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3M Company (96OI)

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Monday 05 August, 2013

3M Company

Half Yearly Report

RNS Number : 8997K
3M Company
02 August 2013
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

Commission file number:  1-3285

 

3M COMPANY

(Exact name of registrant as specified in its charter)

 

DELAWARE


41-0417775

(State or other jurisdiction of


(I.R.S. Employer

incorporation or organization)


Identification No.)




3M Center, St. Paul, Minnesota


55144

(Address of principal executive offices)


(Zip Code)

 

(651) 733-1110

(Registrant's telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

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

 

Large accelerated filer x

Accelerated filer o



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

Smaller reporting company o

 

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

 

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

 

Class


Outstanding at June 30, 2013

Common Stock, $0.01 par value per share


683,468,043 shares

 

This document (excluding exhibits) contains 76 pages.

The table of contents is set forth on page 2.

The exhibit index begins on page 73.


3M COMPANY

Form 10-Q for the Quarterly Period Ended June 30, 2013

TABLE OF CONTENTS




BEGINNING
PAGE


PART I

FINANCIAL INFORMATION




ITEM 1.

Financial Statements





Index to Financial Statements:





Consolidated Statement of Income


3



Consolidated Statement of Comprehensive Income


4



Consolidated Balance Sheet


5



Consolidated Statement of Cash Flows


6



Notes to Consolidated Financial Statements





Note 1.   Significant Accounting Policies


7



Note 2.   Acquisitions and Divestitures


9



Note 3.   Goodwill and Intangible Assets


10



Note 4.   Supplemental Equity and Comprehensive Income Information


12



Note 5.   Supplemental Cash Flow Information


17



Note 6.   Income Taxes


18



Note 7.   Marketable Securities


19



Note 8.   Pension and Postretirement Benefit Plans


21



Note 9.   Derivatives


23



Note 10. Fair Value Measurements


31



Note 11. Commitments and Contingencies


35



Note 12. Stock-Based Compensation


44



Note 13. Business Segments


48



Report of Independent Registered Public Accounting Firm


50


ITEM 2.

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





Index to Management's Discussion and Analysis:





Overview


51



Results of Operations


54



Performance by Business Segment


57



Financial Condition and Liquidity


63



Cautionary Note Concerning Factors That May Affect Future Results


68


ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk


68


ITEM 4.

Controls and Procedures


69


PART II

OTHER INFORMATION




ITEM 1.

Legal Proceedings


70


ITEM 1A.

Risk Factors


70


ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds


72


ITEM 3.

Defaults Upon Senior Securities


72


ITEM 4.

Mine Safety Disclosures


72


ITEM 5.

Other Information


72


ITEM 6.

Exhibits


73


 


3M COMPANY

FORM 10-Q

For the Quarterly Period Ended June 30, 2013

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)


2013 


2012 


2013 


2012 

Net sales


$

 7,752 


$

 7,534 


$

 15,386 


$

 15,020 

Operating expenses














Cost of sales



 4,013 



 3,870 



 7,982 



 7,759 


Selling, general and administrative expenses



 1,610 



 1,528 



 3,199 



 3,080 


Research, development and related expenses



 427 



 408 



 857 



 819 


Total operating expenses



 6,050 



 5,806 



 12,038 



 11,658 

Operating income



 1,702 



 1,728 



 3,348 



 3,362 















Interest expense and income














Interest expense



 41 



 43 



 80 



 83 


Interest income



 (10)



 (10)



 (20)



 (19)



Total interest expense - net



 31 



 33 



 60 



 64 















Income before income taxes



 1,671 



 1,695 



 3,288 



 3,298 

Provision for income taxes



 458 



 509 



 928 



 971 

Net income including noncontrolling interest


$

 1,213 


$

 1,186 


$

 2,360 


$

 2,327 















Less: Net income attributable to noncontrolling interest



 16 



 19 



 34 



 35 















Net income attributable to 3M


$

 1,197 


$

 1,167 


$

 2,326 


$

 2,292 















Weighted average 3M common shares outstanding - basic



 688.2 



 694.3 



 689.6 



 695.5 

Earnings per share attributable to 3M common














shareholders - basic


$

 1.74 


$

 1.68 


$

 3.37 


$

 3.30 















Weighted average 3M common shares outstanding - diluted



 699.1 



 702.6 



 700.6 



 704.4 

Earnings per share attributable to 3M common














shareholders - diluted


$

 1.71 


$

 1.66 


$

 3.32 


$

 3.25 















Cash dividends paid per 3M common share


$

 0.635 


$

 0.59 


$

 1.27 


$

 1.18 














































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


3M Company and Subsidiaries













Consolidated Statement of Comprehensive Income













(Unaudited)










































Three months ended


Six months ended


June 30,


June 30,

(Millions)


2013 


2012 


2013 


2012 

Net income including noncontrolling interest


$

 1,213 


$

 1,186 


$

 2,360 


$

 2,327 

Other comprehensive income (loss), net of tax:














Cumulative translation adjustment



 (279)



 (335)



 (677)



 (201)


Defined benefit pension and postretirement plans adjustment



 91 



 98 



 176 



 195 


Debt and equity securities, unrealized gain (loss)



 (4)



 (2)



 (4)



 1 


Cash flow hedging instruments, unrealized gain (loss)



 8 



 23 



 32 



 8 

Total other comprehensive income (loss), net of tax



 (184)



 (216)



 (473)



 3 

Comprehensive income (loss) including noncontrolling interest



 1,029 



 970 



 1,887 



 2,330 

Comprehensive (income) loss attributable to noncontrolling interest



 3 



 (30)



 23 



 (25)

Comprehensive income (loss) attributable to 3M


$

 1,032 


$

 940 


$

 1,910 


$

 2,305 











































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


3M Company and Subsidiaries







Consolidated Balance Sheet







(Unaudited)




















June 30,


December 31,

(Dollars in millions, except per share amount)

2013 

2012 

Assets





Current assets






Cash and cash equivalents


$

 2,942 


$

 2,883 


Marketable securities - current



 1,310 



 1,648 


Accounts receivable - net



 4,542 



 4,061 


Inventories









Finished goods



 1,792 



 1,754 



Work in process



 1,222 



 1,186 



Raw materials and supplies



 905 



 897 

Total inventories



 3,919 



 3,837 

Other current assets



 1,270 



 1,201 


Total current assets



 13,983 



 13,630 










Marketable securities - non-current



 1,542 



 1,162 

Investments



 154 



 163 

Property, plant and equipment



 22,417 



 22,525 


Less: Accumulated depreciation



 (14,088)



 (14,147)



Property, plant and equipment - net



 8,329 



 8,378 

Goodwill



 7,231 



 7,385 

Intangible assets - net



 1,786 



 1,925 

Prepaid pension benefits



 22 



 16 

Other assets



 1,083 



 1,217 



Total assets


$

 34,130 


$

 33,876 









Liabilities





Current liabilities






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


$

 1,062 


$

 1,085 


Accounts payable



 1,920 



 1,762 


Accrued payroll



 589 



 701 


Accrued income taxes



 460 



 371 


Other current liabilities



 2,304 



 2,281 



Total current liabilities



 6,335 



 6,200 










Long-term debt



 4,884 



 4,916 

Pension and postretirement benefits



 2,909 



 3,086 

Other liabilities



 1,683 



 1,634 



Total liabilities


$

 15,811 


$

 15,836 










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



 4,243 



 4,044 


Retained earnings



 31,716 



 30,679 


Treasury stock, at cost: 260,565,013 shares at June 30, 2013;









256,941,406 shares at December 31, 2012



 (12,926)



 (12,407)


Accumulated other comprehensive income (loss)



 (5,166)



 (4,750)



Total 3M Company shareholders' equity



 17,876 



 17,575 

Noncontrolling interest



 443 



 465 



Total equity


$

 18,319 


$

 18,040 












Total liabilities and equity


$

 34,130 


$

 33,876 










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,

(Millions)


2013 


2012 

Cash Flows from Operating Activities





Net income including noncontrolling interest


$

 2,360 


$

 2,327 

Adjustments to reconcile net income including noncontrolling interest to net cash








provided by operating activities








Depreciation and amortization



 671 



 634 


Company pension and postretirement contributions



 (171)



 (672)


Company pension and postretirement expense



 275 



 335 


Stock-based compensation expense



 150 



 145 


Deferred income taxes



 37 



 86 


Excess tax benefits from stock-based compensation



 (51)



 (41)


Changes in assets and liabilities









Accounts receivable



 (628)



