Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2010

 

Commission file number:  1-3285

 

3M COMPANY

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

41-0417775

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

3M Center, St. Paul, Minnesota

 

55144

(Address of principal executive offices)

 

(Zip Code)

 

(651) 733-1110

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer x

Accelerated filer o

 

 

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

Smaller reporting company o

 

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

 

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

 

Class

 

Outstanding at June 30, 2010

Common Stock, $0.01 par value per share

 

713,134,328 shares

 

This document (excluding exhibits) contains 62 pages.

The table of contents is set forth on page 2.

The exhibit index begins on page 59.

 

 

 



Table of Contents

 

3M COMPANY

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

TABLE OF CONTENTS

 

 

 

 

 

BEGINNING
PAGE

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

ITEM 1.

Financial Statements

 

 

 

 

 

 

 

 

 

Index to Financial Statements:

 

 

 

 

Consolidated Statement of Income

 

3

 

 

Consolidated Balance Sheet

 

4

 

 

Consolidated Statement of Cash Flows

 

5

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Note 1.   Significant Accounting Policies

 

6

 

 

Note 2.   Acquisitions

 

8

 

 

Note 3.   Goodwill and Intangible Assets

 

9

 

 

Note 4.   Restructuring Actions and Exit Activities

 

10

 

 

Note 5.   Supplemental Equity and Comprehensive Income Information

 

12

 

 

Note 6.   Income Taxes

 

15

 

 

Note 7.   Marketable Securities

 

17

 

 

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

 

18

 

 

Note 9.   Pension and Postretirement Benefit Plans

 

19

 

 

Note 10.  Derivatives

 

20

 

 

Note 11.  Fair Value Measurements

 

25

 

 

Note 12.  Commitments and Contingencies

 

30

 

 

Note 13.  Stock-Based Compensation

 

35

 

 

Note 14.  Business Segments

 

37

 

 

Report of Independent Registered Public Accounting Firm

 

39

 

 

 

 

 

 

ITEM 2.

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

 

 

 

 

Index to Management’s Discussion and Analysis:

 

 

 

 

Overview

 

40

 

 

Results of Operations

 

42

 

 

Performance by Business Segment

 

46

 

 

Financial Condition and Liquidity

 

52

 

 

Forward-Looking Statements

 

56

 

 

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

 

56

 

 

 

 

 

 

ITEM 4.

Controls and Procedures

 

56

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

 

57

 

 

 

 

 

 

ITEM 1A.

Risk Factors

 

57

 

 

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

 

 

 

 

 

 

ITEM 3.

Defaults Upon Senior Securities

 

59

 

 

 

 

 

 

ITEM 4.

Removed and Reserved

 

59

 

 

 

 

 

 

ITEM 5.

Other Information

 

59

 

 

 

 

 

 

ITEM 6.

Exhibits

 

59

 

2



Table of Contents

 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended June 30, 2010

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)

 

2010

 

2009

 

2010

 

2009

 

Net sales

 

$

6,731

 

$

5,719

 

$

13,079

 

10,808

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

3,435

 

2,977

 

6,673

 

5,749

 

Selling, general and administrative expenses

 

1,350

 

1,242

 

2,673

 

2,433

 

Research, development and related expenses

 

350

 

309

 

692

 

632

 

Total operating expenses

 

5,135

 

4,528

 

10,038

 

8,814

 

Operating income

 

1,596

 

1,191

 

3,041

 

1,994

 

 

 

 

 

 

 

 

 

 

 

Interest expense and income

 

 

 

 

 

 

 

 

 

Interest expense

 

52

 

55

 

100

 

110

 

Interest income

 

(10

)

(7

)

(16

)

(18

)

Total interest expense (income)

 

42

 

48

 

84

 

92

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

1,554

 

1,143

 

2,957

 

1,902

 

Provision for income taxes

 

414

 

351

 

862

 

580

 

Net income including noncontrolling interest

 

$

1,140

 

$

792

 

2,095

 

1,322

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

19

 

9

 

44

 

21

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,121

 

$

783

 

$

2,051

 

$

1,301

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — basic

 

714.5

 

696.8

 

713.1

 

695.2

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.57

 

$

1.12

 

$

2.88

 

