock


(5

)





(5

)








Issuances pursuant to stock option

















  and benefit plans 

 

192

 



(90

)

282









  Balance at June 30, 2009

 

$11,221

 

$3,142


$22,707


$(11,341

)

$(22

)

$(3,683

)

$418






















3M Company and Subsidiaries

 

 

 














Six months ended June 30, 2009




3M Company Shareholders









Common








Accumulated









Stock and








Other









Additional






Unearned


Comprehensive


Non-







Paid-in


Retained


Treasury


Comp-


Income


controlling



(Millions)

 

Total

 

Capital


Earnings


Stock


ensation


(Loss)


Interest



  Balance at December 31, 2008

 

 $10,304   

 

$3,015


$22,227


$(11,676

)

$(40

)

$(3,646

)

$424




















Net income including

















  noncontrolling interest


1,322




1,301








21



Cumulative translation adjustment


8 










35


(27

)


Defined benefit pension and postretirement plans adjustment



-










-





Debt and equity securities -

















  unrealized gain (loss)


5










5





Cash flow hedging instruments - 

















  unrealized gain (loss)

 

(77

)









(77

)




  Total comprehensive income

 

1,258















Dividends paid


(709

)



(709

)










Amortization of unearned compensation


18 








18







Stock-based compensation, net of

















   tax impacts


127


127













Reacquired stock


(5

)





(5

)








Issuances pursuant to stock option

















  and benefit plans 

 

228

 



(112

)

340









  Balance at June 30, 2009

 

$11,221

 

$3,142


$22,707


$(11,341

)

$(22

)

$(3,683

)

$418





















Consolidated Statement of Changes in Equity 


3M Company and Subsidiaries

 

 

 














Three months ended June 30, 2008




3M Company Shareholders









Common








Accumulated









Stock and








Other









Additional






Unearned


Comprehensive


Non-







Paid-in


Retained


Treasury


Comp-


Income


controlling



(Millions)

 

Total

 

Capital


Earnings


Stock


ensation


(Loss)


Interest



  Balance at March 31, 2008

 

$12,792

 

$2,840


$20,908


$(10,900

)

$(58

)

$(355

)

$357




















Net income including

















  noncontrolling interest


963 




945








18



Cumulative translation adjustment


(141

)









(132

)

(9

)


Defined benefit pension and

















  postretirement plans adjustment


15










14


1



Debt and equity securities -

















  unrealized gain (loss)


(7

)









(7

)




Cash flow hedging instruments - 

















  unrealized gain (loss)

 

29










29





  Total comprehensive income

 

859















Dividends paid 


(351

)



(351

)










Amortization of unearned compensation


(3

)







(3

)






Stock-based compensation, net of


















  tax impacts


95


95













Reacquired stock 


(621

)





(621

)








Issuances pursuant to stock option

















  and benefit plans 

 

131

 



(88

)

219









  Balance at June 30, 2008

 

$12,902

 

$2,935


$21,414


$(11,302

)

$(61

)

$(451

)

$367






















3M Company and Subsidiaries

 

 

 














Six months ended June 30, 2008




3M Company Shareholders









Common








Accumulated









Stock and








Other









Additional






Unearned


Comprehensive


Non-







Paid-in


Retained


Treasury


Comp-


Income


controlling



(Millions)

 

Total

 

Capital


Earnings


Stock


ensation


(Loss)


Interest



  Balance at December 31, 2007

 

 $12,072 

 

$2,798


$20,295


$(10,520

)

$(79

)

$(747

)

$325




















Net income including

















  noncontrolling interest


1,969 




1,933








36



Cumulative translation adjustment


246 










229


17



Defined benefit pension and

















  postretirement plans adjustment


46










45


1



Debt and equity securities -

















  unrealized gain (loss)


(3

)









(3

)




Cash flow hedging instruments - 

















  unrealized gain (loss)

 

25










25





  Total comprehensive income

 

2,283















Dividends paid 


(716

)



(704

)







(12

)


Amortization of unearned compensation


18 








18







Stock-based compensation, net of


















   tax impacts


137


137













Reacquired stock 


(1,117

)





(1,117

)








Issuances pursuant to stock option

















  And benefit plans 

 

225

 



(110

)

335









  Balance at June 30, 2008

 

$12,902

 

$2,935


$21,414


$(11,302

)

$(61

)

$(451

)

$367
























Consolidated Statement of Comprehensive Income (Loss)













Three months ended June 30


Six months ended June 30


(Millions)


2009


2008


2009


2008


Net income including noncontrolling interest


$  792

 

$      963

 

$ 1,322


$ 1,969


Other comprehensive income, net of tax:



 


 





  Cumulative translation adjustment


460

 

(141

)

8


246


  Defined benefit pension and postretirement plans adjustment


21

 

15

 

-


46


  Debt and equity securities, unrealized gain (loss) 


4

 

(7

) 

5


(3

)

  Cash flow hedging instruments, unrealized gain (loss) 


(72

)

29


(77

)

25


Total other comprehensive income (loss), net of tax


413


(104

) 

(64

)

314


Comprehensive income (loss) including noncontrolling interest


1,205

 

859

 

1,258


2,283


Comprehensive (income) loss attributable to noncontrolling interest


(14

) 

(10

6


(54

)

Comprehensive income (loss) attributable to 3M


 $  1,191

 

$ 849

 

1,264


$ 2,229



Accumulated Other Comprehensive Income (Loss) Attributable to 3M 




June 30,


Dec. 31,


(Millions)


2009


2008


Cumulative translation adjustment


$

(111

) 

$

(146

)

Defined benefit pension and postretirement plans adjustment 


(3,525

)

(3,525

)

Debt and equity securities, unrealized gain (loss) 


(14

)

(19

)

Cash flow hedging instruments, unrealized gain (loss) 


(33

)

44


Total accumulated other comprehensive income (loss)


$

(3,683

)

$

(3,646

)


Components of Comprehensive Income (Loss) Attributable to 3M









Three months ended June 30,


Six months ended June 30,


(Millions)


2009


2008


2009


2008


Net income attributable to 3M


$

783

 

$

945

 

$

1,301

 

$

1,933

 




 


 


 


 

Cumulative translation


437


(72

) 

74

 

210

 

Tax effect


18


(60

)

(39

)

19

 

Cumulative translation - net of tax


455


(132

) 

35

 

229

 




 


 


 


 

Defined benefit pension and postretirement plans adjustment


35

 

19

 

(5

) 

68

 

Tax effect


(14

)

(5

)

5


(23

)

Defined benefit pension and postretirement plans adjustment - net of tax


21

 

14

 

-

 

45

 




 


 


 


 

Debt and equity securities, unrealized gain (loss)


6


(11

) 

8


(4

)

Tax effect


(2

4


(3

) 

1

 

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


4


(7

) 

5


(3

)




 


 


 


 

Cash flow hedging instruments, unrealized gain (loss)


(114

51


(125

) 

45


Tax effect


42


(22

) 

48


(20

) 

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


(72

29


(77

) 

25





 


 


 


 

Total comprehensive income (loss) attributable to 3M


$

1,191

 

$

849

 

$

1,264

 

$

2,229


 


Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income. 3M had no reclassification adjustments attributable to noncontrolling interest. As disclosed in Note 8, for the three and six months ended June 30, 2009$34 million pre-tax ($22 million after tax) and $70 million pre-tax ($45 million after tax), respectively, were reclassified to earnings from accumulated other comprehensive income attributable to 3M to pension and postretirement expense in the income statement. These pension and postretirement expense amounts are shown in the table in Note 8 as amortization of transition (asset) obligation, amortization of prior service cost (benefit) and amortization of net actuarial (gain) loss. Reclassifications to earnings from accumulated other comprehensive income for debt and equity securities, which primarily include marketable securities, were not material for the three and six-months ended June 30, 2009. Refer to Note 9 for a table that recaps pre-tax cash flow hedging instruments reclassifications. Income taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation do include impacts from items such as net investment hedge transactions.

NOTE 6. Income Taxes


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


The Internal Revenue Service (IRS) completed its examination of the Company's U.S. federal income tax returns for the years 2002 through 2004 in the first quarter of 2008. The outcome of the 2002 through 2004 audit cycle impacted the 2001 tax year, which was settled in the second quarter of 2008. Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2005 through 2008. It is anticipated that the IRS will complete its examination of the Company for these years by the end of the first quarter of 2010. As of June 30, 2009, the IRS has not proposed any significant adjustments to the Company's tax positions. Currently, the Company is not able to reasonably estimate the amount by which the liability for unrecognized tax benefits will increase or decrease during the next 12 months as a result of the ongoing IRS audit. However, the Company does not anticipate any adjustments that would result in a material change to its financial position. Payments relating to any proposed assessments arising from the 2005 through 2007 audit may not be made until a final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also limited audit activity in several U.S. state and foreign jurisdictions.

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of June 30, 2009 and December 31, 2008, respectively, are $349 million and $334 million.

 

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized in the consolidated statement of income on a gross basis approximately $3 million of expense and a benefit of $1 million for the three months ended June 30, 2009 and June 30, 2008, respectively, and approximately $6 million of expense and a benefit of $2 million for the six months ended June 30, 2009 and June 30, 2008, respectively. At June 30, 2009 and December 31, 2008, accrued interest and penalties in the consolidated balance sheet on a gross basis were $53 million and $47 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

  NOTE 7. Marketable Securities


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




June 30,


Dec. 31,


(Millions)


2009


2008





 



Agency securities


$

150


$

180


Corporate securities


99


145


Asset-backed securities:



 



Automobile loans related


65


24


Credit cards related


19


-


Other


20

 

11


Asset-backed securities total


104

 

35


Other securities


25

 

13





 



Current marketable securities


$

378


$

373





 



Agency securities


$

36


$

200


Corporate securities


53


62


Treasury securities


83

 

12


Asset-backed securities:



 



Automobile loans related


57

 

25


Credit cards related


64

 

40


Other


10

 

11


Asset-backed securities total


131

 

76


Auction rate and other securities


4


2





 



Non-current marketable securities


$

307


$

352





 



Total marketable securities


$

685


$

725



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 June 30, 2009, gross unrealized losses totaled approximately $20 million (pre-tax), while gross unrealized gains totaled approximately $3 million (pre-tax)At December 31, 2008, gross unrealized losses totaled approximately $30 million (pre-tax), while gross unrealized gains were not materialGross unrealized losses related to auction rate securities totaled $13 million and $16 million (pre-tax) as of June 30, 2009 and December 31, 2008, respectively. Gross realized gains and losses on sales or maturities of marketable securities for the first six months of 2009 and 2008 were not materialCost of securities sold or reclassified use the first in, first out (FIFO) method. Since these marketable securities are classified as available-for-sale securities, changes in fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into earnings upon sale or 'other-than-temporary' impairment.