 (553)



Inventories



 (167)



 (268)



Accounts payable



 199 



 150 



Accrued income taxes (current and long-term)



 166 



 226 



Product and other insurance receivables and claims



 19 



 (63)


Other - net



 (187)



 (89)

Net cash provided by operating activities



 2,673 



 2,217 










Cash Flows from Investing Activities







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



 (718)



 (619)

Proceeds from sale of PP&E and other assets



 18 



 8 

Acquisitions, net of cash acquired



            ―



 (144)

Purchases of marketable securities and investments



 (3,000)



 (2,311)

Proceeds from sale of marketable securities and investments



 1,464 



 1,027 

Proceeds from maturities of marketable securities



 1,484 



 1,181 

Proceeds from sale of businesses



 8 



            ―

Other investing



 4 



 4 

Net cash used in investing activities



 (740)



 (854)










Cash Flows from Financing Activities







Change in short-term debt - net



 (12)



 (34)

Repayment of debt (maturities greater than 90 days)



 (12)



 (18)

Proceeds from debt (maturities greater than 90 days)



 11 



 1,244 

Purchases of treasury stock



 (1,995)



 (1,163)

Proceeds from issuance of treasury stock pursuant to stock option and benefit plans



 1,103 



 479 

Dividends paid to shareholders



 (876)



 (820)

Excess tax benefits from stock-based compensation



 51 



 41 

Other - net



 3 



            ―

Net cash used in financing activities



 (1,727)



 (271)










Effect of exchange rate changes on cash and cash equivalents



 (147)



 (3)










Net increase (decrease) in cash and cash equivalents



 59 



 1,089 

Cash and cash equivalents at beginning of year



 2,883 



 2,219 

Cash and cash equivalents at end of period


$

 2,942 


$

 3,308 










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


3M Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1.  Significant Accounting Policies

 

Basis of Presentation

 

The interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair statement of the Company's consolidated financial position, results of operations and cash flows for the periods presented. These adjustments consist of normal, recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year. The interim consolidated financial statements and notes are presented as permitted by the requirements for Quarterly Reports on Form 10-Q.

 

As described in 3M's Current Report on Form 8-K dated May 16, 2013 (which updated 3M's 2012 Annual Report on Form 10-K) and 3M's Quarterly Report on Form 10-Q for the period ended March 31, 2013, during the first quarter of 2013 the Company completed a realignment of its business segments to better serve global markets and customers (refer to Note 13 herein). In addition, during the first quarter of 2013, 3M realigned its geographic area reporting to include Puerto Rico in the United States rather than in Latin America/Canada region. Segment and geographic information presented herein reflects the impact of these changes for all periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's consolidated financial statements and notes included in its Current Report on Form 8-K dated May 16, 2013.

 

Foreign Currency Translation

 

Local currencies generally are considered the functional currencies outside the United States. Assets and liabilities for operations in local-currency environments are translated at month-end exchange rates of the period reported. Income and expense items are translated at month-end exchange rates of the period reported. Cumulative translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in shareholders' equity.

 

Although local currencies are typically considered as the functional currencies outside the United States, under Accounting Standards Codification (ASC) 830, Foreign Currency Matters, the reporting currency of a foreign entity's parent is assumed to be that entity's functional currency when the economic environment of a foreign entity is highly inflationary - generally when its cumulative inflation is approximately 100 percent or more for the three years that precede the beginning of a reporting period. 3M has a subsidiary in Venezuela with operating income representing less than 1.0 percent of 3M's consolidated operating income for 2012. 3M has determined that the cumulative inflation rate of Venezuela has exceeded, and continues to exceed, 100 percent since November 2009. Accordingly, since January 1, 2010, the financial statements of the Venezuelan subsidiary have been remeasured as if its functional currency were that of its parent.

 

Regulations in Venezuela require the purchase and sale of foreign currency to be made at official rates of exchange that are fixed from time to time by the Venezuelan government. Certain laws in the country had, however, provided an exemption for the purchase and sale of certain securities that resulted in an indirect "parallel" market through which companies obtained foreign currency without having to purchase it from Venezuela's Commission for the Administration of Foreign Exchange (CADIVI). However, in 2010, the Venezuelan government took control of the previously freely-traded parallel market and created a government-controlled rate under the Transaction System for Foreign Currency Denominated Securities (SITME). In February 2013, the Venezuelan government announced a devaluation of its currency, the elimination of the SITME market, and the creation of the Superior Body for the Optimization of the Exchange System to oversee its foreign currency exchange policies. As a result, the new official exchange rate changed to a rate less favorable than the previous SITME rate. Since January 1, 2010, as discussed above, the financial statements of 3M's Venezuelan subsidiary have been remeasured as if its functional currency were that of its parent. This remeasurement utilized the parallel rate through May 2010, the SITME rate through January 2013, and the new official rate discussed above thereafter.

 

The Company continues to monitor circumstances relative to its Venezuelan subsidiary. Other factors notwithstanding, the elimination of the SITME rate and use of the new official exchange rate beginning in February 2013 did not have a material impact on 3M's consolidated results of operations or financial condition.

 

 

 

 

 

Earnings Per Share

 

The difference in the weighted average 3M shares outstanding for calculating basic and diluted earnings per share attributable to 3M common shareholders is a result of the dilution associated with the Company's stock-based compensation plans. Certain options outstanding under these stock-based compensation plans were not included in the computation of diluted earnings per share attributable to 3M common shareholders because they would not have had a dilutive effect (3.7 million average options for the three months ended June 30, 2013; 3.9 million average options for the six months ended June 30, 2013; 21.3 million average options for the three months ended June 30, 2012; and 20.3 million average options for the six months ended June 30, 2012). 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)


2013 


2012 


2013 


2012 

Numerator:










Net income attributable to 3M


$

 1,197 


$

 1,167 


$

 2,326 


$

 2,292 
















Denominator:














Denominator for weighted average 3M common shares















outstanding - basic 



 688.2 



 694.3 



 689.6 



 695.5 

















Dilution associated with the Company's stock-based















compensation plans 



 10.9 



 8.3 



 11.0 



 8.9 

















Denominator for weighted average 3M common shares















outstanding - diluted 



 699.1 



 702.6 



 700.6 



 704.4 
















Earnings per share attributable to 3M common














shareholders - basic


$

 1.74 


$

 1.68 


$

 3.37 


$

 3.30 

Earnings per share attributable to 3M common














shareholders - diluted


$

 1.71 


$

 1.66 


$

 3.32 


$

 3.25 

 

New Accounting Pronouncements

 

In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11, Disclosures About Offsetting Assets and Liabilities, and in January 2013 issued ASU No. 2013-01, Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities. These standards created new disclosure requirements regarding the nature of an entity's rights of setoff and related arrangements associated with its derivative instruments, repurchase agreements, and securities lending transactions. Certain disclosures of the amounts of certain instruments subject to enforceable master netting arrangements are required, irrespective of whether the entity has elected to offset those instruments in the statement of financial position. For 3M, these ASUs were effective January 1, 2013 with retrospective application required. The additional disclosures required by these ASUs are included in Note 9. Since these standards impact disclosure requirements only, their adoption did not have a material impact on 3M's consolidated results of operations or financial condition.

 

In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. Under this standard, entities testing long-lived intangible assets for impairment now have an option of performing a qualitative assessment to determine whether further impairment testing is necessary. If an entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more-likely-than-not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. For 3M, this ASU was effective beginning January 1, 2013. The adoption of this standard did not have a material impact on 3M's consolidated results of operations or financial condition.

 

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under this standard, entities are required to disclose additional information with respect to changes in accumulated other comprehensive income (AOCI) balances by component and significant items reclassified out of AOCI. Expanded disclosures for presentation of changes in AOCI involve disaggregating the total change of each component of other comprehensive income (for example, unrealized gains or losses on available for sale debt and equity securities) as well as presenting separately for each such component the portion of change in AOCI related to (1) amounts reclassified into income and (2) current-period other comprehensive income. Additionally, for amounts reclassified into income, disclosure in one location is required, based upon each specific AOCI component, of the amounts impacting individual income statement line items. Disclosure of the income statement line item impacts is required only for components of AOCI reclassified into income in their entirety. Therefore, disclosure of the income statement line items affected by AOCI components such as net periodic benefit costs is not included. The disclosures required with respect to income statement line item impacts are to be made in either the notes to the consolidated financial statements or parenthetically on the face of the financial statements. For 3M, this ASU was effective beginning January 1, 2013. The additional disclosures required by this ASU are included in Note 4. Because this standard only impacts presentation and disclosure requirements, its adoption did not have a material impact on 3M's consolidated results of operations or financial condition.