1.87

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — diluted

 

725.7

 

700.3

 

724.6

 

698.1

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

1.54

 

$

1.12

 

$

2.83

 

1.86

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per 3M common share

 

$

0.525

 

$

0.51

 

$

1.05

 

$

1.02

 

 

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

 

3



Table of Contents

 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

 

 

June 30

 

Dec. 31

 

(Dollars in millions, except per share amount)

 

2010

 

2009

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

3,022

 

$

3,040

 

Marketable securities — current

 

1,909

 

744

 

Accounts receivable — net

 

3,745

 

3,250

 

Inventories

 

 

 

 

 

Finished goods

 

1,366

 

1,255

 

Work in process

 

914

 

815

 

Raw materials and supplies

 

700

 

569

 

Total inventories

 

2,980

 

2,639

 

Other current assets

 

1,235

 

1,122

 

Total current assets

 

12,891

 

10,795

 

 

 

 

 

 

 

Marketable securities — non-current

 

606

 

825

 

Investments

 

111

 

103

 

Property, plant and equipment

 

19,045

 

19,440

 

Less: Accumulated depreciation

 

(12,330

)

(12,440

)

Property, plant and equipment — net

 

6,715

 

7,000

 

Goodwill

 

5,620

 

5,832

 

Intangible assets — net

 

1,268

 

1,342

 

Prepaid pension benefits

 

99

 

78

 

Other assets

 

1,186

 

1,275

 

Total assets

 

$

28,496

 

$

27,250

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

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

 

$

728

 

$

613

 

Accounts payable

 

1,756

 

1,453

 

Accrued payroll

 

616

 

680

 

Accrued income taxes

 

386

 

252

 

Other current liabilities

 

1,951

 

1,899

 

Total current liabilities

 

5,437

 

4,897

 

 

 

 

 

 

 

Long-term debt

 

4,949

 

5,097

 

Pension and postretirement benefits

 

2,137

 

2,227

 

Other liabilities

 

1,710

 

1,727

 

Total liabilities

 

$

14,233

 

$

13,948

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

3M Company shareholders’ equity:

 

 

 

 

 

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

 

$

9

 

$

9

 

Additional paid-in capital

 

3,336

 

3,153

 

Retained earnings

 

24,788

 

23,753

 

Treasury stock, at cost; 230,898,728 shares at June 30, 2010; 233,433,937 shares at Dec. 31, 2009

 

(10,146

)

(10,397

)

Accumulated other comprehensive income (loss)

 

(4,016

)

(3,754

)

Total 3M Company shareholders’ equity

 

13,971

 

12,764

 

Noncontrolling interest

 

292

 

538

 

Total equity

 

$

14,263

 

$

13,302

 

 

 

 

 

 

 

Total liabilities and equity

 

$

28,496

 

$

27,250

 

 

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

 

4



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3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

Six months ended

 

 

 

June 30

 

(Dollars in millions)

 

2010

 

2009

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income including noncontrolling interest

 

$

2,095

 

$

1,322

 

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

 

 

 

 

 

Depreciation and amortization

 

559

 

569

 

Company pension and postretirement contributions

 

(128

)

(205

)

Company pension and postretirement expense

 

155

 

109

 

Stock-based compensation expense

 

171

 

132

 

Deferred income taxes

 

18

 

(15

)

Excess tax benefits from stock-based compensation

 

(36

)

 

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

(586

)

(222

)

Inventories

 

(428

)

447

 

Accounts payable

 

243

 

(76

)

Accrued income taxes (current and long-term)

 

108

 

199

 

Product and other insurance receivables and claims

 

5

 

34

 

Other — net

 

44

 

(133

)

Net cash provided by operating activities

 

2,220

 

2,161

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

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

 

(337

)

(454

)

Proceeds from sale of PP&E and other assets

 

4

 

57

 

Acquisitions, net of cash acquired

 

(30

)

(12

)

Purchases of marketable securities and investments

 

(2,435

)

(485

)

Proceeds from sale of marketable securities and investments

 

572

 

330

 

Proceeds from maturities of marketable securities

 

851

 

195

 

Other investing

 

(63

)

(6

)

Net cash used in investing activities

 

(1,438

)

(375

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Change in short-term debt — net