3M has a diversified marketable securities portfolio of $685 million as of June 30, 2009. Within this portfolio, current and long-term asset-backed securities (estimated fair value of $235 million) are primarily comprised of interests in automobile loans and credit cards. At June 30, 2009, the asset-backed securities credit ratings werAAA or Aߛ1+, with the exception of one security rated BBB with a fair market value of less than $1 million. Historically3M's marketable securities portfolio included auction rate securities that represented interests in investment grade credit default swaps, however, these have been written down to $4 million as of June 30, 2009. Since the second half of 2007, these auction rate securities failed to auction due to sell orders exceeding buy orders. Liquidity for these auction-rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 7, 28, 35, or 90 days. The funds associated with failed auctions will not be accessible until a successful auction occurs or a buyer is found outside of the auction process. Based upon an analysis of 'temporary' and 'other-than-temporary' impairment factors, auction rate securities with an original par value of approximately $34 million were written-down to an estimated fair value of $1 million as of December 31, 2008 and adjusted to an estimated fair value of $4 million as of June 30, 2009. There are $13 million (pre-tax) of temporary impairments associated with auction rate securities at June 30, 2009, which were recorded as unrealized losses within other comprehensive income. As of June 30, 2009, these investments have been in a loss position for approximately 21 months. 3M recorded 'other-than-temporary' impairment charges that reduced pre-tax income by approximately $8 million in the second quarter of 2008, $1 million in the first quarter of 2008, and $8 million in the fourth quarter of 2007Refer to Note 10 for a table that reconciles the beginning and ending balances of auction rate securities.

3M reviews impairments associated with the above in accordance with Emerging Issues Task Force (EITF) 03-1 and FSP No. SFAS 115-1 and 124-1, 'The Meaning of Other-Than-Temporary-Impairment and Its Application to Certain Investments,' as well as EITF 99-20, 'Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets,' and related interpretations to determine the classification of the impairment as 'temporary' or 'other-than-temporary.' In addition, as discussed in Note 1, beginning in April 2009, the Company considers the guidance of FSP No. FAS 115-2 and 124-2, 'Recognition and Presentation of Other-Than-Temporary Impairments' (FSP 115-2), with respect to the determination of 'other-than-temporary' impairments associated with investments in debt securities. A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income component of equity. Such an unrealized loss does not reduce net income for the applicable accounting period because the loss is not viewed as other-than-temporary. The Company believes that a portion of the impairment of its auction rate securities investments is temporary and a portion is other-than-temporary. The factors evaluated to differentiate between temporary and other-than-temporary include the projected future cash flows, credit ratings actions, and assessment of the credit quality of the underlying collateral, as well as the factors included in the impairment model for debt securities included in FSP 115-2 as described in Note 1.


The balances at June 30, 2009 for marketable securities by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.




June 30,


(Millions)


2009





 

Due in one year or less


$

309

 

Due after one year through three years


232

 

Due after three years through five years


126

 

Due after five years


18

 




 

Total marketable securities


$

685

 


NOTE 8. Pension and Postretirement Benefit Plans


Components of net periodic benefit cost and other supplemental information for the three and six months ended June 30 follow:


Benefit Plan Information




Three months ended June 30,




Qualified and Non-qualified








Pension Benefits


Postretirement




United States


International


Benefits


(Millions)


2009


2008


2009


2008


2009


2008





 


 


 


 


 


 

Service cost


$

46 

 

$

48

 

$

24

 

$

31

 

$

13

 

$

13

 

Interest cost


155 

 

149

 

55

 

66

 

24

 

25

 

Expected return on plan assets


(226

)

(222

)

(61

)

(80

)

(23

)

(26

)

Amortization of transition (asset) obligation


-

 

-

 

-

 

1

 

-

 

-

 

Amortization of prior service cost (benefit)


4

 

4

 

(1

)

(1

)

(20

)

(25

)

Amortization of net actuarial (gain) loss


24

 

14

 

11

 

10

 

16

 

16

 

Net periodic benefit cost (benefit)


$

  3


$

(7)

 

$

28

 

$

27

 

$

10

 

$

3

 

Settlements, curtailments and special termination benefits 


25 


1 


1 




- 


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

 

$

28

 

$

(6

 

$

29 

 

$

27 

 

$

10 

 

$

3 

 


  



Six months ended June 30,




Qualified and Non-qualified








Pension Benefits


Postretirement




United States


International


Benefits


(Millions)


2009


2008


2009


2008


2009


2008





 


 


 


 


 


 

Service cost


$

92 

 

$

96

 

$

48

 

$

62

 

$

26

 

$

26

 

Interest cost


310 

 

298

 

111

 

132

 

48

 

51

 

Expected return on plan assets


(453

)

(444

)

(123

)

(160

)

(46

)

(52

)

Amortization of transition (asset) obligation


-

 

-

 

1

 

2

 

-

 

-

 

Amortization of prior service cost (benefit)


8

 

8

 

(2

)

(2

)

(40

)

(46

)

Amortization of net actuarial (gain) loss


49

 

28

 

21

 

20

 

33

 

32

 

Net periodic benefit cost (benefit)


$

   6


$

(14)

 

$

56

 

$

54

 

$

21

 

$

11

 

Settlements, curtailments and special termination benefits 


25 


1 





- 


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

 

$

31

 

$

(13

 

$

57 

 

$

54 

 

$

21 

 

$

11 

 


For the six months ended June 30, 2009, contributions totaling $171 million were made to the Company's U.S. and international pension plans and $34 million to its postretirement plans. For the last six months of 2009, the Company expects to contribute approximately $700 million to its U.S. and international pension plans and approximately $100 million to its postretirement plans. Of this remaining $800 million, the Company intends to make pension contributions in shares of its common stock for approximately $600 million related to its U.S. plans. The Company does not have a required minimum pension contribution obligation for its U.S. plans in 2009. Therefore, the amount of the anticipated discretionary pension contribution could vary significantly depending on the U.S. plans' funding status as of the 2009 measurement date and the anticipated tax deductibility of the contribution. 3M's annual measurement date for pension and postretirement assets and liabilities is December 31 each year, which is also the date used for the related annual measurement assumptions.

 

In April 2009, the Company offered a voluntary early retirement incentive program to certain eligible participants of its U.S. pension plans who meet age and years of pension service requirements. The eligible participants who accepted the offer and retired by June 1, 2009 received an enhanced pension benefit. Pension benefits were enhanced by adding one additional year of pension service and one additional year of age for certain benefit calculations.  Approximately 700 participants accepted the offer and retired by June 1, 2009. As a result the Company incurred a $21 million charge related to these special termination benefits.

 

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


NOTE 9. Derivatives 


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


Additional information with respect to the impacts on other comprehensive income of nonderivative hedging and derivative instruments is included in Note 5. Additional information with respect to the fair value of derivative instruments is included in Note 10. References to information regarding derivatives and/or hedging instruments associated with the Company's long-term debt are also made in Note 10 to the Consolidated Financial Statements in 3M's Current Report on Form 8-K filed May 13, 2009.

  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 six month periods ended June 30, 2009 and 2008. The maximum length of time over which 3M hedges its exposure to the variability in future cash flows for a majority of the forecasted transactions is 12 months and, accordingly, at June 30, 2009, the majority of the Company's open foreign exchange forward and option contracts had maturities of one year or less.  The dollar equivalent gross notional amount of the Company's foreign exchange forward and option contracts designated as cash flow hedges at June 30, 2009 was approximately $2.9 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 six month periods ended June 30, 2009 and 2008. The dollar equivalent gross notional amount of the Company's natural gas commodity price swaps designated as cash flow hedges at June 30, 2009 was $50 million.


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


Three months ended June 30, 2009

(Millions)


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


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


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


Derivatives in Cash Flow Hedging Relationships


Amount


Location


Amount


Location


Amount


Foreign currency forward/option contracts


$

(65

)

Cost of sales


$

53


Cost of sales


$

-


Foreign currency forward contracts


19


Interest expense


16


Interest expense


-


Commodity price swap contracts


(9

)

Cost of sales


(10

)

Cost of sales


-


Total


$

(55

)



$

59




$

-



  

Six months ended June 30, 2009

(Millions)


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


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


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


Derivatives in Cash Flow Hedging Relationships


Amount


Location


Amount


Location


Amount


Foreign currency forward/option contracts


$

(32

)

Cost of sales


$

97


Cost of sales


$

-


Foreign currency forward contracts


28


Interest expense


19


Interest expense


-


Commodity price swap contracts


(24

)

Cost of sales


(19

)

Cost of sales


-


Total


$

(28

)



$

97




$

-



As of June 30, 2009, the Company had a balance of $33 million associated with the after tax net unrealized loss associated with cash flow hedging instruments recorded in accumulated other comprehensive income. 3M expects to reclassify to earnings over the next 12 months a majority of this balance (with the impact offset by cash flows from underlying hedged items).


Fair Value Hedges:


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


Fair Value Hedging - Interest Rate Swaps: The Company manages interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The dollar equivalent (based on inception date foreign currency exchange rates) gross notional amount of the Company's interest rate swaps at June 30, 2009 was $1,752 million.


At June 30, 2009, the Company had interest rate swaps designated as fair value hedges of underlying fixed rate obligations. In November 2006, the Company entered into a $400 million fixed-to-floating interest rate swap concurrent with the issuance of the three-year medium-term note due in 2009. Also, in July 2007, in connection with the issuance of a seven-year Eurobond for an amount of 750 million Euros, the Company completed a fixed-to-floating interest rate swap on a notional amount of 400 million Euros as a fair value hedge of a portion of the fixed interest rate Eurobond obligation. In May 2009, the Company entered into two fixed-to-floating interest rate swaps with an aggregate notional amount of $800 million designated as fair value hedges of the fixed interest rate obligation under the existing $800 million, three-year, 4.50% notes issued in October 2008. The mark-to-market of these fair value hedges is recorded as gains or losses in interest expense and is offset by the gain or loss on the underlying debt instrument, which also is recorded in interest expense. These fair value hedges are 100 percent effective and, thus, there is no impact on earnings due to hedge ineffectiveness.