 

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters. This standard provides additional guidance with respect to the reclassification into income of the cumulative translation adjustment (CTA) recorded in accumulated other comprehensive income associated with a foreign entity of a parent company. The ASU differentiates between transactions occurring within a foreign entity and transactions/events affecting an investment in a foreign entity. For transactions within a foreign entity, the full CTA associated with the foreign entity would be reclassified into income only when the sale of a subsidiary or group of net assets within the foreign entity represents the substantially complete liquidation of that foreign entity. For transactions/events affecting an investment in a foreign entity (for example, control or ownership of shares in a foreign entity), the full CTA associated with the foreign entity would be reclassified into income only if the parent no longer has a controlling interest in that foreign entity as a result of the transaction/event. In addition, acquisitions of a foreign entity completed in stages will trigger release of the CTA associated with an equity method investment in that entity at the point a controlling interest in the foreign entity is obtained. For 3M, this ASU is effective prospectively beginning January 1, 2014, with early adoption permitted. This ASU would impact 3M's consolidated results of operations and financial condition only in the instance of an event/transaction as described above.


 

NOTE 2.  Acquisitions and Divestitures

 

Acquisitions:

 

3M makes acquisitions of certain businesses from time to time that the Company feels align with its strategic intent with respect to, among other factors, growth markets and adjacent product lines or technologies. Goodwill resulting from business combinations is largely attributable to the existing workforce of the acquired businesses and synergies expected to arise after 3M's acquisition of these businesses. In 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.

 

There were no business combinations that closed during the six months ended June 30, 2013. Adjustments in the first half of 2013 to the preliminary purchase price allocations of other acquisitions within the allocation period were not material and primarily related to the 2012 acquisition of Ceradyne, Inc. The allocation of purchase price related to the acquisition of Ceradyne, Inc. in November 2012 is considered preliminary, largely with respect to certain acquired property, plant and equipment; intangible assets; and tax-related assets and liabilities. Refer to Note 2 in 3M's Current Report on Form 8-K dated May 16, 2013 (which updated 3M's 2012 Annual Report on Form 10-K) for more information on 3M's 2012 acquisitions.

 

Divestitures:

 

In June 2013, 3M (Consumer Business) completed the sale of its Scientific Anglers and Ross Reels businesses to The Orvis Company, Inc. based in Manchester, Vermont.


NOTE 3.  Goodwill and Intangible Assets

 

There were no acquisitions that closed during the first six monthsof 2013. The acquisition activity in the following table includes the net impacts of adjustments to the preliminary allocation of purchase price for prior year acquisitions, which increased goodwill by $2 million. The amounts in the "Translation and other" column in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balances by business segment as of December 31, 2012 and June 30, 2013, follow:

 

Goodwill

 



December 31, 2012


Acquisition


Translation


June 30, 2013

(Millions)

Balance

activity

and other

Balance

Industrial


$

 2,174 


$

 2 


$

 (62)


$

 2,114 

Safety and Graphics



 1,751 



            ―



 (38)



 1,713 

Electronics and Energy



 1,622 



            ―



 (21)



 1,601 

Health Care



 1,598 



            ―



 (24)



 1,574 

Consumer



 240 



            ―



 (11)



 229 

Total Company


$

 7,385 


$

 2 


$

 (156)


$

 7,231 

 

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

 

As discussed in Note 13, effective in the first quarter of 2013, 3M completed a realignment of its business segments. Concurrent with this business segment realignment, certain products were also moved between business segments, with the resulting impact reflected in the goodwill balances by business segment above for all periods presented. For any product moves that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill of the associated reporting units. During the first quarter of 2013, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.

 

Acquired Intangible Assets

 

3M did not complete any business combinations during the six months ended June 30, 2013. As a result, balances of acquired intangible assets were primarily impacted by changes in foreign currency exchange rates. The carrying amount and accumulated amortization of acquired finite-lived intangible assets, in addition to the balance of non-amortizable intangible assets, as of June 30, 2013, and December 31, 2012, follow:

 




June 30,


December 31,

(Millions)

2013 

2012 

Patents


$

 593 


$

 596 

Other amortizable intangible assets (primarily tradenames and customer related








intangibles)



 2,424 



 2,456 

Total gross carrying amount


$

 3,017 


$

 3,052 









Accumulated amortization - patents



 (435)



 (421)

Accumulated amortization - other



 (922)



 (833)

Total accumulated amortization


$

 (1,357)


$

 (1,254)










Total finite-lived intangible assets - net


$

 1,660 


$

 1,798 









Non-amortizable intangible assets (primarily tradenames)



 126 



 127 


Total intangible assets - net


$

 1,786 


$

 1,925 



 

Amortization expense for acquired intangible assets for the three-month and six-month periods ended June 30, 2013 and 2012 follows:
















Three months ended


Six months ended



June 30,


June 30,

(Millions)


2013 


2012 


2013 


2012 

Amortization expense


$

 60 


$

 58 


$

 120 


$

 116 

 

The table below shows expected amortization expense for acquired amortizable intangible assets recorded as of June 30, 2013:

(Millions)


Remainder


















of












  After

2013 

2014 

2015 

2016 

2017 

2018 

2018 

Amortization expense


$

 119 


$

 212 


$

 198 


$

 184 


$

 169 


$

 152 


$

 626 

 

 

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


NOTE 4.  Supplemental Equity and Comprehensive Income Information

Consolidated Statement of Changes in Equity

 

Three months ended June 30, 2013




3M Company Shareholders



(Millions)


Total


Common Stock and Additional Paid-in Capital


Retained Earnings


Treasury Stock


Accumulated Other Comprehen-sive Income (Loss)


Non-controlling Interest

Balance at March 31, 2013


$

 18,528 


$

 4,188 


$

 31,073 


$

 (12,178)


$

 (5,001)


$

 446 





















Net income



 1,213 






 1,197 









 16 

Other comprehensive income (loss), net of tax:



















Cumulative translation adjustment



 (279)












 (260)



 (19)

Defined benefit pension and post-retirement




















plans adjustment



 91 












 91 



         ―

Debt and equity securities - unrealized gain (loss)



 (4)












 (4)



         ―

Cash flow hedging instruments - unrealized




















gain/(loss)



 8 












 8 



        ―

Total other comprehensive income (loss), net




















of tax



 (184)
















Dividends paid



 (436)






 (436)










Stock-based compensation, net of tax impacts



 64 



 64 













Reacquired stock



 (1,232)









 (1,232)







Issuances pursuant to stock option and




















benefit plans



 366 






 (118)



 484 







Balance at June 30, 2013


$

 18,319 


$

 4,252 


$

 31,716 


$

 (12,926)


$

 (5,166)


$

 443 





















Six months ended June 30, 2013





3M Company Shareholders



(Millions)


Total


Common Stock and Additional Paid-in Capital


Retained Earnings


Treasury Stock


Accumulated Other Comprehen-sive Income (Loss)


Non-controlling Interest

Balance at December 31, 2012


$

 18,040 


$

 4,053 


$

 30,679 


$

 (12,407)


$

 (4,750)


$

 465 





















Net income



 2,360 






 2,326 









 34 

Other comprehensive income (loss), net of tax:



















Cumulative translation adjustment



 (677)












 (620)



 (57)

Defined benefit pension and post-retirement




















plans adjustment



 176 












 176 



         ―

Debt and equity securities - unrealized gain (loss)



 (4)












 (4)



         ―

Cash flow hedging instruments - unrealized




















gain/(loss)



 32 












 32 



         ―

Total other comprehensive income (loss),




















net of tax



 (473)
















Dividends paid



 (876)






 (876)










Sale of subsidiary shares



 8 



 7 












 1 

Stock-based compensation, net of tax impacts



 192 



 192 













Reacquired stock



 (2,039)









 (2,039)







Issuances pursuant to stock option and




















benefit plans



 1,107 






 (413)



 1,520 







Balance at June 30, 2013


$

 18,319 


$

 4,252 


$

 31,716 


$

 (12,926)


$

 (5,166)


$

 443 



 

Three months ended June 30, 2012




3M Company Shareholders



(Millions)


Total


Common Stock and Additional Paid-in Capital


Retained Earnings


Treasury Stock


Accumulated Other Comprehen-sive Income (Loss)


Non-controlling Interest

Balance at March 31, 2012


$

 16,619 


$

 3,903 


$

 28,858 


$

 (11,794)