 

(32

)

(552

)

Repayment of debt (maturities greater than 90 days)

 

(45

)

(88

)

Proceeds from debt (maturities greater than 90 days)

 

9

 

 

Purchases of treasury stock

 

(393

)

(6

)

Reissuances of treasury stock

 

386

 

225

 

Dividends paid to shareholders

 

(749

)

(709

)

Excess tax benefits from stock-based compensation

 

36

 

 

Other — net

 

90

 

3

 

Net cash used in financing activities

 

(698

)

(1,127

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(102

)

88

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(18

)

747

 

Cash and cash equivalents at beginning of year

 

3,040

 

1,849

 

Cash and cash equivalents at end of period

 

$

3,022

 

$

2,596

 

 

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

 

5


 


Table of Contents

 

3M Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1.  Significant Accounting Policies

 

Basis of Presentation

 

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

 

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

 

Foreign Currency Translation

 

3M generally considers local currencies as the functional currencies outside the United States. However, under Accounting Standards Codification (ASC) 830, Foreign Currency Matters, the reporting currency of a foreign entity’s parent is assumed to be that entity’s functional currency when the economic environment of a foreign entity is highly inflationary—generally when its cumulative inflation is approximately 100 percent or more for the three years that precede the beginning of a reporting period. 3M has a subsidiary in Venezuela with operating income representing less than 1.5 percent of 3M’s consolidated operating income for both 2009 and the six-month period ended June 30, 2010. As previously disclosed by the Company in Note 1 to the consolidated financial statements in 3M’s Current Report on Form 8-K dated May 17, 2010, 3M determined that the cumulative inflation rate of Venezuela in November 2009 exceeded 100 percent. Accordingly, the financial statements of the Venezuelan subsidiary were remeasured as if its functional currency were that of its parent beginning January 1, 2010.

 

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

 

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

 

Earnings per share

 

The difference in the weighted average 3M shares outstanding for calculating basic and diluted earnings per share attributable to 3M common shareholders is a result of the dilution associated with the Company’s stock-based compensation plans. Certain options outstanding under these stock-based compensation plans were not included in the computation of diluted earnings per share attributable to 3M common shareholders because they would not have had a dilutive effect (30.7 million average options for the three months ended June 30, 2010; 30.5 million average options for the six months ended June 30, 2010; 71.5 million average options for the three months ended June 30, 2009; 71.7

 

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million average options for the six months ended June 30, 2009). The conditions for conversion related to the Company’s “Convertible Notes” were not met (refer to 3M’s Current Report on Form 8-K dated May 17, 2010, Note 10 to the Consolidated Financial Statements, for more detail). If the conditions for conversion are met, 3M may choose to pay in cash and/or common stock; however, if this occurs, the Company has the intent and ability to settle this debt security in cash. Accordingly, there was no impact on diluted earnings per share attributable to 3M common shareholders. The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30

 

June 30

 

(Amounts in millions, except per share amounts)

 

2010

 

2009

 

2010

 

2009

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,121

 

$

783

 

$

2,051

 

$

1,301

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — basic

 

714.5

 

696.8

 

713.1

 

695.2

 

 

 

 

 

 

 

 

 

 

 

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

 

11.2

 

3.5

 

11.5

 

2.9

 

 

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — diluted

 

725.7

 

700.3

 

724.6

 

698.1

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.57

 

$

1.12

 

$

2.88

 

$

1.87

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

1.54

 

$

1.12

 

$

2.83

 

$

1.86

 

 

New Accounting Standards

 

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

 

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

 

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

 

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Company is currently evaluating the impact of this standard on 3M’s consolidated results of operations and financial condition.

 

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

 

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

 

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

 

NOTE 2.  Acquisitions

 

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

 

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

 

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

 

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

 

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

 

Purchased identifiable intangible assets related to the acquisitions that closed in the first six months of 2010 totaled $60 million and will be amortized on a straight-line basis over a weighted-average life of 9 years (lives ranging from 3 to 14 years). Acquired identifiable intangible assets for which significant assumed renewals or extensions of underlying arrangements impacted the determination of their useful lives were not material. Pro forma information related to the above acquisitions is not included because the impact on the Company’s consolidated results of operations is not considered to be material.