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


The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments designated as fair value hedges and similar information relative to the hedged items are as follows:



Three months ended June 30, 2009


Gain (Loss) on Derivative


Gain (Loss) on Hedged Item


(Millions)


Recognized in Income


Recognized in Income


Derivatives in Fair Value Hedging Relationships


Location


Amount


Location


Amount


Interest rate swap contracts


Interest expense


$

(10

)

Interest expense


$

10


Total




$

(10

)



$

10



Six months ended June 30, 2009


Gain (Loss) on Derivative


Gain (Loss) on Hedged Item


(Millions)


Recognized in Income


Recognized in Income


Derivatives in Fair Value Hedging Relationships


Location


Amount


Location


Amount


Interest rate swap contracts


Interest expense


$

4


Interest expense


$

(4

)

Total




$

4




$

(4

)


Net Investment Hedges:


As circumstances warrant, the Company uses cross currency swaps, forwards and foreign currency denominated debt to hedge portions of the Company's net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in cumulative translation within other comprehensive income. The remainder of the change in value of such instruments is recorded in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. The dollar equivalent gross notional amount of the Company's cross currency swaps and foreign currency forward contracts designated as net investment hedges at June 30, 2009 was $500 million.


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


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


In addition to the derivative instruments used as hedging instruments in net investment hedges, 3M also uses foreign currency denominated debt as nonderivative hedging instruments in certain net investment hedges.  In July and December 2007, the Company issued seven-year fixed rate Eurobond securities for amounts of 750 million Euros and 275 million Euros, respectively. 3M designated each of these Eurobond issuances as hedging instruments of the Company's net investment in its European subsidiaries.


The location in the consolidated statements of income and comprehensive income and amounts of gains and losses related to derivative and nonderivative instruments designated as net investment hedges are as follows. There were no reclassifications of the effective portion of net investment hedges out of accumulated other comprehensive income into income for the period presented in the table below.


Three months ended June 30, 2009

(Millions)

Derivative and Nonderivative Instruments in


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


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


Net Investment Hedging Relationships


Amount


Location


Amount


Cross currency swap contracts


$


(19

)

Interest expense


$

-


Foreign currency denominated debt




(75

)

N/A


-


Total


$


(94

)



$

-



Six months ended June 30, 2009

(Millions)

Derivative and Nonderivative Instruments in


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


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


Net Investment Hedging Relationships


Amount


Location


Amount


Cross currency swap contracts


$


19


Interest expense


$

-


Foreign currency denominated debt




20


N/A


-


Total


$


39




$

-



Derivatives Not Designated as Hedging Instruments:


Derivatives not designated as hedging instruments include dedesignated foreign currency forward and option contracts that formerly were designated in cash flow hedging relationships (as referenced in the Cash Flow Hedges section above). In addition, 3M enters into foreign currency forward contracts and commodity price swaps to offset, in part, the impacts of certain intercompany activities (primarily associated with intercompany licensing arrangements) and fluctuations in costs associated with the use of certain precious metals, respectively. These derivative instruments are not designated in hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings.  The dollar equivalent gross notional amount of these forward, option and swap contracts not designated as hedging instruments totaled $488 million as of June 30, 2009.  The Company does not hold or issue derivative financial instruments for trading purposes.




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




Three months ended June 30, 2009


Six months ended June 30, 2009




Gain (Loss) on Derivative


Gain (Loss) on Derivative


(Millions)


Recognized in Income


Recognized in Income


Derivatives Not Designated as Hedging Instruments


Location


Amount


Location


Amount


Foreign currency forward/option contracts


Cost of sales


$

(34

)

Cost of sales


$  (21

)

Commodity price swap contracts


Cost of sales


-


Cost of sales


(1

)

Total




$

(34

)



$  (22

)


Location and Fair Value Amount of Derivative Instruments


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


June 30, 2009






(Millions)


Assets


Liabilities


Fair Value of Derivative Instruments


Location


Amount


Location


Amount












Derivatives designated as hedging instruments










Foreign currency forward/option contracts


Other current assets


$

43


Other current liabilities


$

104


Commodity price swap contracts


Other current assets


-


Other current liabilities


21


Interest rate swap contracts


Other current assets


5


Other current liabilities


-


Interest rate swap contracts


Other assets


51


Other liabilities


6


Cross currency swap contracts


Other current assets


-


Other current liabilities


80


Total derivatives designated as hedging instruments




$

99




$

211












Derivatives not designated as hedging instruments










Foreign currency forward/option contracts


Other current assets


$

1


Other current liabilities


$

20


Commodity price swap contracts


Other current assets


-


Other current liabilities


-


Total derivatives not designated as hedging instruments




$

1




$

20












Total derivative instruments




$

100




$

231



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, decreased net income attributable to 3M by approximately $80 million for the for the three months ended June 30, 2009 and decreased net income attributable to 3M by approximately $100 million for the six months ended June 30, 2009. This estimate includes the effect of translating profits from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks and the negative impact of swapping Venezuelan bolivars into U.S. dollars. 3M estimates that year-on-year derivative and other transaction gains and losses had a minimal impact on net income attributable to 3M for the three months ended June 30, 2009 and increased net income attributable to 3M by approximately $65 million for the six months ended June 30, 2009.


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. During the second quarter of 2006, the Company entered into a credit support agreement with one of its primary derivatives counterparties. Under this agreement either party is required to post eligible collateral when the market value of transactions covered by the agreement exceeds specified thresholds, thus limiting credit exposure for both parties. 








NOTE 10. Fair Value Measurements


As discussed in Note 1, 3M adopted SFAS No. 157, 'Fair Value Measurements' (as amended by associated FSP's), prospectively effective January 1, 2008, with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company's financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. 3M adopted the remaining aspects of SFAS No. 157 relative to nonfinancial assets and liabilities that are measured at fair value, but are recognized and disclosed at fair value on a nonrecurring basis, prospectively effective January 1, 2009.


Under SFAS No. 157, 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. SFAS No. 157 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:


At 3M, effective January 1, 2008, fair value under SFAS No. 157 (as impacted by FSP Nos. FAS 157-1 and 157-2) principally applied to financial asset and liabilities such as 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. These items were previously and will continue to be marked-to-market at each reporting period; however, the definition of fair value used for these mark-to-markets is now applied using SFAS No. 157. The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and liabilities. The information incorporates the guidance of FSP No. FAS 157-3, 'Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active,' which was effective for 3M beginning with the quarter ended September 30, 2008, and FSP No. FAS 157-4, 'Determining Fair Values When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,' which was effective for 3M beginning April 1, 2009Separately, 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 subsequent to the effective date of SFAS No. 157 (as impacted by associated FSP's).


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 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 7.


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


As discussed in Note 7, 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 broker-dealer valuation models and third-party indicative bid levels in markets that are not active. 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:


Derivative assets and liabilities within the scope of SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities', are required to be recorded at fair value. The Company's derivatives that are impacted by SFAS No. 157 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 SFAS No. 157 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 table provides information by level for assets and liabilities that are measured at fair value, as defined by SFAS No. 157, on a recurring basis.



Fair Value




(Millions)


at
June 30,


Fair Value Measurements
Using Inputs Considered as


Description


2009


Level 1


Level 2


Level 3


Assets:



 


 


 


 

Available-for-sale:










  Marketable securities:














  Agency securities


$

186


$

-


$

186


$

-

 

  Corporate securities


152


-


152



 

  Asset-backed securities:










  Credit cards related


83


-


83


-


  Automobile loans related


122


-


122


-


  Other


30


-


30


-


  Treasury securities


83


83






  Auction rate securities


4


-


-


4


  Other securities


25


-


25


-


  Investments


6


6


-


-

 

Derivative instruments - assets


100


44


56


-

 











Liabilities: 










Derivative instruments - liabilities


231


145


86


-

 




Fair Value




(Millions)


at
Dec. 31,


Fair Value Measurements
Using Inputs Considered as


Description


2008


Level 1


Level 2


Level 3


Assets:



 


 


 


 

Available-for-sale:










  Marketable securities:














  Agency securities


$

380


$

-


$

380


$

-

 

  Corporate securities


207


-


207


-

 

  Asset-backed securities:










  Credit cards related


40


-


40


-


  Automobile loans related


49


-


49


-


  Other


22


-


22


-


  Treasury securities .


14


14


-


-


  Auction rate securities 


1


-


-


1


  Other securities


12


-


12


-


  Investments


5

 

5

 

-

 

-

 

Derivative instruments - assets 


279

 

221

 

58

 

-

 











Liabilities: 










Derivative instruments - liabilities


212

 

99

 

113

 

-

 

  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 June 30,
 
Six months ended June 30,
 
Marketable securities – auction rate securities only
 
2009
 
2008
 
2009
 
2008
 
Beginning balance
 
$
 
$
11
 
$
1    
 
$
16
 
Total gains or losses:
 
 
 
 
 
 
 
 
 
Included in earnings
 
 
(2
 
(3
Included in other comprehensive income
 
4
 
1
 
3
 
(3
Purchases, issuances, and settlements
 
 
 
 
 
Transfers in and/or out of Level 3
 
 
 
 
 
Ending balance (June 30)
 
4
 
10
 
4
 
10
 
 
 
 
 
 
 
 
 
 
 
Additional losses included in earnings due to reclassifications from other comprehensive income for securities still held at June 30
 
 
(6
 
(6


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). 


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


Disclosures for nonfinancial assets and liabilities that are measured at fair value, but are recognized and disclosed at fair value on a nonrecurring basis, are required prospectively beginning January 1, 2009. During the six months ended June 30, 2009, such measurements of fair value related primarily to the nonfinancial assets and liabilities with respect to the business combinations that closed in 2009 and long-lived asset impairments in 2009.