$

 (4,785)


$

 437 





















Net income



 1,186 






 1,167 









 19 

Other comprehensive income (loss), net of tax:



















Cumulative translation adjustment



 (335)












 (346)



 11 

Defined benefit pension and post-retirement




















plans adjustment



 98 












 98 



         ―

Debt and equity securities - unrealized gain (loss)



 (2)












 (2)



         ―

Cash flow hedging instruments - unrealized




















gain/(loss)



 23 












 23 



        ―

Total other comprehensive income (loss), net




















of tax



 (216)
















Dividends paid



 (410)






 (410)










Stock-based compensation, net of tax impacts



 60 



 60 













Reacquired stock



 (633)









 (633)







Issuances pursuant to stock option and




















benefit plans



 267 






 (150)



 417 







Balance at June 30, 2012


$

 16,873 


$

 3,963 


$

 29,465 


$

 (12,010)


$

 (5,012)


$

 467 





















Six months ended June 30, 2012




3M Company Shareholders



(Millions)


Total


Common Stock and Additional Paid-in Capital


Retained Earnings


Treasury Stock


Accumulated Other Comprehen-sive Income (Loss)


Non-controlling Interest

Balance at December 31, 2011


$

 15,862 


$

 3,776 


$

 28,348 


$

 (11,679)


$

 (5,025)


$

 442 





















Net income



 2,327 






 2,292 









 35 

Other comprehensive income (loss), net of tax:



















Cumulative translation adjustment



 (201)












 (191)



 (10)

Defined benefit pension and post-retirement




















plans adjustment



 195 












 195 



         ―

Debt and equity securities - unrealized gain (loss)



 1 












 1 



         ―

Cash flow hedging instruments - unrealized




















gain/(loss)



 8 












 8 



         ―

Total other comprehensive income (loss),




















net of tax



 3 
















Dividends paid



 (820)






 (820)










Stock-based compensation, net of tax impacts



 187 



 187 













Reacquired stock



 (1,167)









 (1,167)







Issuances pursuant to stock option and




















benefit plans



 481 






 (355)



 836 







Balance at June 30, 2012


$

 16,873 


$

 3,963 


$

 29,465 


$

 (12,010)


$

 (5,012)


$

 467 



 

Changes in Accumulated Other Comprehensive Income (Loss) Attributable to 3M by Component























Three months ended June 30, 2013
















(Millions)


Cumulative Translation Adjustment


Defined Benefit Pension and Postretirement Plans Adjustment


Debt and Equity Securities, Unrealized Gain (Loss)


Cash Flow Hedging Instruments, Unrealized Gain (Loss)


Total Accumulated Other Comprehen-sive Income (Loss)

Balance at March 31, 2013, net of tax


$

 (130)


$

 (4,870)


$

 (2)


$

 1 


$

 (5,001)

Other comprehensive income (loss),

















before tax:

















Amounts before reclassifications



 (260)



            ―



 (6)



 (42)



 (308)


Amounts reclassified out



            ―



 144 



             ―



 54 



 198 

Total other comprehensive income (loss),

















before tax



 (260)



 144 



 (6)



 12 



 (110)

Tax effect



            ―



 (53)



 2 



 (4)



 (55)

Total other comprehensive income (loss),

















net of tax



 (260)



 91 



 (4)



 8 



 (165)

Balance at June 30, 2013, net of tax


$

 (390)


$

 (4,779)


$

 (6)


$

 9 


$

 (5,166)


















Six months ended June 30, 2013
















(Millions)


Cumulative Translation Adjustment


Defined Benefit Pension and Postretirement Plans Adjustment


Debt and Equity Securities, Unrealized Gain (Loss)


Cash Flow Hedging Instruments, Unrealized Gain (Loss)


Total Accumulated Other Comprehen-sive Income (Loss)

Balance at December 31, 2012, net of tax


$

 230 


$

 (4,955)


$

 (2)


$

 (23)


$

 (4,750)

Other comprehensive income (loss),

















before tax:

















Amounts before reclassifications



 (584)



            ―



 (6)



 (112)



 (702)


Amounts reclassified out



             ―



 287 



             ―



 162 



 449 

Total other comprehensive income (loss),

















before tax



 (584)



 287 



 (6)



 50 



 (253)

Tax effect



 (36)



 (111)



 2 



 (18)



 (163)

Total other comprehensive income (loss),

















net of tax



 (620)



 176 



 (4)



 32 



 (416)

Balance at June 30, 2013, net of tax


$

 (390)


$

 (4,779)


$

 (6)


$

 9 


$

 (5,166)



 

Three months ended June 30, 2012
















(Millions)


Cumulative Translation Adjustment


Defined Benefit Pension and Postretirement Plans Adjustment


Debt and Equity Securities, Unrealized Gain (Loss)


Cash Flow Hedging Instruments, Unrealized Gain (Loss)


Total Accumulated Other Comprehen-sive Income (Loss)

Balance at March 31, 2012, net of tax


$

 269 


$

 (5,058)


$

 (3)


$

 7 


$

 (4,785)

Other comprehensive income (loss),

















before tax:

















Amounts before reclassifications



 (324)



            ―



 (3)



 29 



 (298)


Amounts reclassified out



            ―



 154 



             ―



 8 



 162 

Total other comprehensive income (loss),

















before tax



 (324)



 154 



 (3)



 37 



 (136)

Tax effect



 (22)



 (56)



 1 



 (14)



 (91)

Total other comprehensive income (loss),

















net of tax



 (346)



 98 



 (2)



 23 



 (227)

Balance at June 30, 2012, net of tax


$

 (77)


$

 (4,960)


$

 (5)


$

 30 


$

 (5,012)




















Six months ended June 30, 2012
















(Millions)


Cumulative Translation Adjustment


Defined Benefit Pension and Postretirement Plans Adjustment


Debt and Equity Securities, Unrealized Gain (Loss)


Cash Flow Hedging Instruments, Unrealized Gain (Loss)


Total Accumulated Other Comprehen-sive Income (Loss)

Balance at December 31, 2011, net of tax


$

 114 


$

 (5,155)


$

 (6)


$

 22 


$

 (5,025)

Other comprehensive income (loss),

















before tax:

















Amounts before reclassifications



 (169)



            ―



 1 



 1 



 (167)


Amounts reclassified out



             ―



 307 



 1 



 12 



 320 

Total other comprehensive income (loss),

















before tax



 (169)



 307 



 2 



 13 



 153 

Tax effect



 (22)



 (112)



 (1)



 (5)



 (140)

Total other comprehensive income (loss),

















net of tax



 (191)



 195 



 1 



 8 



 13 

Balance at June 30, 2012, net of tax


$

 (77)


$

 (4,960)


$

 (5)


$

 30 


$

 (5,012)

 

Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation does include impacts from items such as net investment hedge transactions. Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income.



 

Reclassifications out of Accumulated Other Comprehensive Income Attributable to 3M





















Amount Reclassified from






Accumulated Other Comprehensive Income



(Millions)


Three months ended June 30,


Six months ended June 30,


Location on Income Statement

Details about Accumulated Other Comprehensive Income Components


2013 


2012 


2013 


2012 


Gains (losses) associated with, defined benefit pension and postretirement plans amortization
















Transition asset


$

          ―


$

         ―


$

 1 


$

 1 


See Note 8


Prior service benefit



 20 



 22 



 40 



 42 


See Note 8


Net actuarial loss



 (164)



 (176)



 (328)



 (350)


See Note 8

Total before tax



 (144)



 (154)



 (287)



 (307)



Tax effect



 53 



 56 



 111 



 112 


Provision for income taxes

Net of tax


$

 (91)


$

 (98)


$

 (176)


$

 (195)



















Debt and equity security gains (losses)
















Sales or impairments                                of securities


$

          ―


$

         ―


$

         ―


$

 (1)


Selling, general and administrative expenses

Total before tax



          ―



         ―



         ―



 (1)



Tax effect



          ―



         ―



         ―



           ―


Provision for income taxes

Net of tax


$

          ―


$

         ―


$

         ―


$

 (1)



















Cash flow hedging instruments gains (losses)
















Foreign currency forward/option contracts


$

 (3)


$

 9 


$

 (9)


$

 9 


Cost of sales


Foreign currency forward contracts



 (52)



 (13)



 (153)



 (13)


Interest expense


Commodity price swap contracts



 1 



 (4)



          ―



 (8)


Cost of sales

Total before tax



 (54)



 (8)



 (162)



 (12)



Tax effect



 19 



 3 



 58 



 4 


Provision for income taxes

Net of tax


$

 (35)


$

 (5)


$

 (104)


$

 (8)



Total reclassifications for the period,               net of tax


$

 (126)


$

 (103)


$

 (280)


$

 (204)



 

Sale of Subsidiary Shares

 

In March 2013, 3M sold shares in 3M India Limited, a subsidiary of the Company, in return for $8 million. The noncontrolling interest shares of this subsidiary trade on a public exchange in India. This sale of shares complied with an amendment to Indian securities regulations that required 3M India Limited, as a listed company, to achieve a minimum public shareholding of at least 25 percent. As a result of this transaction, 3M's ownership in 3M India Limited was reduced from 76 percent to 75 percent. The $8 million received in the first quarter of 2013 was classified as other financing activity in the consolidated statement of cash flows. Because the Company retained its controlling interest, the sales resulted in an increase in 3M Company shareholder's equity of $7 million and an increase in noncontrolling interest of $1 million.