 

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

 

NOTE 3.  Goodwill and Intangible Assets

 

Purchased goodwill related to the four acquisitions which closed in the first six months of 2010 totaled $31 million, less than $1 million of which is deductible for tax purposes. The acquisition activity in the following table also includes the impacts of contingent consideration for pre-2009 acquisitions, which increased goodwill by $1 million. The amounts in the “Translation and other” column in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balance by business segment as of December 31, 2009 and June 30, 2010, follow:

 

Goodwill

 

 

 

Dec. 31,

 

 

 

 

 

June 30,

 

 

 

2009

 

Acquisition

 

Translation

 

2010

 

(Millions)

 

Balance

 

activity

 

and other

 

Balance

 

Industrial and Transportation

 

$

1,783

 

$

7

 

$

(69

)

$

1,721

 

Health Care

 

1,007

 

1

 

(74

)

934

 

Consumer and Office

 

155

 

24

 

(3

)

176

 

Display and Graphics

 

990

 

 

(12

)

978

 

Safety, Security and Protection Services

 

1,220

 

 

(33

)

1,187

 

Electro and Communications

 

677

 

 

(53

)

624

 

Total Company

 

$

5,832

 

$

32

 

$

(244

)

$

5,620

 

 

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

 

As discussed in Note 14, effective in the first quarter of 2010, 3M made certain product moves between its business segments, with the resulting impact reflected in the goodwill balances by business segment above for all periods presented. For any product moves that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact to reporting units. During the first quarter of 2010, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.

 

Acquired Intangible Assets

 

For the six months ended June 30, 2010, intangible assets (excluding goodwill) acquired through business combinations increased balances by $60 million. Balances are also impacted by changes in foreign currency exchange rates. The carrying amount and accumulated amortization of acquired intangible assets as of June 30, 2010, and December 31, 2009, follow:

 

 

 

June 30

 

Dec. 31

 

(Millions)

 

2010

 

2009

 

Patents

 

$

430

 

$

457

 

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

 

1,515

 

1,519

 

Non-amortizable intangible assets (tradenames)

 

121

 

138

 

Total gross carrying amount

 

$

2,066

 

$

2,114

 

 

 

 

 

 

 

Accumulated amortization — patents

 

(324

)

(339

)

Accumulated amortization — other

 

(474

)

(433

)

Total accumulated amortization

 

(798

)

(772

)

Total intangible assets — net

 

$

1,268

 

$

1,342

 

 

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

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30

 

June 30

 

(Millions)

 

2010

 

2009

 

2010

 

2009

 

Amortization expense

 

$

43

 

$

48

 

$

86

 

$

87

 

 

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

 

(Millions)

 

Last 2
Quarters
2010

 

2011

 

2012

 

2013

 

2014

 

2015

 

After
2015

 

Amortization expense

 

$

85

 

$

140

 

$

126

 

$

120

 

$

114

 

$

104

 

$

458

 

 

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

 

NOTE 4.  Restructuring Actions and Exit Activities

 

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

 

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

 

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

 

The following provides information concerning the Company’s 2009/2008 restructuring actions.

 

2009 and 2008 Restructuring Actions:

 

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

 

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

 

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

 

·                     During the second quarter of 2009, 3M announced the permanent reduction of approximately 900 positions, the majority of which were concentrated in the United States, Western Europe and Japan. In the United States,

 

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

 

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

 

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

 

(Millions)

 

Employee-
Related Items/
Benefits and Other

 

Asset
Impairments

 

Total

 

 

 

 

 

 

 

 

 

Expenses incurred in first quarter 2009:

 

 

 

 

 

 

 

Industrial and Transportation

 

$

22

 

$

1

 

$

23

 

Health Care

 

4

 

 

4

 

Consumer and Office

 

2

 

 

2

 

Display and Graphics

 

1

 

5

 

6

 

Safety, Security and Protection Services

 

4

 

 

4

 

Electro and Communications

 

3

 

 

3

 

Corporate and Unallocated

 

25

 

 

25

 

First quarter 2009 expenses

 

$

61

 

$

6

 

$

67

 

 

 

 

 

 

 

 

 

Expenses incurred in second quarter 2009:

 

 

 

 

 

 

 