The net identifiable tangible and intangible assets and liabilities (excluding goodwill) for business combinations that closed in 2009 (discussed in Note 2) was not material for the three months ended June 30, 2009 and totaled approximately $7 million for the six months ended June 30, 2009. For business combinations, 3M uses inputs other than quoted prices that are observable, such as interest rates, cost of capital, and market comparable royalty rates, which are applied to income and market valuation approaches. 3M considers these level 2 inputs. 


For the three and six months ended June 30, 2009, long-lived asset impairments totaled approximately $26 million and $32 million, pre-tax, respectively. These include the portion of 2009 restructuring actions related to long-lived asset impairments as discussed in Note 4, with the complete carrying amount of such assets written off and included in operating income results. In addition to the restructuring activities, in June 2009 the Company recorded a $13 million impairment of certain long-lived assets associated with the UK passport production activity of 3M's Security Systems Division (within the Safety, Security and Protection Services business segment)In June 2009, 3M was notified that the UK government decided to award the production of its passports to a competitor upon the expiration of 3M's existing UK passport contracts in October 2010. Accordingly, 3M tested the long lived assets associated with the UK passport activity for recoverability which indicated that the asset grouping's carrying amount exceeded the remaining expected cash flows. As a result, associated assets were written down to a fair value of $41 million in June 2009. 3M primarily uses a discounted cash flow model that uses inputs other than quoted prices that are observable, such as interest rates and cost of capital, to determine the fair value of such assets. 3M considers these level 2 inputs. Refer to Note 1 ('Property, plant and equipment' and 'Intangible Assets') in 3M's Form 8-K filed May 13, 2009 (which updated 3M's 2008 Annual Report on Form 10-K) for further discussion of accounting policies related to long-lived asset impairments. 


  The following table provides information by level for nonfinancial assets and liabilities that were measured at fair value during 2009, as defined by SFAS No. 157, on a nonrecurring basis.


Three months ended June 30, 2009


Fair Value Measurements Using



(millions)

Fair value

Three-months ended June 30, 2009

Quoted Prices in Active Markets for Identical Assets (Level 1)


Significant Other Observable Inputs (Level 2)


Significant Unobservable Inputs (Level 3)


Total Gains (Losses)


Description





Long-lived assets held and used

$

41

$

-

 

$

41

 

$

-

 

$

(26

) 

Business combinations

-

-

 

-

 

-

 

-

 

Total




 


 


 

$

(26

) 


Six months ended June 30, 2009


Fair Value Measurements Using



(millions)

Fair value

Six-months ended June 30, 2009

Quoted Prices in Active Markets for Identical Assets (Level 1)


Significant Other Observable Inputs (Level 2)


Significant Unobservable Inputs (Level 3)


Total Gains (Losses)


Description





Long-lived assets held and used

$

41

$

-

 

$

41

 

$

-

 

$

(32

Business combinations

7

-

 

7

 

-

 

-

 

Total




 


 


 

$

(32

) 


Fair Value of Financial Instruments:


The Company's financial instruments include cash and cash equivalents, marketable securities, accounts receivable, 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 (except the $350 million dealer remarketable securities) 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. Fair values for investments held at cost are not readily available, but are estimated to approximate fair value. The Company utilized third-party quotes to estimate fair values for its dealer remarketable securities and long-term debt. Information with respect to the carrying amounts and estimated fair values of these financial instruments follow:




June 30, 2009


Dec. 31, 2008


(Millions)


Carrying
Amount


Fair
Value


Carrying
Amount


Fair
Value


Dealer remarketable securities


$

350


$

365


$

350


$

364


Long-term debt, excluding current portion


5,172


5,359


5,166


5,375



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 1,025 million Euros 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 are trading at a premium at June 30, 2009 and December 31, 2008 due to the low interest rates and improvement in credit spreads. The convertible debt (included in long-term debt) has a fair value which is below the carrying amount due to the low yield on the bond, combined with the 3M stock price trading below the conversion trigger price.


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. The following sections first describe the significant legal proceedings in which the Company is involved, and then describe the liabilities and associated insurance receivables the Company has accrued relating to its significant legal proceedings. 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 Current Report on Form 8-K filed May 13, 2009, including information about the Company's process for establishing and disclosing accruals and insurance receivables.

Shareholder Derivative Litigation

As previously reported, in July 2007, a shareholder derivative lawsuit was filed in the U.S. District Court for the District of Delaware against the Company as nominal defendant and against each then current member of the Board of Directors and the officers named in the Summary Compensation Table of the 2007 Proxy Statement. The suit alleges that the Company's 2007 Proxy Statement contained false and misleading statements concerning the tax deductibility of compensation payable under the Executive Annual Incentive Plan ('Plan') and the standards for determining the amounts payable under the Plan. The lawsuit seeks a declaration voiding shareholder approval of the Plan, termination of the Plan, voiding the elections of directors, equitable accounting, and awarding costs, including attorneys' fees. 

In May 2008, the Company and the individual defendants agreed to settle the litigation without admitting any liability or wrongdoing of any kind. The settlement agreement, which is subject to court approval, calls for the Compensation Committee of the Company's Board of Directors to adopt a resolution formally stating its interpretation of certain aspects of the Plan, and the Company to file a Current Report on Form 8-K to the same effect, and to pay up to $600,000 in attorney's fees to the plaintiff's counsel. On December 30, 2008, the Court issued an order preliminarily approving the settlement agreement. As a result, the Company notified all stockholders of the proposed settlement and its terms and their right to object to the terms of the settlement. On June 5, 2009, the Court issued an order approving the settlement.

French Competition Council Investigation

On December 4, 2008, the Company's subsidiary in France received a Statement of Objections from the French Competition Council alleging an abuse of a dominant position regarding the supply of retro-reflective films for vertical signing applications in France and of participation in a concerted practice with the major French manufacturers of vertical signs. The Statement of Objections is an intermediate stage in the proceedings and no final determination regarding an infringement of French competition rules has been made. 3M has filed its response denying that the Statement of Objections states a valid claim against 3M. It is difficult to predict the final outcome of the investigation at this time.

Respirator Mask/Asbestos Litigation

As of June 30, 2009, the Company is a named defendant, with multiple co-defendants, in numerous lawsuits in various courts that purport to represent approximately 2,640 individual claimants, similar to the number of individual claimants with actions pending at March 31, 2009 and December 31, 2008.

The vast majority of the lawsuits and claims resolved by and currently pending against the Company allege use of some of the Company's mask and respirator products and seek damages from the Company and other defendants for alleged personal injury from workplace exposures to asbestos, silica, coal or other occupational dusts found in products manufactured by other defendants or generally in the workplace. A minority of claimants generally allege personal injury from occupational exposure to asbestos from products previously manufactured by the Company, which are often unspecified, as well as products manufactured by other defendants, or occasionally at Company premises.

Since approximately 2006, the Company has experienced a significant decline in the number of new claims filed annually by apparently unimpaired claimants. The Company attributes this decline to several factors, including certain changes enacted in several states in recent years of the law governing asbestos-related claims, and the highly-publicized decision in mid-2005 of the United States District Court for the Southern District of Texas that identified and criticized abuses by certain attorneys, doctors and x-ray screening companies on behalf of primarily unimpaired claimants, many of whom were recruited by plaintiffs' lawyers through mass chest x-ray screenings. The Company expects the filing of claims by unimpaired claimants in the future to continue at much lower levels than in the past. The Company believes that due to this change in the type and volume of incoming claims, it is likely that the number of claims alleging more serious injuries, including mesothelioma and other malignancies, while remaining relatively constant, will represent a greater percentage of total claims than in the past. The Company has demonstrated in past trial proceedings that its respiratory protection products are effective as claimed when used in the intended manner and in the intended circumstances. Consequently the Company believes that claimants are unable to establish that their medical conditions, even if significant, are attributable to the Company's respiratory protection products. Nonetheless the Company's litigation experience indicates that claims of persons with malignant conditions are costlier to resolve than the claims of unimpaired persons, and it therefore anticipates an increase in the average cost of resolving pending and future claims on a per-claim basis than it experienced in prior periods when the vast majority of claims were asserted by the unimpaired.

On July 6, 2009, after nearly four months of trial in the Superior Court of Alameda County, California, the trial judge granted the Company's motion to dismiss all claims against the Company at the end of the plaintiff's case. The plaintiff, who is suffering from mesothelioma as a result of his exposure to asbestos, claimed that the Company's respirators were defective and failed to provide him with adequate protection and came with inadequate warnings. The trial judge dismissed all claims against the Company because the plaintiff failed to prove that a defect in the Company's respirator or its warnings was a substantial factor in causing the plaintiff's mesothelioma. With this dismissal, the Company has prevailed in all nine cases taken to trial, including seven of the eight cases tried to verdict (such trials occurred in 1999, 2000, 2001, 2003, 2004, and 2007), and an appellate reversal in 2005 of the one jury verdict adverse to the Company.

Respirator Mask/Asbestos Litigation - Aearo Technologies

On April 1, 2008, a subsidiary of the Company purchased the stock of Aearo Holding Corp., the parent of Aearo Technologies ('Aearo'). Aearo manufactures and sells various products, including personal protection equipment, such as eye, ear, head, face, fall and respiratory protection products. 

As of June 30, 2009, Aearo and/or other companies that previously owned and operated Aearo's respirator business (American Optical Corporation, Warner-Lambert LLC, AO Corp. and Cabot Corporation ('Cabot')) are named defendants, with multiple co-defendants, including the Company, in numerous lawsuits in various courts in which plaintiffs allege use of mask and respirator products and seek damages from Aearo and other defendants for alleged personal injury from workplace exposures to asbestos, silica-related, or other occupational dusts found in products manufactured by other defendants or generally in the workplace. 

As of June 30, 2009the Company, through its Aearo subsidiary, has recorded $34 million as an estimate of the probable liabilities for product liabilities and defense costs related to current and future Aearo-related asbestos and silica-related claims. Responsibility for legal costs, as well as for settlements and judgments, is currently shared in an informal arrangement among Aearo, Cabot, American Optical Corporation and a subsidiary of Warner Lambert and their insurers (the 'Payor Group'). Liability is allocated among the parties based on the number of years each company sold respiratory products under the 'AO Safety' brand and/or owned the AO Safety Division of American Optical Corporation and the alleged years of exposure of the individual plaintiff. Aearo's share of the contingent liability is further limited by an agreement entered into between Aearo and Cabot on July 11, 1995. This agreement provides that, so long as Aearo pays to Cabot an annual fee of $400,000, Cabot will retain responsibility and liability for, and indemnify Aearo against, asbestos and silica-related product liability claims for respirators manufactured prior to July 11, 1995. Because the date of manufacture for a particular respirator allegedly used in the past is often difficult to determine, Aearo and Cabot have applied the agreement to claims arising out of the use of respirators while exposed to asbestos or silica or products containing asbestos or silica prior to January 1, 1997. With these arrangements in place, Aearo's potential liability is limited to exposures alleged to have arisen from the use of respirators while exposed to asbestossilica or other occupational dusts on or after January 1, 1997.