NOTE 5.  Supplemental Cash Flow Information

 

Transactions related to investing and financing activities with significant non-cash components are as follows:

 

·      During the second quarter of 2013, the Company's Sumitomo 3M Limited subsidiary moved its administrative headquarters to a new leased location and sold the former site under an installment sale arrangement. As a result, at the time of the closing of the sale transaction, the Company received certain cash proceeds (included in proceeds from sale of property, plant and equipment in the consolidated statement of cash flows) and recorded a note receivable (due in quarterly installments through the first quarter of 2016) of $78 million and deferred profit of $49 million (both based on the foreign currency exchange rate at the time of closing). Remaining quarterly installments are due through the first quarter of 2016 and will be included in other investing activities in the consolidated statement of cash flows. Deferred profit is reduced and recognized into income in connection with such quarterly installments.


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 2004.

 

The IRS completed its field examination of the Company's U.S. federal income tax returns for the years 2005 through 2007 in the fourth quarter of 2009. The Company protested certain IRS positions within these tax years and entered into the administrative appeals process with the IRS during the first quarter of 2010. During the first quarter of 2010, the IRS completed its field examination of the Company's U.S. federal income tax return for the 2008 year. The Company protested certain IRS positions for 2008 and entered into the administrative appeals process with the IRS during the second quarter of 2010. During the first quarter of 2011, the IRS completed its field examination of the Company's U.S. federal income tax return for the 2009 year. The Company protested certain IRS positions for 2009 and entered into the administrative appeals process with the IRS during the second quarter of 2011. During the first quarter of 2012, the IRS completed its field examination of the Company's U.S. federal income tax return for the 2010 year. The Company protested certain IRS positions for 2010 and entered into the administrative appeals process with the IRS during the second quarter of 2012. In December 2012, the Company received a statutory notice of deficiency for the 2006 year. The Company filed a petition in Tax Court in the first quarter of 2013 relating to the 2006 tax year.

 

Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2011, 2012, and 2013. It is anticipated that the IRS will complete its examination of the Company for 2011 by the end of the fourth quarter of 2013, for 2012 by the end of the first quarter of 2014, and for 2013 by the end of the first quarter of 2015. As of June 30, 2013, the IRS has not proposed any significant adjustments to any of the Company's tax positions for which the Company is not adequately reserved.

 

During the second quarter of 2011, the Company received a refund from the IRS for the 2004 tax year. During the first quarter of 2012, the Company paid the agreed upon assessments for the 2010 tax year. Payments relating to other proposed assessments arising from the 2005 through 2013 examinations may not be made until a final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also limited audit activity in several U.S. state and foreign jurisdictions.

 

3M anticipates changes to the Company's uncertain tax positions due to the closing of various audit years mentioned above. Currently, the Company is not able to reasonably estimate the amount by which the liability for unrecognized tax benefits will increase or decrease during the next 12 months as a result of the ongoing income tax authority examinations. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of June 30, 2013 and December 31, 2012, respectively, are $190 million and $185 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 $1 million of expense and $1 million of benefit for the three months ended June 30, 2013 and June 30, 2012, respectively, and approximately $5 million in expense and $5 million of benefit for the six months ended June 30, 2013 and June 30, 2012, respectively. At June 30, 2013 and December 31, 2012, accrued interest and penalties in the consolidated balance sheet on a gross basis were $47 million and $44 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

The effective tax rate for the second quarter of 2013 was 27.4 percent, compared to 30.1 percent in the second quarter of 2012, a decrease of 2.7 percentage points. This decrease was due to several factors, which included benefits realized for certain future deductions, international taxes (with this international tax benefit largely due to the estimated current year geographic mix of income before taxes), the reinstatement of the U.S. research and development credit in 2013, and adjustments to 3M's income tax reserves.

The effective tax rate for the first six months of 2013 was 28.2 percent, compared to 29.5 percent in the first six months of 2012, a decrease of 1.3 percentage points. Factors which decreased the Company's effective tax rate by 3.0 percentage points for the first six months of 2013 compared to the same period for 2012 included international taxes (with this international tax benefit largely due to the estimated current year geographic mix of income before taxes), benefits realized for certain future deductions, and the reinstatement of the U.S. research and development credit in 2013. This decrease was partially offset by a 1.7 percentage point increase as a result of adjustments to 3M's reserves for the first six months of 2013 when compared to the same period for 2012.

The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exits. As of June 30, 2013 and December 31, 2012, the Company had valuation allowances of $27 million and $29 million on its deferred tax assets, respectively.


 

NOTE 7.  Marketable Securities

 

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

 




June 30,


December 31,

(Millions)


2013 


2012 







U.S. government agency securities


$

 158 


$

 162 

Foreign government agency securities



 11 



 16 

Corporate debt securities



 283 



 471 

Commercial paper



 165 



 116 

Certificates of deposit/time deposits



 57 



 41 

U.S. treasury securities



 54 



 54 

U.S. municipal securities



 12 



 13 

Asset-backed securities:








Automobile loan related



 479 



 567 


Credit card related



 38 



 123 


Equipment lease related



 42 



 54 


Other



 11 



 31 

Asset-backed securities total



 570 



 775 









Current marketable securities


$

 1,310 


$

 1,648 









U.S. government agency securities


$

 207 


$

 125 

Foreign government agency securities



 62 



 51 

Corporate debt securities



 523 



 494 

Certificates of deposit/time deposits



 20 



                   ―

U.S. treasury securities



 49 



 18 

U.S. municipal securities



                   ―



 14 

Auction rate securities



 10 



 7 

Asset-backed securities:








Automobile loan related



 417 



 375 


Credit card related



 117 



 34 


Equipment lease related



 81 



 36 


Other



 56 



 8 

Asset-backed securities total



 671 



 453 









Non-current marketable securities


$

 1,542 


$

 1,162 









Total marketable securities


$

 2,852 


$

 2,810 

 

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, 2013, gross unrealized losses totaled approximately $10 million (pre-tax), while gross unrealized gains totaled approximately $1 million (pre-tax). At December 31, 2012, gross unrealized losses totaled approximately $6 million (pre-tax), while gross unrealized gains totaled approximately $3 million (pre-tax). Refer to Note 4 for a table that provides the net realized gains (losses) related to sales or impairments of debt and equity securities, which includes marketable securities. The gross amounts of the realized gains or losses were not material. Cost of securities sold use the first in, first out (FIFO) method. Since these marketable securities are classified as available-for-sale securities, changes in fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into earnings upon sale or "other-than-temporary" impairment.

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

The balances at June 30, 2013 for marketable securities by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

(Millions)


June 30, 2013




Due in one year or less


$

 713 

Due after one year through five years



 2,077 

Due after five years through ten years



 62 

Due after ten years



                  ―





Total marketable securities


$

 2,852 

 

3M has a diversified marketable securities portfolio with a fair market value of $2.852 billion as of June 30, 2013. Within this portfolio, current and long-term asset-backed securities (estimated fair value of $1.241 billion) primarily include interests in automobile loans, credit cards and equipment leases. 3M's investment policy allows investments in asset-backed securities with minimum credit ratings of Aa2 by Moody's or AA by S&P or Fitch. At June 30, 2013, all asset-backed security investments were in compliance with this policy. Approximately 99 percent of all asset-backed security investments were rated AAA or A-1+ by Standard & Poor's and/or Aaa or P-1 by Moody's and/or AAA or F1+ by Fitch.