Industrial and Transportation

 

$

41

 

$

4

 

$

45

 

Health Care

 

15

 

 

15

 

Consumer and Office

 

11

 

 

11

 

Display and Graphics

 

10

 

8

 

18

 

Safety, Security and Protection Services

 

12

 

 

12

 

Electro and Communications

 

7

 

 

7

 

Corporate and Unallocated

 

7

 

1

 

8

 

Second quarter 2009 expenses

 

$

103

 

$

13

 

$

116

 

 

(Millions)

 

Employee-
Related Items/
Benefits and Other

 

Asset
Impairments

 

Total

 

Accrued liability balance as of December 31, 2009

 

$

76

 

$

 

$

76

 

Cash payments in first quarter 2010

 

(18

)

 

(18

)

Cash payments in second quarter 2010

 

(13

)

 

(13

)

Accrued liability balance as of June 30, 2010

 

$

45

 

$

 

$

45

 

 

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

 

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Table of Contents

 

NOTE 5.  Supplemental Equity and Comprehensive Income Information

 

Consolidated Statement of Changes in Equity

 

3M Company and Subsidiaries

Three months ended June 30, 2010

 

 

 

 

 

3M Company Shareholders

 

 

 

(Millions)

 

Total

 

Common
Stock and

Additional
Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehensive
Income

(Loss)

 

Non-
controlling

Interest

 

Balance at March 31, 2010

 

$

13,851

 

$

3,269

 

$

24,231

 

$

(10,187

)

$

(3,747

)

$

285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,140

 

 

 

1,121

 

 

 

 

 

19

 

Cumulative translation adjustment

 

(358

)

 

 

 

 

 

 

(370

)

12

 

Defined benefit pension and postretirement plans adjustment

 

48

 

 

 

 

 

 

 

48

 

 

Debt and equity securities — unrealized gain (loss)

 

1

 

 

 

 

 

 

 

1

 

 

Cash flow hedging instruments — unrealized gain (loss)

 

40

 

 

 

 

 

 

 

40

 

 

Total comprehensive income

 

871

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(375

)

 

 

(375

)

 

 

 

 

 

 

Transfer from noncontrolling interest

 

 

12

 

 

 

 

 

12

 

(24

)

Stock-based compensation, net of tax impacts

 

64

 

64

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(384

)

 

 

 

 

(384

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

236

 

 

 

(189

)

425

 

 

 

 

 

Balance at June 30, 2010

 

$

14,263

 

$

3,345

 

$

24,788

 

$

(10,146

)

$

(4,016

)

$

292

 

 

3M Company and Subsidiaries

Six months ended June 30, 2010

 

 

 

 

 

3M Company Shareholders

 

 

 

(Millions)

 

Total

 

Common
Stock and

Additional
Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehensive
Income

(Loss)

 

Non-
controlling

Interest

 

Balance at December 31, 2009

 

$

13,302

 

$

3,162

 

$

23,753

 

$

(10,397

)

$

(3,754

)

$

538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

2,095

 

 

 

2,051

 

 

 

 

 

44

 

Cumulative translation adjustment

 

(453

)

 

 

 

 

 

 

(464

)

11

 

Defined benefit pension and postretirement plans adjustment

 

99

 

 

 

 

 

 

 

98

 

1

 

Debt and equity securities — unrealized gain (loss)

 

2

 

 

 

 

 

 

 

2

 

 

Cash flow hedging instruments — unrealized gain (loss)

 

63

 

 

 

 

 

 

 

63

 

 

Total comprehensive income

 

1,806

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(749

)

 

 

(749

)

 

 

 

 

 

 

Purchase of subsidiary shares and transfers from noncontrolling interest

 

(256

)

7

 

 

 

 

 

39

 

(302

)

Stock-based compensation, net of tax impacts

 

176

 

176

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(404

)

 

 

 

 

(404

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

388

 

 

 

(267

)

655

 

 

 

 

 

Balance at June 30, 2010

 

$

14,263

 

$

3,345

 

$

24,788

 

$

(10,146

)

$

(4,016

)

$

292

 

 

12



Table of Contents

 

Consolidated Statement of Changes in Equity

 

3M Company and Subsidiaries

Three months ended June 30, 2009

 