To date, Aearo has elected to pay the annual fee. Aearo could potentially be exposed to additional claims for some part of the pre-July 11, 1995 period covered by its agreement with Cabot if Aearo elects to discontinue its participation in this arrangement, or if Cabot is no longer able to meet its obligations in these matters.  

Developments may occur that could affect the estimate of Aearo's liabilities. These developments include, but are not limited to: (i) significant changes in the number of future claims, (ii) significant changes in the average cost of resolving claims, (iii) significant changes in the legal costs of defending these claims, (iv) significant changes in the mix and nature of claims received, (v) trial and appellate outcomes, (vi) significant changes in the law and procedure applicable to these claims, (vii) significant changes in the liability allocation among the co-defendants, (viii) the financial viability of members of the Payor Group including exhaustion of available coverage limits(ix) the outcome of pending insurance coverage litigation among certain other members of the Payor Group and their respective insurers, and/or (x) a determination that the interpretation of the contractual obligations on which Aearo has estimated its share of liability is inaccurate. The Company cannot determine the impact of these potential developments on its current estimate of Aearo's share of liability for these existing and future claims. If any of the developments described above were to occur, the actual amount of these liabilities for existing and future claims could be significantly larger than the reserved amount.

Employment Litigation

Whitaker lawsuit: As previously reported, one current and one former employee of the Company filed a purported class action in the District Court of Ramsey County, Minnesota, in December 2004, seeking to represent a class of all current and certain former salaried employees employed by the Company in Minnesota below a certain salary grade who were age 46 or older at any time during the applicable period to be determined by the Court (the 'Whitaker' lawsuit). The complaint alleges the plaintiffs suffered various forms of employment discrimination on the basis of age in violation of the Minnesota Human Rights Act and seeks injunctive relief, unspecified compensatory damages (which they seek to treble under the statute), including back and front pay, punitive damages (limited by statute to $8,500 per claimant) and attorneys' fees. In January 2006, the plaintiffs filed a motion to join four additional named plaintiffs. This motion was unopposed by the Company and the four plaintiffs were joined in the case, although one claim has been dismissed following an individual settlement. The class certification hearing was held in December 2007. On April 11, 2008, the Court granted the plaintiffs' motion to certify the case as a class action and defined the class as all persons who were 46 or older when employed by 3M in Minnesota in a salaried exempt position below a certain salary grade at any time on or after May 10, 2003, and who did not sign a document on their last day of employment purporting to release claims arising out of their employment with 3M.  On June 25, 2008, the Minnesota Court of Appeals granted the Company's petition for interlocutory review of the District Court's decision granting class certification in the case. On April 28, 2009, the Court of Appeals issued its decision, reversing the District Court's class certification decision. The Court of Appeals found that the District Court had not required plaintiffs to meet the proper legal standards for certification of a class under Minnesota law and had deferred resolving certain factual disputes that were relevant to the class certification requirements. The Court of Appeals remanded the case to the District Court for further proceedings in line with the evidentiary standards defined in its opinion. The Company believes that the Court of Appeals correctly determined the proper legal standards to apply to motions to certify a class action, but the Company also believes that plaintiffs' motion for class certification in this case should be denied as a matter of law. Accordingly, on May 28, 2009, the Company filed in the Minnesota Supreme Court a Petition for Partial Review of the Decision of the Court of Appeals. No trial date or calendar of pretrial proceedings has been set at this time.

Garcia lawsuit: The Company was served on May 7, 2009 with a purported class action/collective action age discrimination lawsuit, which was filed in United States District Court for the Northern District of California, San Jose Division (the 'Garcia lawsuit'). Five former and one current employee of the Company are seeking to represent all current and former salaried employees employed by the Company in the United States during the liability period, which plaintiffs define as 2001 to the present. In addition to the six named plaintiffs, 65 other current or former employees have signed 'opt-in' forms, seeking to join the action. The Garcia lawsuit expressly excludes those persons and those claims encompassed within the proposed class and claims in the Whitaker lawsuit. The same counsel, joined by additional California counsel for the Garcia lawsuit, represents the plaintiffs in both cases.

The allegations of the complaint in the Garcia lawsuit are similar to those in the Whitaker lawsuit. Plaintiffs claim that they and other similarly situated employees suffered various forms of employment discrimination on the basis of age in violation of the federal Age Discrimination in Employment Act. In regard to these claims, plaintiffs seek to represent 'all persons who were 46 or older when employed by 3M in the United States in a salaried position below the level of director, or salary grade 18, during the liability period.' Because federal law protects persons age 40 and older from age discrimination, with respect to their claim of disparate impact only, plaintiffs also propose an alternative definition of similarly situated persons that would begin at age 40. Plaintiffs allege that there are more than 6,000 current and former employees who may potentially opt into the collective action. On behalf of this group, plaintiffs seek injunctive relief, unspecified compensatory damages including back and front pay, benefits, liquidated damages and attorneys' fees.

Certain of the plaintiffs' and putative class members' employment terminated under circumstances in which they were eligible for group severance plan benefits and in connection with those plans they signed waivers of claims, including age discrimination claims. Plaintiffs claim the waivers of age discrimination claims were invalid in various respects. This subset of release-signing plaintiffs seeks a declaration that the waivers of age discrimination claims are invalid, other injunctive, but non-monetary, remedies, and attorneys' fees. Plaintiffs allege that there are more than 2,000 current and former employees who would comprise this declaratory judgment class action. On July 2, 2009, the Company filed its Answer to the Garcia lawsuit complaint and filed a motion to transfer the venue of the lawsuit to the United States District Court for the District of Minnesota.

EEOC age-discrimination charges: Six former employees and one current employee, all but one of whom are plaintiffs in the Garcia lawsuit, have also filed age discrimination charges against the Company with the U.S. Equal Employment Opportunity Commission and various pertinent state agencies. Of these, three former employees filed charges in 2005 in MinnesotaTexas, and California. These filings include allegations that the release of claims signed by certain former employees in the purported class defined in the charges is invalid for various reasons and assert age discrimination claims on behalf of certain current and former salaried employees in states other than Minnesota and New Jersey. In 2006, a current employee filed an age discrimination charge against the Company with the U.S. Equal Employment Opportunity Commission and the pertinent state agency in Missouri, asserting claims on behalf of a class of all current and certain former salaried employees who worked in Missouri and other states other than Minnesota and New Jersey. In 2007, a former employee filed an age discrimination charge against the Company with the U.S. Equal Employment Opportunity Commission and the pertinent state agency in California, asserting claims on behalf of a class of all current and certain former salaried employees who worked in California. In January 2009, two former employees filed age discrimination charges against the Company with the U.S. Equal Employment Opportunity Commission and the pertinent state agency in Minnesota.  The filings include allegations that the release of claims signed by certain former employees in the purported class defined in the charges is invalid for various reasons and assert age discrimination claims on behalf of certain current and former salaried employees in states other than Minnesota. The same law firm represents the plaintiffs in the Whitaker lawsuit as well as the claimants in each of these EEOC proceedings.

Environmental Matters and Litigation

The Company's operations are subject to environmental laws and regulations including those pertaining to air emissions, wastewater discharges, toxic substances, and the handling and disposal of solid and hazardous wastes enforceable by national, state, and local authorities around the world, and private parties in the United States and abroad. These laws and regulations provide, under certain circumstances, a basis for the remediation of contamination and for personal injury and property damage claims. The Company has incurred, and will continue to incur, costs and capital expenditures in complying with these laws and regulations, defending personal injury and property damage claims, and modifying its business operations in light of its environmental responsibilities. In its effort to satisfy its environmental responsibilities and comply with environmental laws and regulations, the Company has established, and periodically updates, policies relating to environmental standards of performance for its operations worldwide.

Remediation: Under certain environmental laws, including the United States Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state laws, the Company may be jointly and severally liable, typically with other companies, for the costs of environmental contamination at current or former facilities and at off-site locations. The Company has identified numerous locations, most of which are in the United States, at which it may have some liability. Please refer to the 'Environmental remediation liabilities' in the table in the following section, 'Accrued Liabilities and Insurance Receivables Related to Legal Proceedings,' for information on the amount of the reserve.  

Regulatory Activities: As previously reported, the Company has been voluntarily cooperating with ongoing reviews by local, state, national (primarily the U.S. Environmental Protection Agency (EPA)), and international agencies of possible environmental and health effects of various perfluoronated compounds ('PFCs'), including perfluorooctanyl compounds (perflurooctanoic acid or 'PFOA' and perfluorooctane sulfonate or 'PFOS'). As a result of its phase-out decision in May 2000, the Company no longer manufactures perfluorooctanyl compounds, and has agreed to a product stewardship initiative with the EPA to end its use of PFOA by 2015. 

Regulatory activities concerning PFOA and/or PFOS continue in Europe and elsewhere, and before certain international bodies. These activities include gathering of exposure and use information, risk assessment, and consideration of regulatory approaches.  

In late 2008 and early 2009, the EPA implemented testing of private wells and soils at certain agricultural sites in Alabama where sewage sludge was applied from a local wastewater treatment plant that received wastewater from numerous industrial sources. The EPA also tested public drinking water in Lawrence and Morgan Counties and concluded that the levels of PFOA and PFOS are lower than 0.04 part per billion (ppb). The EPA currently believes that these levels are not of concern and is working with local industry to continue testing private wells in the area. The EPA also issued provisional health advisory values (above which action should be taken to reduce exposure to these compounds in drinking water) for PFOA of 0.4 ppb and PFOS of 0.2 ppb.