3M's marketable securities portfolio includes auction rate securities that represent interests in investment grade credit default swaps; however, currently these holdings comprise less than one percent of this portfolio. The estimated fair value of auction rate securities was $10 million at June 30, 2013 and $7 million at December 31, 2012. Gross unrealized losses within accumulated other comprehensive income related to auction rate securities totaled $3 million (pre-tax) at June 30, 2013 and $6 million (pre-tax) at December 31, 2012. As of June 30, 2013, auction rate securities associated with these balances have been in a loss position for more than 12 months. Since the second half of 2007, these auction rate securities failed to auction due to sell orders exceeding buy orders. Liquidity for these auction-rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 7, 28, 35, or 90 days. The funds associated with failed auctions will not be accessible until a successful auction occurs or a buyer is found outside of the auction process. Refer to Note 10 for a table that reconciles the beginning and ending balances of auction rate securities.


NOTE 8.  Pension and Postretirement Benefit Plans

 

Net periodic benefit cost is recorded in cost of sales, selling, general and administrative expenses, and research, development and related expenses. Components of net periodic benefit cost and other supplemental information for the six months ended June 30, 2013 and 2012 follow:

 

Benefit Plan Information

 




Three months ended June 30,




Qualified and Non-qualified




Pension Benefits

Postretirement




United States


International


Benefits

(Millions)


2013 


2012 


2013 


2012 


2013 


2012 

Net periodic benefit cost (benefit)














Service cost


$

 64 


$

 64 


$

 36 


$

 31 


$

 20 


$

 20 


Interest cost



 149 



 146 



 61 



 62 



 22 



 21 


Expected return on plan assets



 (261)



 (248)



 (75)



 (73)



 (23)



 (22)


Amortization of transition (asset) obligation



    ―



    ―



     ―



    ―



    ―



    ―


Amortization of prior service cost (benefit)



 1 



 1 



 (5)



 (5)



 (16)



 (18)


Amortization of net actuarial (gain) loss



 100 



 118 



 40 



 30 



 24 



 28 

Net periodic benefit cost (benefit)


$

 53 


$

 81 


$

 57 


$

 45 


$

 27 


$

 29 

Settlements, curtailments, special termination benefits and other



    ―



    ―



    ―



    ―



    ―



    ―

Net periodic benefit cost (benefit) after settlements, curtailments,




















special termination benefits and other


$

 53 


$

 81 


$

 57 


$

 45 


$

 27 


$

 29 











































Six months ended June 30,




Qualified and Non-qualified





Pension Benefits

Postretirement




United States


International


Benefits

(Millions)


2013 


2012 


2013 


2012 


2013 


2012 

Net periodic benefit cost (benefit)














Service cost


$

 128 


$

 127 


$

 72 


$

 62 


$

 40 


$

 39 


Interest cost



 299 



 293 



 122 



 123 



 44 



 43 


Expected return on plan assets



 (522)



 (496)



 (150)



 (146)



 (45)



 (43)


Amortization of transition (asset) obligation



    ―



     ―



 (1)



 (1)



     ―



    ―


Amortization of prior service cost (benefit)



 2 



 3 



 (9)



 (9)



 (33)



 (36)


Amortization of net actuarial (gain) loss



 200 



 235 



 80 



 60 



 48 



 55 

Net periodic benefit cost (benefit)


$

 107 


$

 162 


$

 114 


$

 89 


$

 54 


$

 58 

Settlements, curtailments, special termination benefits and other



    ―



 26 



    ―



    ―



    ―



    ―

Net periodic benefit cost (benefit) after settlements, curtailments,




















special termination benefits and other


$

 107 


$

 188 


$

 114 


$

 89 


$

 54 


$

 58 

 

For the six months ended June 30, 2013, contributions totaling $168 million were made to the Company's U.S. and international pension plans and $3 million to its postretirement plans. For total year 2013, the Company expects to contribute approximately $400 million to $500 million of cash to its pension and postretirement plans. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2013. Therefore, the amount of future discretionary pension contributions could vary significantly depending on the U.S. plans' funded status and the anticipated tax deductibility of the contributions. Future contributions will also depend on market conditions, interest rates and other factors. 3M's annual measurement date for pension and postretirement assets and liabilities is December 31 each year, which is also the date used for the related annual measurement assumptions.

In December 2011, the Company began offering a voluntary early retirement incentive program to certain eligible participants of its U.S. pension plans who met age and years of pension service requirements. The eligible participants who accepted the offer and retired on February 1, 2012 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. 616 participants accepted the offer and retired on February 1, 2012. As a result, the Company incurred a $26 million charge related to these special termination benefits in the first quarter of 2012.

 

3M was informed during the first quarter of 2009 that the general partners of WG Trading Company, in which 3M's benefit plans hold limited partnership interests, are the subject of a criminal investigation as well as civil proceedings by the SEC and CFTC (Commodity Futures Trading Commission). In March 2011, over the objections of 3M and six other limited partners of WG Trading Company, the district court judge ruled in favor of the court appointed receiver's proposed distribution plan (and in April 2013, the United States Court of Appeals for the Second Circuit affirmed the district court's ruling). The benefit plan trustee holdings of WG Trading Company interests were adjusted to reflect the decreased estimated fair market value, inclusive of estimated insurance proceeds, as of the annual measurement dates. The Company has insurance that it believes, based on what is currently known, will result in the recovery of a portion of the decrease in original asset value. As of the 2012 measurement date these holdings represented less than one percent of 3M's fair value of total plan assets. 3M currently believes that the resolution of these events will not have a material adverse effect on the consolidated financial position of the Company.

 

In addition, the Company also sponsors employee savings plans under Section 401(k) of the Internal Revenue Code, as discussed in Note 10 in 3M's Form 8-K dated May 16, 2013 (which updated 3M's 2012 Annual Report on Form 10-K).


NOTE 9.  Derivatives

 

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

 

Additional information with respect to the impacts on other comprehensive income of nonderivative hedging and derivative instruments is included in Note 4. Additional information with respect to the fair value of derivative instruments is included in Note 10. References to information regarding derivatives and/or hedging instruments associated with the Company's long-term debt are also made in Note 9 to the Consolidated Financial Statements in 3M's Current Report on Form 8-K dated May 16, 2013 (which updated 3M's 2012 Annual Report on Form 10-K).

 

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

 

Cash Flow Hedges:

 

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

 

Cash Flow Hedging - Foreign Currency Forward and Option Contracts: The Company enters into foreign exchange forward and option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies and certain intercompany financing transactions. These transactions are designated as cash flow hedges. The settlement or extension of these derivatives will result in reclassifications (from accumulated other comprehensive income) to earnings in the period during which the hedged transactions affect earnings. Generally, 3M dedesignates these cash flow hedge relationships in advance of the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction occurs. Changes in the value of derivative instruments after dedesignation are recorded in earnings and are included in the Derivatives Not Designated as Hedging Instruments section below. Hedge ineffectiveness and the amount excluded from effectiveness testing recognized in income on cash flow hedges were not material for the three and six months ended June 30, 2013 and 2012. 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, 2013, 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, 2013 was approximately $6.4 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 months ended June 30, 2013 and 2012. The dollar equivalent gross notional amount of the Company's natural gas commodity price swaps designated as cash flow hedges at June 30, 2013 was $20 million.

 

Cash Flow Hedging - Forecasted Debt Issuance: In August 2011, in anticipation of the September 2011 issuance of $1 billion in five-year fixed rate notes, 3M executed a pre-issuance cash flow hedge on a notional amount of $400 million by entering into a forward-starting five-year floating-to-fixed interest rate swap. Upon debt issuance in September 2011, 3M terminated the floating-to-fixed interest rate swap. The termination of the swap resulted in a $7 million pre-tax loss ($4 million after-tax) that is amortized over the five-year life of the note and, when material, is included in the tables below as part of the loss recognized in income on the effective portion of derivatives as a result of reclassification from accumulated other comprehensive income.

 

As of June 30, 2013, the Company had a balance of $9 million associated with the after-tax net unrealized gain associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This net gain includes a $3 million balance(loss) related to a floating-to-fixed interest rate swap (discussed in the preceding paragraph), which is being amortized over the five-year life of the note. 3M expects to reclassify a majority of the remaining balance to earnings over the next 12 months (with the impact offset by cash flows from underlying hedged items).