 

 

 

 

3M Company Shareholders

 

 

 

(Millions)

 

Total

 

Common
Stock and
Additional
Paid-in

Capital

 

Retained
Earnings

 

Treasury
Stock

 

Unearned
Comp-
ensation

 

Accumulated
Other
Comprehensive
Income
(Loss)

 

Non-
controlling
Interest

 

Balance at March 31, 2009

 

$

10,141

 

$

3,095

 

$

22,369

 

$

(11,618

)

$

(18

)

$

(4,091

)

$

404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

792

 

 

 

783

 

 

 

 

 

 

 

9

 

Cumulative translation adjustment

 

460

 

 

 

 

 

 

 

 

 

455

 

5

 

Defined benefit pension and postretirement plans adjustment

 

21

 

 

 

 

 

 

 

 

 

21

 

 

 

Debt and equity securities — unrealized gain (loss)

 

4

 

 

 

 

 

 

 

 

 

4

 

 

 

Cash flow hedging instruments — unrealized gain (loss)

 

(72

)

 

 

 

 

 

 

 

 

(72

)

 

 

Total comprehensive income

 

1,205

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(355

)

 

 

(355

)

 

 

 

 

 

 

 

 

Amortization of unearned compensation

 

(4

)

 

 

 

 

 

 

(4

)

 

 

 

 

Stock-based compensation, net of tax impacts

 

47

 

47

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(5

)

 

 

 

 

(5

)

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

192

 

 

 

(90

)

282

 

 

 

 

 

 

 

Balance at June 30, 2009

 

$

11,221

 

$

3,142

 

$

22,707

 

$

(11,341

)

$

(22

)

$

(3,683

)

$

418

 

 

3M Company and Subsidiaries

Six months ended June 30, 2009

 

 

 

 

 

3M Company Shareholders

 

 

 

(Millions)

 

Total

 

Common
Stock and
Additional
Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Unearned
Comp-
ensation

 

Accumulated
Other
Comprehensive
Income
(Loss)

 

Non-
controlling
Interest

 

Balance at December 31, 2008

 

$

10,304

 

$

3,015

 

$

22,227

 

$

(11,676

)

$

(40

)

$

(3,646

)

$

424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,322

 

 

 

1,301

 

 

 

 

 

 

 

21

 

Cumulative translation adjustment

 

8

 

 

 

 

 

 

 

 

 

35

 

(27

)

Defined benefit pension and postretirement plans adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt and equity securities — unrealized gain (loss)

 

5

 

 

 

 

 

 

 

 

 

5

 

 

 

Cash flow hedging instruments — unrealized gain (loss)

 

(77

)

 

 

 

 

 

 

 

 

(77

)

 

 

Total comprehensive income

 

1,258

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(709

)

 

 

(709

)

 

 

 

 

 

 

 

 

Amortization of unearned compensation

 

18

 

 

 

 

 

 

 

18

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

127

 

127

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(5

)

 

 

 

 

(5

)

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

228

 

 

 

(112

)

340

 

 

 

 

 

 

 

Balance at June 30, 2009

 

$

11,221

 

$

3,142

 

$

22,707

 

$

(11,341

)

$

(22

)

$

(3,683

)

$

418

 

 

13


 


Table of Contents

 

Consolidated Statement of Comprehensive Income (Loss)

 

 

 

Three months ended June 30

 

Six months ended June 30

 

(Millions)

 

2010

 

2009

 

2010

 

2009

 

Net income including noncontrolling interest

 

$

1,140

 

$

792

 

$

2,095

 

$

1,322

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(358

)

460

 

(453

)

8

 

Defined benefit pension and postretirement plans adjustment

 

48

 

21

 

99

 

 

Debt and equity securities, unrealized gain (loss)

 

1

 

4

 

2

 

5

 

Cash flow hedging instruments, unrealized gain (loss)

 

40

 

(72

)

63

 

(77

)

Total other comprehensive income (loss), net of tax

 

(269

)

413

 

(289

)

(64

)

Comprehensive income (loss) including noncontrolling interest

 

871

 

1,205

 

1,806

 

1,258

 

Comprehensive (income) loss attributable to noncontrolling interest

 

(31

)

(14

)

(56

)