As previously reported, the Minnesota Department of Health ('MDH') detected low levels of another perfluoronated compound called perfluorobutanoic acid (PFBA) in municipal wells (and in private wells as announced by the MDH in June 2007) in six nearby communities (Woodbury, Cottage Grove, Newport, St. Paul Park, South St. Paul, and Hastings, all communities located southeast of St. Paul), some of which slightly exceeded the MDH's interim advisory level for PFBA of 1 ppb. In February 2008, the MDH established a health-based value (HBV) for PFBA of 7 ppb based on a clearer understanding of PFBA through the results of three major studies and sampling more than 1,000 private wells. An HBV is the amount of a chemical in drinking water considered by the MDH staff to be safe for people to drink for a lifetime. As a result of this new HBV for PFBA, well advisories will no longer be required for certain wells in the Minnesota communities of Lake Elmo, Oakdale and Cottage Grove. Residents in the affected communities where the levels of PFBA in private wells exceed the HBV either have been provided water treatment systems or connected to a city water system. As part of legislation passed during the 2007 Minnesota legislative session directing the MDH to develop and implement a statewide Environmental Health Tracking and Biomonitoring program, the MDH announced in July 2008 that it will measure the amount of PFCs in the blood of 200 adults who live in the Minnesota communities of Oakdale, Lake Elmo and Cottage Grove. In July 2009, the MDH reported that the levels of three PFCs in the blood of residents in these communities who participated in the study were slightly higher than the national average. A large body of research, including laboratory studies and epidemiology studies of exposed employees, shows that no human health effects are caused by PFCs at current levels of exposure. This research has been published in peer-reviewed scientific journals and shared with the EPA and global scientific-community.

The Company continues to work with the Minnesota Pollution Control Agency (MPCA) pursuant to the terms of the previously disclosed May 2007 Settlement Agreement and Consent Order to address the presence of perfluoronated compounds in the soil and groundwater at former disposal sites in Washington County Minnesota and at the Company's manufacturing facility at Cottage Grove Minnesota. Under this agreement, the Company's principal obligations include (i) evaluation of releases of perfluoronated compounds from these sites and propose response actions; (ii) providing alternative drinking water if and when an HBV or Health Risk Limit ('HRL') (i.e., the amount of a chemical in drinking water determined by the MDH to be safe for people to drink for a lifetime) is exceeded for any perfluoronated compounds as a result of contamination from these sites; (iii) remediation of any source of PFBA and provide alternative drinking water if and when levels are found above an HBV or HRL; and (iv) sharing information with the MPCA about perfluoronated compounds. During 2008, the MPCA issued formal decisions adopting remedial options for the former disposal sites in Washington County Minnesota (Oakdale and Woodbury). In May 2009, the MPCA selected remedial options for the Company's Cottage Grove manufacturing facility. At each location the remedial options were among those recommended by the Company.

As previously reported, the Company entered into a voluntary remedial action agreement with the Alabama Department of Environmental Management (ADEM) to address the presence of PFCs in the soil on the Company's manufacturing facility in Decatur, Alabama. For approximately twenty years, the Company incorporated wastewater treatment plant sludge containing PFCs in fields surrounding its Decatur facility pursuant to a permit issued by ADEM. After a review of the available options to address the presence of PFCs in the soil, ADEM agreed that the preferred remediation option is to use a multilayer cap over the former sludge incorporation areas on the manufacturing site with groundwater migration controls and treatment. 

Please refer to the 'Other environmental liabilities' in the table in the following section, 'Accrued Liabilities and Insurance Receivables Related to Legal Proceedings' for information on the balance of the reserve established to implement the Settlement Agreement and Consent Order with the MPCA, the remedial action agreement with ADEM, and to address trace amounts of perfluorinated compounds in drinking water sources in the City of Oakdale and Lake Elmo, Minnesota, as well as presence in the soil and groundwater at the Company's manufacturing facilities in Decatur, Alabama, and Cottage Grove, Minnesota, and at two former disposal sites in Minnesota.

The Company cannot predict what regulatory actions arising from the foregoing proceedings and activities, if any, may be taken regarding such compounds or the consequences of any such actions.

Litigation: As previously reported, a former employee filed a purported class action lawsuit in 2002 in the Circuit Court of Morgan County, Alabama, involving perfluorooctanyl chemistry, alleging that the plaintiffs suffered fear, increased risk, subclinical injuries, and property damage from exposure to perfluorooctanyl chemistry at or near the Company's Decatur, Alabama, manufacturing facility. The Circuit Court in 2005 granted the Company's motion to dismiss the named plaintiff's personal injury-related claims on the basis that such claims are barred by the exclusivity provisions of the state's Workers Compensation Act. The plaintiffs' counsel filed an amended complaint in November 2006, limiting the case to property damage claims on behalf of a purported class of residents and property owners in the vicinity of the Decatur plant. Also in 2005, the judge in a second purported class action lawsuit (filed by three residents of Morgan County, Alabama, seeking unstated compensatory and punitive damages involving alleged damage to their property from emissions of perfluorooctanyl compounds from the Company's Decatur, Alabama, manufacturing facility that formerly manufactured those compounds) granted the Company's motion to abate the case, effectively putting the case on hold pending the resolution of class certification issues in the action described above filed in the same court in 2002. Despite the stay, plaintiffs filed an amended complaint seeking damages for alleged personal injuries and property damage on behalf of the named plaintiffs and the members of a purported class. No further action in the case is expected unless and until the stay is lifted.

In February 2009, a resident of Franklin County, Alabama, filed a purported class action lawsuit in the Circuit Court of Franklin County seeking compensatory damages and injunctive relief based on the application by the Decatur wastewater treatment plant of municipal sewage sludge to farmland and grasslands in the state that allegedly contain PFOA, PFOS and other perfluorochemicals. The named defendants in the case include 3M, Dyneon LLC, Daikin America, Inc., Synagro-WWT, Inc., Synagro South, LLC and Biological Processors of America. The named plaintiff seeks to represent a class of all persons within the State of Alabama, Inc. who, within the past six years, have had PFOA, PFOS and other perfluorochemicals released or dumped onto their property by the defendants.

As previously reported, two residents of Washington County, Minnesota, filed in October 2004 a purported class action in the District Court of Washington County on behalf of Washington County residents who have allegedly suffered personal injuries and property damage from alleged emissions from the former perfluorooctanyl production facility at Cottage Grove, Minnesota, and from historic waste disposal sites in the vicinity of that facilityAfter the District Court granted the Company's motion to dismiss the claims for medical monitoring and public nuisance in April 2005, the plaintiffs filed an amended complaint adding additional allegations involving other perfluorinated compounds manufactured by the Company, alleging additional legal theories in support of their claims, adding four plaintiffs, and seeking relief based on alleged contamination of the City of Oakdale municipal water supply and certain private wells in the vicinity of Lake Elmo, Minnesota. In April 2006, the plaintiffs filed a second amended complaint adding two additional plaintiffs. The two original plaintiffs thereafter dismissed their claims against the Company. On June 19, 2007 the Court denied the plaintiffs' motion to certify the litigation as a class action. Thereafter, two of the remaining named plaintiffs voluntarily dismissed their claims. In December 2008 and January 2009 the Court granted the Company's summary judgment motions dismissing all of the plaintiffs' claims under the Minnesota Environmental Response and Liability Act and all claims for personal injury and emotional distress, but allowed the plaintiffs to add a claim for punitive damages with respect to their property damage claims. In March 2009, the Court granted the Company's summary judgment motions seeking dismissal of the plaintiffs' private nuisance and trespass to blood claims, but denied the Company's summary judgment motion with respect to the plaintiffs' negligence and trespass to soil and water claims, and denied the Company's motion to dismiss the plaintiffs' claim for punitive damages. Subsequent rulings by the Court in April 2009 limited the plaintiffs to property damage claims based on negligence and trespass, and punitive damages if plaintiffs prove their trespass claim. On June 17, 2009, after six weeks of trial, a Washington County jury returned a unanimous verdict in favor of the Company on all remaining issues in the lawsuit. The jury decided that the Company was not negligent and had not committed a trespass, and that plaintiffs had not suffered damage to their properties.  

In July 2009, the Emerald Coast Utilities Authority in Florida filed a lawsuit against the Company, E.I. DuPont de Nemours and Company, Solutia, Inc., and Fire Ram International, Inc. in the Escambia County Circuit Court alleging contamination of public drinking water wells from PFOA and PFOS and seeking to recover costs related to investigation, treatment, remediation and monitoring of alleged PFOA and PFOS contamination of its wells.

In June 2009, the Company, along with more than 250 other companies, was served with a third-party complaint seeking contribution towards the cost of cleaning up a 17-mile stretch of the Passaic River in New Jersey. After commencing an enforcement action in 1990, the State of New Jersey filed suit against Maxus Energy, Tierra Solutions, Occidental Chemical and two other companies seeking cleanup and removal costs and other damages associated with the presence of dioxin and other hazardous substances in the sediment of the Passaic. The third-party complaint seeks to spread those costs among the third-party defendants, including the Company. Based on the cleanup remedy currently proposed by the EPA, the total costs at issue could easily exceed $1 billion. The Company's recent involvement in the case appears to relate to its past disposal of industrial waste at two commercial waste disposal facilities in New Jersey. Whether, and to what extent, the Company may be required to contribute to the costs at issue in the case remains to be determined. The Company does not yet have a basis for estimating its potential exposure in this case, although the Company currently believes its allocable share, if any, of the total costs is likely to be a fraction of one percent.

Accrued Liabilities and Insurance Receivables Related to Legal Proceedings

The following table shows the major categories of on-going litigation, 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


June 30,


Dec. 31,


(Millions)


2009


2008





 


 

Breast implant liabilities


$

2

 

$

5

 

Breast implant insurance receivables


3

 

6

 




 


 

Respirator mask/asbestos liabilities

   

$  

131


$  

140

 

Respirator mask/asbestos insurance receivables


173

 

193

 




 


 

Environmental remediation liabilities


$  

31

 

$  

31

 

Environmental remediation insurance receivables


15

 

15

 




 


 

Other environmental liabilities


$

130

 

$

137

 


For those significant pending legal proceedings that do not appear in the table and that are not the subject of pending settlement agreements, the Company has determined that liability is not probable or the amount of the liability is not estimable, or both, and the Company is unable to estimate the possible loss or range of loss at this time. The amount in the preceding table with respect to breast implant liabilities represents the Company's best estimate of the liability. The Company does not believe that there is any single best estimate of the respirator/mask/asbestos liability, environmental remediation or the other environmental liabilities shown above, nor that it can reliably estimate the amount or range of amounts by which those liabilities may exceed the reserves the Company has established. 