 

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

 

Three months ended June 30, 2013







(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


$

 10 


Cost of sales


$

 (3)


Cost of sales


$

 ―   

Foreign currency forward contracts



 (49)


Interest expense



 (52)


Interest expense



 ―   

Commodity price swap contracts



 (3)


Cost of sales



 1 


Cost of sales



 ―   

  Total


$

 (42)




$

 (54)




$

 ―   















Six months ended June 30, 2013







(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


$

 41 


Cost of sales


$

 (9)


Cost of sales


$

 ―   

Foreign currency forward contracts



 (152)


Interest expense



 (153)


Interest expense



 ―   

Commodity price swap contracts



 (1)


Cost of sales



 ―   


Cost of sales



 ―   

  Total


$

 (112)




$

 (162)




$

 ―   















Three months ended June 30, 2012







(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


$

 42 


Cost of sales


$

 9 


Cost of sales


$

 ―   

Foreign currency forward contracts



 (13)


Interest expense



 (13)


Interest expense



 ―   

Commodity price swap contracts



 ―   


Cost of sales



 (4)


Cost of sales



 ―   

  Total


$

 29 




$

 (8)




$

 ―   















Six months ended June 30, 2012







(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


$

 18 


Cost of sales


$

 9 


Cost of sales


$

 ―   

Foreign currency forward contracts



 (12)


Interest expense



 (13)


Interest expense



 ―   

Commodity price swap contracts



 (5)


Cost of sales



 (8)


Cost of sales



 ―   

  Total


$

 1 




$

 (12)




$

 ―   



 

Fair Value Hedges:

 

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

 

Fair Value Hedging - Interest Rate Swaps: The Company manages interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains or losses in interest expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest expense. These fair value hedges are highly effective and, thus, there is no impact on earnings due to hedge ineffectiveness. The dollar equivalent (based on inception date foreign currency exchange rates) gross notional amount of the Company's interest rate swaps at June 30, 2013 was $342 million.

 

At June 30, 2013, the Company had interest rate swaps designated as fair value hedges of underlying fixed rate obligations. In July 2007, in connection with the issuance of a seven-year Eurobond for an amount of 750 million Euros, the Company completed a fixed-to-floating interest rate swap on a notional amount of 400 million Euros as a fair value hedge of a portion of the fixed interest rate Eurobond obligation. In August 2010, the Company terminated 150 million Euros of the notional amount of this swap. As a result, a gain of 18 million Euros, recorded as part of the balance of the underlying debt, is amortized over this debt's remaining life. Prior to termination of the applicable portion of the interest rate swap, the mark-to-market of the hedge instrument was recorded as gains or losses in interest expense and was offset by the gain or loss on carrying value of the underlying debt instrument. Consequently, the subsequent amortization of the 18 million Euros recorded as part of the underlying debt balance is not part of gain on hedged items recognized in income in the tables below.

 

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, 2013


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


$

 (3)


Interest expense


$

 3 

  Total




$

 (3)




$

 3 












Six months ended June 30, 2013


Gain (Loss) on Derivative


Gain (Loss) on Hedged Item

(Millions)

Recognized in Income

Recognized in Income

Derivatives in Fair Value Hedging Relationships


Location


Amount


Location


Amount

Interest rate swap contracts


Interest expense


$

 (8)


Interest expense


$

 8 

  Total




$

 (8)




$

 8 












Three months ended June 30, 2012


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


$

 (2)


Interest expense


$

 2 

  Total




$

 (2)




$

 2 












Six months ended June 30, 2012


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


$

 (3)


Interest expense


$

 3 

  Total




$

 (3)




$

 3 

 

Net Investment Hedges:

 

As circumstances warrant, the Company uses cross currency swaps, forwards and foreign currency denominated debt to hedge portions of the Company's net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in cumulative translation within other comprehensive income. The remainder of the change in value of such instruments is recorded in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. At June 30, 2013, there were no cross currency swaps and foreign currency forward contracts designated as net investment hedges.

 

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

 

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

 

Three months ended June 30, 2013









Derivative and Nonderivative Instruments in Net Investment Hedging Relationships

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

(Millions)


Amount


Location


Amount

Foreign currency denominated debt


$

 (24)


N/A


$

 ―   

  Total


$

 (24)




$

 ―   










Six months ended June 30, 2013





Derivative and Nonderivative Instruments in Net Investment Hedging Relationships

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

(Millions)

Amount

Location


Amount

Foreign currency denominated debt


$

 17 


N/A


$

 ―   

  Total


$

 17 




$

 ―   










Three months ended June 30, 2012





Derivative and Nonderivative Instruments in Net Investment Hedging Relationships

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

(Millions)


Amount


Location


Amount

Foreign currency denominated debt


$

 90 


N/A


$

 ―   

  Total


$

 90 




$

 ―   










Six months ended June 30, 2012









Derivative and Nonderivative Instruments in Net Investment Hedging Relationships


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

(Millions)


Amount


Location


Amount

Foreign currency denominated debt


$

 50 


N/A


$          

 ―   

  Total


$

 50 




$

 ―   



 

Derivatives Not Designated as Hedging Instruments:

Derivatives not designated as hedging instruments include dedesignated foreign currency forward and option contracts that formerly were designated in cash flow hedging relationships (as referenced in the preceding Cash Flow Hedges section). In addition, 3M enters into foreign currency forward contracts and commodity price swaps to offset, in part, the impacts of certain intercompany activities (primarily associated with intercompany licensing arrangements) and fluctuations in costs associated with the use of certain precious metals, respectively. These derivative instruments are not designated in hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings. The dollar equivalent gross notional amount of these forward, option and swap contracts not designated as hedging instruments totaled $1.4 billion as of June 30, 2013. 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:

 

Derivatives Not Designated as Hedging Instruments


Three months ended June 30, 2013


Gain (Loss) on Derivative Recognized in Income

Gain (Loss) on Derivative Recognized in Income

(Millions)


Location


Amount


Location


Amount

Foreign currency forward/option contracts


Cost of sales


$

 21 


Cost of sales


$

 31 

Foreign currency forward contracts


Interest expense



 (48)


Interest expense



 (27)

Commodity price swap contracts


Cost of sales



 (1)


Cost of sales



 (1)

  Total




$

 (28)




$

 3 












Derivatives Not Designated as Hedging Instruments


Three months ended June 30, 2012


Gain (Loss) on Derivative Recognized in Income

Gain (Loss) on Derivative Recognized in Income

(Millions)


Location


Amount


Location


Amount

Foreign currency forward/option contracts


Cost of sales


$

 20 


Cost of sales


$

 5 

Foreign currency forward contracts


Interest expense



 (15)


Interest expense



 12 

Commodity price swap contracts


Cost of sales



 (1)


Cost of sales



            ―

  Total




$

 4 




$

 17 



 

Location and Fair Value Amount of Derivative Instruments

 

The following tables summarize the fair value of 3M's derivative instruments, excluding nonderivative instruments used as hedging instruments, and their location in the consolidated balance sheet. Additional information with respect to the fair value of derivative instruments is included in Note 10.

 

June 30, 2013











(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


$

 54 


Other current liabilities


$

 33 

Commodity price swap contracts


Other current assets



     ―


Other current liabilities



 1 

Interest rate swap contracts


Other assets



 15 


Other liabilities



     ―

  Total derivatives designated as












hedging instruments




$

 69 




$

 34 













Derivatives not designated as hedging instruments









Foreign currency forward/option contracts


Other current assets


$

 34 


Other current liabilities


$

 24 

  Total derivatives not designated as












hedging instruments




$

 34 




$

 24 













Total derivative instruments




$

 103 




$

 58 













December 31, 2012











(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


$

 39 


Other current liabilities


$

 85 

Commodity price swap contracts


Other current assets



     ―


Other current liabilities



 1 

Interest rate swap contracts


Other assets



 23 


Other liabilities



     ―

  Total derivatives designated as












hedging instruments




$

 62 




$

 86 













Derivatives not designated as hedging instruments









Foreign currency forward/option contracts


Other current assets


$

 10 


Other current liabilities


$

 20 

  Total derivatives not designated as












hedging instruments




$

 10 




$

 20 













Total derivative instruments




$

 72 




$

 106 

 

Credit Risk and Offsetting of Assets and Liabilities of Derivative Instruments

 

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. 3M enters into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow each counterparty to net settle amounts owed between a 3M entity and the counterparty as a result of multiple, separate derivative transactions. As of June 30, 2013, 3M has International Swaps and Derivatives Association (ISDA) agreements with eight applicable banks and financial institutions which contain netting provisions. In addition to a master agreement with 3M supported by a primary counterparty's parent guarantee, 3M also has associated credit support agreements in place with seven of its primary derivative counterparties which, among other things, provide the circumstances under which either party is required to post eligible collateral (when the market value of transactions covered by these agreements exceeds specified thresholds or if a counterparty's credit rating has been downgraded to a predetermined rating). The Company does not anticipate nonperformance by any of these counterparties.