6

 

Comprehensive income (loss) attributable to 3M

 

$

840

 

$

1,191

 

$

1,750

 

$

1,264

 

 

Accumulated Other Comprehensive Income (Loss) Attributable to 3M

 

(Millions)

 

June 30, 2010

 

Dec. 31, 2009

 

Cumulative translation adjustment

 

$

(295

)

$

122

 

Defined benefit pension and postretirement plans adjustment

 

(3,741

)

(3,831

)

Debt and equity securities, unrealized gain (loss)

 

(7

)

(9

)

Cash flow hedging instruments, unrealized gain (loss)

 

27

 

(36

)

Total accumulated other comprehensive income (loss)

 

$

(4,016

)

$

(3,754

)

 

Components of Comprehensive Income (Loss) Attributable to 3M

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

(Millions)

 

2010

 

2009

 

2010

 

2009

 

Net income attributable to 3M

 

$

1,121

 

$

783

 

$

2,051

 

$

1,301

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation

 

(324

)

437

 

(401

)

74

 

Tax effect

 

(46

)

18

 

(63

)

(39

)

Cumulative translation — net of tax

 

(370

)

455

 

(464

)

35

 

 

 

 

 

 

 

 

 

 

 

Defined benefit pension and postretirement plans adjustment

 

80

 

35

 

156

 

(5

)

Tax effect

 

(32

)

(14

)

(58

)

5

 

Defined benefit pension and postretirement plans adjustment — net of tax

 

48

 

21

 

98

 

 

 

 

 

 

 

 

 

 

 

 

Debt and equity securities, unrealized gain (loss)

 

1

 

6

 

4

 

8

 

Tax effect

 

 

(2

)

(2

)

(3

)

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

 

1

 

4

 

2

 

5

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments, unrealized gain (loss)

 

64

 

(114

)

100

 

(125

)

Tax effect

 

(24

)

42

 

(37

)

48

 

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

 

40

 

(72

)

63

 

(77

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss) attributable to 3M

 

$

840

 

$

1,191

 

$

1,750

 

$

1,264

 

 

Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income. 3M had no material reclassification adjustments attributable to noncontrolling interest. As disclosed in Note 9, for the three and six months ended June 30, 2010, $78 million pre-tax ($48 million after tax) and $154 million pre-tax ($98 million after tax), respectively, were reclassified to earnings from accumulated other comprehensive income attributable to 3M to pension and postretirement expense in the income statement. These pension and postretirement expense amounts are shown in the table in Note 9 as amortization of transition (asset) obligation, amortization of prior service cost (benefit) and amortization of net actuarial (gain) loss. Reclassifications to earnings from accumulated other comprehensive income for debt and equity securities, which primarily include marketable securities, were not material for the three and six-months ended June 30, 2010. Refer to Note 10 for a table that recaps pre-tax cash flow hedging instruments reclassifications. Income taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation do include impacts from items such as net investment hedge transactions.

 

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Table of Contents

 

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

 

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

 

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

 

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

 

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

 

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

 

(Millions)

 

Three months ended
June 30, 2010

 

Six months ended
June 30, 2010

 

Net income attributable to 3M

 

$

1,121

 

$

2,051

 

Transfer from noncontrolling interest

 

24

 

46

 

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

 

$

1,145

 

$

2,097

 

 

NOTE 6. Income Taxes

 

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

 

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

 

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Table of Contents

 

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

 

3M anticipates changes to the Company’s uncertain tax positions due to the closing of the various audit years mentioned above. Currently, the Company is not able to reasonably estimate the amount by which the liability for unrecognized tax benefits will increase or decrease during the next 12 months as a result of the ongoing income tax authority examinations. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of June 30, 2010 and December 31, 2009, respectively, are $362 million and $425 million.

 

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized in the consolidated statement of income on a gross basis approximately $13 million of benefit and $3 million expense for the three months ended June 30, 2010 and June 30, 2009, respectively, and approximately $9 million of benefit and $6 million expense for the six months ended June 30, 2010 and June 30, 2009, respectively. At June 30, 2010 and December 31, 2009, accrued interest and penalties in the consolidated balance sheet on a gross basis were $42 million and $53 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate, but would accelerate the payment of cash to the taxing authority to an earlier period.