As a result of the costs of aggressively defending itself and the greater cost of resolving claims of persons with malignant conditions, the Company increased its reserves for respirator mask/asbestos liabilities by approximately $7 million in the second quarter of 2009 and increased its receivables for insurance recoveries by approximately $2 million related to this litigation. As a result of settlements reached with its insurers, the Company was paid approximately $8.5 million in the second quarter of 2009 in connection with the respirator mask/asbestos receivable.

On January 5, 2007 the Company was served with a declaratory judgment action filed on behalf of two of its insurers (Continental Casualty and Continental Insurance Co. - both part of the Continental Casualty Group) disclaiming coverage for respirator mask/asbestos claims. These insurers represent approximately $14 million of the $173 million insurance recovery receivable referenced in the above table. The action seeks declaratory judgment regarding the allocation of covered costs among the policies issued by the various insurers. It was filed in Hennepin CountyMinnesota and names, in addition to the Company, over 60 of the Company's insurers. This action is similar in nature to an action filed in 1994 with respect to breast implant coverage, which ultimately resulted in the Minnesota Supreme Court's ruling of 2003 that was largely in the Company's favor.  At the Company's request, the case was transferred to Ramsey County, over the objections of the insurers. The Minnesota Supreme Court heard oral argument of the insurers' appeal of that decision in March 2008 and ruled in May 2008 that the proper venue of that case is Ramsey CountyThe case has been assigned to a judge in Ramsey County District Court. The plaintiff insurers have served an amended complaint that names some additional insurers and deletes others. The case remains in its early stages.

NOTE 12Stock-Based Compensation


In 2009, 3M changed its annual stock option and restricted stock unit grant date to more closely align the award with the timing of the Company's performance review process. In 2009 and forward, under the annual grant, 3M will grant shares in February instead of May as in previous years. Accounting rules require recognition of expense under a non-substantive vesting period approach, requiring compensation expense recognition when an employee is eligible to retire. 3M employees in the United States are eligible to retire at age 55 and after having completed five years of service. Approximately 25 percent of the stock-based compensation award expense dollars are for this retiree-eligible population. Therefore, in 2009 the retiree-eligible impact shifted stock-based compensation expense to the first quarter, whereas in 2008 and prior this impact was recognized in the second quarter (because of the May grant date).


The income tax benefits shown in the following table can fluctuate by period due to the amount of Incentive Stock Options (ISO) exercised since the Company receives the ISO tax benefit upon exercise. The Company last granted ISO in 2002. Amounts recognized in the financial statements with respect to stock-based compensation programs, which include stock options, restricted stock, restricted stock units and the General Employees' Stock Purchase Plan (GESPP), are as follows:



Three months ended


Six months ended 




June 30,


June 30,


(Millions, except per share amounts)


2009


2008


2009


2008


Cost of sales


$

9

 

$

17

 

$

24

 

$

26

 

Selling, general and administrative expenses


33

 

47

 

86

 

73

 

Research, development and related expenses


7


15

 

22

 

23

 




 


 


 


 

Operating Income (Loss)


$

(49

)

$

(79

)

$

(132

)

$

(122

)




 


 


 


 

Income tax benefits


$

15

 

$

34

 

$

43

 

$

51

 




 


 


 


 

Net Income (Loss) attributable to 3M


$

(34

)

$

(45

)

$

(89

)

$

(71

)




 


 


 


 

Earnings per share impact attributable














  to 3M common shareholders - diluted


$

(0.05

)

$

(0.06

)

$

(0.13

)

$

 (0.10)


In May 2008, shareholders approved 35 million shares for issuance under the '3M 2008 Long-Term Incentive Plan', which replaced and succeeded the 2005 Management Stock Ownership Program (MSOP), the 3M Performance Unit Plan, and the 1992 Directors Stock Ownership Program. Shares under this plan may be issued in the form of Incentive Stock Options, Nonqualified Stock Options, Progressive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Other Stock Awards, and Performance Units and Performance Shares. Awards denominated in shares of common stock other than options and Stock Appreciation Rights, per the 2008 Plan, will be counted against the 35 million share limit as 3.38 shares for every one share covered by such award. The remaining total shares available for grant under the 2008 Long Term Incentive Plan Program are 15,502,663 as of June 30, 2009


The following table summarizes stock option activity during the six months ended June 30, 2009:








Remaining


Aggregate




Number of


Exercise


Contractual


Intrinsic Value


Stock Options


Options


Price*


Life* (months)


(millions)


Under option -



 


 


 


 

  January 1


75,452,722

 

$

71.96

 


 


 

  Granted



 


 


 


 

   Annual


6,649,672

 

53.93

 


 


 

   Progressive (Reload)


4,678

 

50.83

 


 


 

  Exercised


(3,817,239

)

47.37

 


 


 

  Canceled


(782,977

)

72.38

 


 


 

  June 30


77,506,856

 

$

71.62

 

63

 

$

121

 

Options exercisable



 


 


 


 

  June 30


65,576,834

 

$

72.75

 

54

 

$

80

 

*Weighted average


As of June 30, 2009, there was $97 million of compensation expense that has yet to be recognized related to non-vested stock option based awards. This expense is expected to be recognized over the remaining vesting period with a weighted-average life of 2.0 yearsThe total intrinsic values of stock options exercised was $32 million and $100 million during the six-month periods ended June 30, 2009 and 2008, respectively. Cash received from options exercised was $181 million and $166 million for the six months ended June 30, 2009 and 2008, respectively. The Company's actual tax benefits realized for the tax deductions related to the exercise of employee stock options were $10 million and $28 million for the six months ended June 30, 2009 and 2008, respectively. Capitalized stock-based compensation amounts were not material at June 30, 2009.


For the 2009 annual stock option grant, the weighted average fair value at the date of grant was calculated using the Black-Scholes option-pricing model and the assumptions that follow.




Annual


Stock Option Assumptions


2009


Exercise price


$

54.11

 


Risk-free interest rate


2.2

%

Dividend yield


2.3

%

Expected volatility


30.3

%

Expected life (months)


71

 

Black-Scholes fair value


$

13.00

 



Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. For the 2009 annual grant date, the Company estimated the expected volatility based upon the average of the most recent one year volatility, the median of the term of the expected life rolling volatility, the median of the most recent term of the expected life volatility of 3M stock, and the implied volatility on the grant date. The expected term assumption is based on the weighted average of historical grants.

  Restricted stock unit grants generally vest at the end of three years. The one-time 'buyout' restricted stock unit grant in 2007 vests at the end of five years. The following table summarizes restricted stock and restricted stock unit activity during the six months ended June 30, 2009:


Restricted Stock and
Restricted Stock Units


Number of
Awards


Grant Date
Fair Value*


Nonvested balance -



 


 

As of January 1


2,957,538

 

$

77.41

 

Granted



 


 

Annual


1,151,093

 

53.89

 

Other


501,436

 

53.96

 

Vested


(98,633

)

53.57

 

Forfeited


(69,858

)

74.86

 

As of June 30


4,441,576

 

$

69.24

 

*Weighted average


As of June 30, 2009, there was $135 million of compensation expense that has yet to be recognized related to non-vested restricted stock and restricted stock units. This expense is expected to be recognized over the remaining vesting period with a weighted-average life of 2.1 years. The total fair value of restricted stock and restricted stock units that vested during the six-month period ended June 30, 2009 was $3 million and for the six-month period ended June 30, 2008 was not material.


Restricted stock units granted under the '3M 2008 Long-Term Incentive Plan' vest three years following the grant date assuming continued employment. Beginning in 2009, dividend equivalents equal to the dividends payable on the same number of shares of 3M common stock accrue on these restricted stock units during the vesting period, although no dividend equivalents are paid on any of these restricted stock units that are forfeited prior to the vesting date. Since the rights to dividends are forfeitable, there is no impact on basic earnings per share calculations. Weighted average restricted stock unit shares outstanding are included in the computation of diluted earnings per share.


In addition, the Company issues cash settled Restricted Stock Units and Stock Appreciation Rights in certain countries. These grants do not result in the issuance of Common Stock and are considered immaterial by the Company.


NOTE 13. Business Segments


Effective in the first quarter of 2009, 3M made certain changes to its business segments in its continuing effort to drive growth by aligning businesses around markets and customers. The most significant of these changes are summarized as follows:


Certain 3M window films, such as 3M™ Scotchtint™ Window Film for buildings and 3M™ Ultra Safety and Security Window Film for property and personal protection during destructive weather conditions, were previously part of the Building and Commercial Services Division within the Safety, Security and Protection Services business segment. These window films were transferred to the newly created Renewable Energy Division, which is part of the Industrial and Transportation business segment. The Renewable Energy Division consists of current 3M solar energy creation and management products and solutions, as well as products focused on the renewable energy markets. Renewable Energy's portfolio includes various 3M products for solar energy production and solar energy management (such as window films) and also includes responsibility for wind, geothermal and biofuel oriented products. The preceding product moves resulted in an increase in net sales for total year 2008 of $152 million for Industrial and Transportation, which was offset by a corresponding decrease in net sales for Safety, Security and Protection Services.


3M acquired Aearo Holding Corp., the parent company of Aearo Technologies Inc. (hereafter referred to as Aearo), in April 2008. Aearo manufactures and sells personal protection and energy absorbing products through the Industrial retail channels and certain safety products through the Consumer retail channels. The consumer retail portion of Aearo's business manufactures and markets personal safety products (including head, eye, face and hearing products, reflective vests, protective coveralls, and first aid kits) to the do-it-yourself consumer retail markets. The do-it-yourself retail market portion of 3M's Aearo business (previously in the Occupational Health and Environmental Safety Division within the Safety, Security and Protection Services business segment) was transferred to the Construction and Home Improvement Division within the Consumer and Office business segment. The preceding product moves resulted in an increase in net sales for total year 2008 of $49 million for Consumer and Office, which was offset by a corresponding decrease in net sales for Safety, Security and Protection Services.