 

3M has elected to present the fair value of derivative assets and liabilities within the Company's consolidated balance sheet on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. However, the following tables provide information as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria in the event of default or termination as stipulated by the terms of netting arrangements with each of the counterparties. For each counterparty, if netted, the Company would offset the asset and liability balances of all derivatives at the end of the reporting period based on the 3M entity that is a party to the transactions. Derivatives not subject to master netting agreements are not eligible for net presentation. As of the applicable dates presented below, no cash collateral had been received or pledged related to these derivative instruments.

 

Offsetting of Financial Assets/Liabilities under Master Netting Agreements with Derivative Counterparties

June 30, 2013



















Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements




(Millions)



Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet



Gross Amount of Eligible Offsetting Recognized Derivative Liabilities



Cash Collateral Received



Net Amount of Derivative Assets

Derivatives subject to master netting agreements


$

 102 


$

 34 


$

 ―   


$

 68 

Derivatives not subject to master netting agreements



 1 









 1 

Total


$

 103 








$

 69 

 

June 30, 2013



















Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements




(Millions)



Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet



Gross Amount of Eligible Offsetting Recognized Derivative Assets



Cash Collateral Pledged



Net Amount of Derivative Liabilities

Derivatives subject to master netting agreements


$

 51 


$

 34 


$

 ―   


$

 17 

Derivatives not subject to master netting agreements



 7 









 7 

Total


$

 58 








$

 24 

 

December 31, 2012



















Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements




(Millions)



Gross Amount of Derivative Assets Presented in the Consolidated Balance Sheet



Gross Amount of Eligible Offsetting Recognized Derivative Liabilities



Cash Collateral Received



Net Amount of Derivative Assets

Derivatives subject to master netting agreements


$

 67 


$

 25 


$

 ―   


$

 42 

Derivatives not subject to master netting agreements



 5 









 5 

Total


$

 72 








$

 47 



 

December 31, 2012



















Gross Amounts not Offset in the Consolidated Balance Sheet that are Subject to Master Netting Agreements




(Millions)



Gross Amount of Derivative Liabilities Presented in the Consolidated Balance Sheet



Gross Amount of Eligible Offsetting Recognized Derivative Assets



Cash Collateral Pledged



Net Amount of Derivative Liabilities

Derivatives subject to master netting agreements


$

 106 


$

 25 


$

 ―   


$

 81 

Derivatives not subject to master netting agreements



                    ―









                     ―

Total


$

 106 








$

 81 

 

Currency Effects

 

3M estimates that year-on-year currency effects, including hedging impacts, decreased net income attributable to 3M by approximately $12 million for the three months ended June 30, 2013 and decreased net income attributable to 3M by approximately $18 million for the six months ended June 30, 2013. This estimate includes the effect of translating profits from local currencies into U.S. dollars and the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad. This estimate also includes year-on-year currency effects from transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks and the negative impact of swapping Venezuelan bolivars into U.S. dollars, which 3M estimates decreased net income attributable to 3M by approximately $3 million for three months ended June 30, 2013 and increased net income attributable to 3M by approximately $10 million for the six months ended June 30, 2013.


NOTE 10.  Fair Value Measurements

 

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

 

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

 

For 3M, assets and liabilities that are measured at fair value on a recurring basis primarily relate to available-for-sale marketable securities, available-for-sale investments (included as part of investments in the Consolidated Balance Sheet) and certain derivative instruments. Derivatives include cash flow hedges, interest rate swaps and most net investment hedges. The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and liabilities. Separately, there were no material fair value measurements with respect to nonfinancial assets or liabilities that are recognized or disclosed at fair value in the Company's financial statements on a recurring basis for the three and six month periods ended June 30, 2013 and 2012.

 

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

 

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

 

Marketable securities, except auction rate securities, are valued utilizing multiple sources. A weighted average price is used for these securities. Market prices are obtained for these securities from a variety of industry standard data providers, security master files from large financial institutions, and other third-party sources. These multiple prices are used as inputs into a distribution-curve-based algorithm to determine the daily fair value to be used. 3M classifies U.S. treasury securities as level 1, while all other marketable securities (excluding auction rate securities) are classified as level 2. Marketable securities are discussed further in Note 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 third-party indicative bid levels in markets that are not active and broker-dealer valuation models that utilize inputs such as current/forward interest rates, current market conditions and credit default swap spreads. 3M classifies these securities as level 3.

 

Available-for-sale investments:

 

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

 

Derivative instruments:

 

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

 

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

 

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








Fair Value Measurements

(Millions)

Fair Value at

Using Inputs Considered as

Description


June 30, 2013


Level 1


Level 2


Level 3

Assets:









Available-for-sale:










Marketable securities:











U.S. government agency securities


$

 365 


$


$

365


$



Foreign government agency securities



 73 





73





Corporate debt securities



 806 





806





Certificates of deposit/time deposits



 77 





77





Commercial paper



 165 





165





Asset-backed securities:
















Automobile loan related



 896 





896






Credit card related



 155 





155






Equipment lease related



 123 





123






Other



 67 





67





U.S. treasury securities



 103 



103







U.S. municipal securities



 12 





12





Auction rate securities



 10 







10


Investments



 3 



3





Derivative instruments - assets:














Foreign currency forward/option contracts



 88 



88






Interest rate swap contracts



 15 





15



















Liabilities:













Derivative instruments - liabilities:














Foreign currency forward/option contracts



 57 



57






Commodity price swap contracts



 1 



1







 






Fair Value at


Fair Value Measurements

(Millions)

December 31, 2012

Using Inputs Considered as

Description



Level 1


Level 2


Level 3

Assets:









Available-for-sale:










Marketable securities:











U.S. government agency securities


$

 287 


$


$

287


$



Foreign government agency securities



 67 





67





Corporate debt securities



 965 





965





Certificates of deposit/time deposits



 41 





41





Commercial paper



 116 





116





Asset-backed securities:
















Automobile loan related



 942 





942






Credit card related



 157 





157






Equipment lease related



 90 





90






Other



 39 





39





U.S. treasury securities



 72 



72







U.S. municipal securities



 27 





27





Auction rate securities



 7 







7


Investments



 3 



3





Derivative instruments - assets:














Foreign currency forward/option contracts



 49 



49






Interest rate swap contracts



 23 





23



















Liabilities:













Derivative instruments - liabilities:














Foreign currency forward/option contracts



 105 



104



1




Commodity price swap contracts



 1 



1





 

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).

 




Three months ended


Six months ended

(Millions)

June 30,

June 30,

Marketable securities - auction rate securities only


2013 


2012 


2013 


2012 

Beginning balance


$

7


$

5


$

7


$

4

Total gains or losses:














Included in earnings










Included in other comprehensive income



3



(1)



3



Purchases, issuances, and settlements









Transfers in and/or out of Level 3









Ending balance (June 30)



10



4



10



4















Additional losses included in earnings due to reclassifications from














other comprehensive income for:














Securities sold during the period ended June 30










Securities still held at June 30









 

In addition, the plan assets of 3M's pension and postretirement benefit plans are measured at fair value on a recurring basis (at least annually). Refer to Note 10 in 3M's Current Report on Form 8-K dated May 16, 2013 (which updated 3M's 2012 Annual Report on Form 10-K).

 

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

Disclosures are required for certain assets and liabilities that are measured at fair value, but are recognized and disclosed at fair value on a nonrecurring basis in periods subsequent to initial recognition. For 3M, such measurements of fair value relate primarily to long-lived asset impairments. There were no material long-lived asset impairments for the three and six months ended June 30, 2013 and 2012.

Fair Value of Financial Instruments:

The Company's financial instruments include cash and cash equivalents, marketable securities, accounts receivable, certain investments, accounts payable, borrowings, and derivative contracts. The fair values of cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings and current portion of long-term debt approximated carrying values because of the short-term nature of these instruments. Available-for-sale marketable securities and investments, in addition to certain derivative instruments, are recorded at fair values as indicated in the preceding disclosures. For its long-term debt the Company utilized third-party quotes to estimate fair values (classified as level 2). Information with respect to the carrying amounts and estimated fair values of these financial instruments follow:

 



June 30, 2013



December 31, 2012



Carrying


Fair


Carrying


Fair

(Millions)

Value

Value

Value


Value

Long-term debt, excluding current portion


$

 4,884 


$

 5,116 


$

 4,916 


$

 5,363 

 

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 inte