 

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

 

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

 

The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exists. As of June 30, 2010 and December 31, 2009, the ending balance of the Company’s valuation allowance on its deferred tax assets totaled $69 million and $23 million, respectively.

 

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Table of Contents

 

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).

 

(Millions)

 

June 30, 2010

 

Dec. 31, 2009

 

 

 

 

 

 

 

U.S. government agency securities

 

$

946

 

$

326

 

Foreign government agency securities

 

47

 

 

Corporate debt securities

 

368

 

154

 

U.S. treasury securities

 

25

 

 

U.S. municipal securities

 

12

 

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

278

 

198

 

Credit card related

 

136

 

9

 

Equipment lease related

 

60

 

41

 

Other

 

8

 

8

 

Asset-backed securities total

 

482

 

256

 

Other securities

 

29

 

8

 

 

 

 

 

 

 

Current marketable securities

 

$

1,909

 

$

744

 

 

 

 

 

 

 

U.S. government agency securities

 

$

96

 

$

165

 

Foreign government agency securities

 

3

 

 

Corporate debt securities

 

130

 

112

 

U.S. treasury securities

 

44

 

94

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

225

 

317

 

Credit card related

 

55

 

98

 

Equipment lease related

 

45

 

29

 

Other

 

1

 

5

 

Asset-backed securities total

 

326

 

449

 

Auction rate securities

 

7

 

5

 

 

 

 

 

 

 

Non-current marketable securities

 

$

606

 

$

825

 

 

 

 

 

 

 

Total marketable securities

 

$

2,515

 

$

1,569

 

 

Classification of marketable securities as current or non-current is dependent upon management’s intended holding period, the security’s maturity date and liquidity considerations based on market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current. At June 30, 2010, gross unrealized losses totaled approximately $9 million (pre-tax), while gross unrealized gains totaled approximately $5 million (pre-tax). At December 31, 2009, gross unrealized losses totaled approximately $12 million (pre-tax), while gross unrealized gains totaled approximately $3 million. Gross realized gains and losses on sales or maturities of marketable securities for the first six months of 2010 and 2009 were not material. Cost of securities sold use the first in, first out (FIFO) method. Since these marketable securities are classified as available-for-sale securities, changes in fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into earnings upon sale or “other-than-temporary” impairment.

 

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

 

The balance at June 30, 2010 for marketable securities and short-term investments by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

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Table of Contents

 

(Millions)

 

June 30, 2010

 

 

 

 

 

Due in one year or less

 

$

1,432

 

Due after one year through three years

 

1,014

 

Due after three years through five years

 

35

 

Due after five years

 

34

 

 

 

 

 

Total marketable securities

 

$

2,515

 

 

3M has a diversified marketable securities portfolio of $2.515 billion as of June 30, 2010. Within this portfolio, current and long-term asset-backed securities (estimated fair value of $808 million) are primarily comprised of interests in automobile loans and credit cards. At June 30, 2010, the asset-backed securities credit ratings were AAA or A-1.

 

3M’s marketable securities portfolio includes auction rate securities that represent interests in investment grade credit default swaps; however, currently these holdings comprise less than one percent of this portfolio. The estimated fair value of auction rate securities are $7 million and $5 million as of June 30, 2010 and December 31, 2009, respectively. Gross unrealized losses within accumulated other comprehensive income related to auction rate securities totaled $6 million and $8 million (pre-tax) as of June 30, 2010 and December 31, 2009, respectively. As of June 30, 2010, auction rate securities associated with these balances have been in a loss position for more than 12 months. Since the second half of 2007, these auction rate securities failed to auction due to sell orders exceeding buy orders. Liquidity for these auction-rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 7, 28, 35, or 90 days. The funds associated with failed auctions will not be accessible until a successful auction occurs or a buyer is found outside of the auction process. Refer to Note 11 for a table that reconciles the beginning and ending balances of auction rate securities.

 

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

 

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

 

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

 

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Table of Contents

 

NOTE 9. Pension and Postretirement Benefit Plans

 

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

 

Benefit Plan Information

 

 

 

Three months ended June 30,

 

 

 

Qualified and Non-qualified
Pension Benefits

 

Postretirement