Also, during the first quarter of 2009, 3M changed its segment reporting measures to include dual credit to business segments for certain U.S. sales and related operating income. Management now evaluates each of its six operating business segments based on net sales and operating income performance, including dual credit U.S. reporting. This change was made to further incentivize U.S. sales growth. As a result, 3M now provides additional ('dual') credit to those business segments selling products in the U.S. to an external customer when that segment is not the primary seller of the product. For example, certain respirators are primarily sold by the Occupational Health and Environmental Safety Division within the Safety, Security and Protection Services business segment; however, the Industrial and Transportation business segment also sells this product to certain customers in its U.S. markets. In this example, the non-primary selling segment (Industrial and Transportation) would also receive credit for the associated net sales it initiated and the related approximate operating income. The assigned operating income related to dual credit activity may differ from operating income that would result from actual costs associated with such sales. The offset to the dual credit business segment reporting is reflected as a reconciling item entitled 'Elimination of Dual Credit,' such that sales and operating income for the U.S. in total are unchanged.


3M's businesses are organized, managed and internally grouped into segments based on differences in products, technologies and services. 3M continues to manage its operations in six operating business segments: Industrial and Transportation; Health Care; Consumer and Office; Safety, Security and Protection Services; Display and Graphics; and Electro and Communications. 3M's six business segments bring together common or related 3M technologies, enhancing the development of innovative products and services and providing for efficient sharing of business resources. These segments have worldwide responsibility for virtually all 3M product lines. 3M is not dependent on any single product/service or market. Transactions among reportable segments are recorded at cost. 3M is an integrated enterprise characterized by substantial intersegment cooperation, cost allocations and inventory transfers. Therefore, management does not represent that these segments, if operated independently, would report the operating income information shown.


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


Business Segment Information


Three months ended


Six months ended 




June 30,


June 30,


(Millions)


2009


2008


2009


2008





 


 


 


 

Net Sales



 


 


 


 

Industrial and Transportation


$

1,726

 

$

2,178

 

$

3,307

 

$

4,360

 

Health Care


1,065

 

1,120

 

2,062

 

2,200

 

Consumer and Office


866

 

939

 

1,661

 

1,794

 

Safety, Security and Protection Services


794

 

979

 

1,488

 

1,800

 

Display and Graphics


808

 

849

 

1,419

 

1,724

 

Electro and Communications


551

 

760

 

1,031

 

1,495

 

Corporate and Unallocated


4

 

9

 

8

 

15

 

Elimination of Dual Credit


(95

)

(95

)

(168

)

(186

)

Total Company


$

5,719

 

$

6,739

 

$

10,808

 

$

13,202

 




 


 


 


 

Operating Income



 


 


 


 

Industrial and Transportation


$

285

 

$

427

 

$

459

 

$

919

 

Health Care


329

 

310

 

636

 

632

 

Consumer and Office


197

 

187

 

362

 

357

 

Safety, Security and Protection Services


183

 

186

 

308

 

382

 

Display and Graphics


183

 

185

 

243

 

373

 

Electro and Communications


67

 

153

 

88

 

302

 

Corporate and Unallocated


(32

) 

22


(65

) 

26


Elimination of Dual Credit


(21

)

(21

)

(37

)

(41

)

Total Company


$

1,191

 

$

1,449

 

$

1,994

 

$

2,950

 


For the three months and six months ended June 30, 2009, results included pre-tax charges of $116 million and $183 million, respectively, related to restructuring actions. Refer to Note 4 (Restructuring Actions and Exit Activities) for more detail. In addition, results for the three months and six months ended June 30, 2009 also included a gain on sale of real estate of $15 million pre-tax related to the sale of a New Jersey roofing granule facility (recorded within Safety, Security and Protection Services). 



The following items impacted operating income for the three months and six months ended June 30, 2008. In June 2008, 3M completed the sale of HighJump Software and recognized a pre-tax loss of $23 million (recorded in the Safety, Security and Protection Services segment). The Company also recorded pre-tax charges of $19 million in the second quarter of 2008 related to exit activities. These charges related to employee reductions at an Industrial and Transportation manufacturing facility located in the United Kingdom. These 2008 items are discussed in more detail in Note 2 (Acquisitions and Divestitures) and Note 4 (Restructuring Actions and Other Exit Activities), respectively, in 3M's Current Report on Form 8-K filed May 13, 2009.


Corporate and unallocated operating income includes a variety of miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and certain under- or over-absorbed costs (e.g. pension) that the Company may choose not to allocate directly to its business segments. Because this category includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.

 

Report of Independent Registered Public Accounting Firm* 


To the Stockholders and Board of Directors of 3M Company:


We have reviewed the accompanying consolidated balance sheet of 3M Company and its subsidiaries as of June 30, 2009 and the related consolidated statements of income and of cash flows for each of the three-month and six-month periods ended June 30, 2009 and 2008. These interim financial statements are the responsibility of the Company's management.


We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.


We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2008, and the related consolidated statements of income, of changes in stockholders' equity and comprehensive income, and of cash flows for the year then ended (not presented herein), and in our report dated February 10, 2009except with respect to our opinion on the consolidated financial statements insofar as it relates to the effects of the change in the manner in which the Company accounts for noncontrolling interests in consolidated subsidiaries and certain convertible debt instruments and the segment realignments discussed in Notes 1 and 17, respectively, as to which the date is May 12, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2008, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.



/s/ PricewaterhouseCoopers LLP


PricewaterhouseCoopers LLP

MinneapolisMinnesota

July 31, 2009

_____________

*Pursuant to Rule 436(c) of the Securities Act of 1933 ('Act') this report should not be considered a 'report' within the meaning of Sections 7 and 11 of the Act and the independent registered public accounting firm liability under Section 11 does not extend to it.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.


Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of 3M's financial statements with a narrative from the perspective of management. 3M's MD&A is presented in the following sections:

·Overview
·Results of Operations
·Performance by Business Segment
·Critical Accounting Estimates -- Update
·Financial Condition and Liquidity
·Forward-Looking Statements


OVERVIEW


3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. 3M manages its operations in six operating business segments: Industrial and Transportation, Health Care, Consumer and Office, Safety, Security and Protection Services, Display and Graphics and Electro and Communications. As discussed in Note 13 to the Consolidated Financial Statements, effective in the first quarter of 2009, 3M made certain changes to its business segments. The financial information presented herein reflects the impact of these business segment changes for all periods presented.


3M drove stronger results in the second quarter of 2009 when compared to the first quarter of 2009. Operating discipline was key to the quarter, as discretionary spending was well-controlled and restructuring actions proceeded according to plan. While sales were helped by improved demand for consumer electronics and respiratory products used to prevent the spread of the H1N1 virus, 3M's sound operational strategy and early actions to address the recession were at the core of the strong second-quarter 2009 performance. 


3M announced a number of restructuring actions across various businesses and geographies in the second quarter of 2009. The Company permanently reduced approximately 900 positions spanning many businesses and geographies, although several of the reductions were concentrated in the United StatesWestern Europe and Japan. In the United States, another 700 people accepted a voluntary early retirement option. 3M expects that a small portion of those employees that accepted the voluntary separation will be replaced in some form; thus, on a net basis, 3M estimates that total employment levels will drop by approximately 1,400 to 1,500 due to restructuring actions taken in the second quarter of 2009. There may be additional restructuring actions in the third quarter of 2009, but 3M anticipates something much smaller than those in the first or second quarter of 2009. The second quarter of 2009 included restructuring actions that reduced net income attributable to 3M by $69 million, or $0.09 per diluted share, which were partially offset by a gain on sale of real estate that reduced net income attributable to 3M by $9 million, or $0.01 per diluted share. The second quarter of 2008 included a loss on sale of businesses and exit activities, which combined reduced net income attributable to 3M by $46 million, or $0.06 per diluted share. Refer to '2009 special items' and '2008 special items' at the end of this overview section for more detail.


Second-quarter sales totaled $5.7 billion, a decrease of 15.1 percent from the second quarter of 2008, but up 12.4 percent sequentially from the first quarter of 2009. Including the preceding special items, net income attributable to 3M was $783 million, or $1.12 per diluted share, versus $945 million, or $1.33 per diluted share in the corresponding period last year. 


For the first six months of 2009, the stronger second quarter followed a challenging first quarter as the global economic slowdown dramatically affected 3M's businesses. Substantial end-market declines and continued inventory takedowns in major industries, including automotive, consumer electronics and general industrial manufacturing, resulted in significantly lower sales and income. Accordingly, 3M aggressively reduced its cost structure, lowered manufacturing output and intensified its attention to operational improvement. The combination of these actions drove strong operating income margins in the first six months of 2009. The first six months of 2009 included restructuring actions that reduced net income attributable to 3M by $114 million, or $0.16 per diluted share, which were partially offset by a gain on sale of real estate that reduced net income attributable to 3M by $9 million, or $0.01 per diluted share. The first six months of 2008 included a loss on sale of businesses and exit activities, which combined reduced net income attributable to 3M by $46 million, or $0.07 per diluted share. Refer to '2009 special items' and '2008 special items' at the end of this overview section for more detail.


Sales in the first six months of 2009 totaled $10.8 billion, a decrease of 18.1 percent from the first six months of 2008. Including the preceding special items, net income attributable to 3M was $1.301 billion, or $1.86 per diluted share, versus $1.933 billion, or $2.70 per diluted share in the corresponding period last year. In addition to the second quarter 2009 restructuring actions described above, 3M announced the elimination of approximately 1,200 positions in the first quarter of 2009. These first and second quarter 2009 restructuring actions are expected to save 3M approximately $100 million in the second half of 2009, with estimated additional incremental savings of approximately $120 million in 2010.


The following table summarizes sales and operating income results by business segment.




Three months ended June 30








2009


2008


% change




Net


Oper.


Net


Oper.


Net


Oper.


(Millions)


Sales


Income


Sales


Income


Sales


Income





 


 


 


 


 


 

Industrial and Transportation


$

1,726

 

$

285

 

$

2,178

 

$

427

 

(20.7

)%

(33.3

)%

Health Care


1,065

 

329

 

1,120

 

310

 

(4.9

)%

6.1

%

Consumer and Office


866

 

197

 

939

 

187


(7.8

)%

5.6

%

Safety, Security and Protection Services


794

 

183

 

979

 

186

 

(19.0

)%

(1.1

)%

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