3M CO, 10-Q filed on 10/30/2009
Quarterly Report
Consolidated Statement of Income (USD $)
In Millions, except Per Share data
3 Months Ended
Sep. 30, 2009
9 Months Ended
Sep. 30, 2009
3 Months Ended
Sep. 30, 2008
9 Months Ended
Sep. 30, 2008
Consolidated Statement of Income
 
 
 
 
Net sales
$ 6,193 
$ 17,001 
$ 6,558 
$ 19,760 
Operating expenses
 
 
 
 
Cost of sales
3,171 
8,920 
3,432 
10,278 
Selling, general and administrative expenses
1,209 
3,642 
1,269 
3,938 
Research, development and related expenses
335 
967 
344 
1,058 
(Gain)/loss from sale of businesses
 
 
 
23 
Total operating expenses
4,715 
13,529 
5,045 
15,297 
Operating income
1,478 
3,472 
1,513 
4,463 
Interest expense and income
 
 
 
 
Interest expense
55 
165 
52 
158 
Interest income
(8)
(26)
(28)
(76)
Total interest expense (income)
47 
139 
24 
82 
Income before income taxes
1,431 
3,333 
1,489 
4,381 
Provision for income taxes
460 
1,040 
479 
1,402 
Net income including noncontrolling interest
971 
2,293 
1,010 
2,979 
Less: Net income attributable to noncontrolling interest
14 
35 
19 
55 
Net income attributable to 3M
957 
2,258 
991 
2,924 
Weighted average 3M common shares outstanding - basic (in shares)
702.8 
697.7 
695.5 
701.3 
Earnings per share attributable to 3M common shareholders - basic (in dollars per share)
1.36 
3.24 
1.43 
4.17 
Weighted average 3M common shares outstanding - diluted (in shares)
710.8 
702.3 
703.1 
710.7 
Earnings per share attributable to 3M common shareholders - diluted (in dollars per share)
1.35 
3.21 
1.41 
4.11 
Cash dividends paid per 3M common share (in dollars per share)
0.51 
1.53 
0.50 
1.50 
Consolidated Balance Sheet (USD $)
In Millions
Sep. 30, 2009
Dec. 31, 2008
Assets:
 
 
Current assets
 
 
Cash and cash equivalents
$ 3,239 
$ 1,849 
Marketable securities - current
697 
373 
Accounts receivable - net
3,638 
3,195 
Inventories
 
 
Finished goods
1,248 
1,505 
Work in process
830 
851 
Raw materials and supplies
557 
657 
Total inventories
2,635 
3,013 
Other current assets
987 
1,168 
Total current assets
11,196 
9,598 
Marketable securities - non-current
519 
352 
Investments
106 
111 
Property, plant and equipment
19,451 
18,812 
Less: Accumulated depreciation
(12,528)
(11,926)
Property, plant and equipment - net
6,923 
6,886 
Goodwill
5,861 
5,753 
Intangible assets - net
1,392 
1,398 
Prepaid pension benefits
41 
36 
Other assets
1,595 
1,659 
Total assets
27,633 
25,793 
Liabilities and Equity
 
 
Liabilities:
 
 
Current liabilities
 
 
Short-term borrowings and current portion of long-term debt
921 
1,552 
Accounts payable
1,404 
1,301 
Accrued payroll
685 
644 
Accrued income taxes
540 
350 
Other current liabilities
2,216 
1,992 
Total current liabilities
5,766 
5,839 
Long-term debt
5,204 
5,166 
Pension and postretirement benefits
2,058 
2,847 
Other liabilities
1,686 
1,637 
Total liabilities
14,714 
15,489 
Commitments and contingencies (Note 11)
 
 
Common stock par value, $.01 par value, 944,033,056 shares issued
Additional paid-in capital
3,089 
3,006 
Retained earnings
23,252 
22,227 
Treasury stock, at cost; 236,074,788 shares at Sept. 30, 2009; 250,489,769 shares at Dec. 31, 2008
(10,622)
(11,676)
Unearned compensation
 
(40)
Accumulated other comprehensive income (loss)
(3,368)
(3,646)
Total 3M Company shareholders' equity
12,360 
9,880 
Noncontrolling interest
559 
424 
Total equity
12,919 
10,304 
Total liabilities and equity
$ 27,633 
$ 25,793 
Consolidated Balance Sheet (Parenthetical)
Sep. 30, 2009
Dec. 31, 2008
Consolidated Balance Sheet
 
 
Common stock, par value (in dollars per share)
0.01 
0.01 
Common stock, shares issued
944,033,056 
944,033,056 
Treasury stock, shares
236,074,788 
250,489,769 
Consolidated Statement of Cash Flows (USD $)
In Millions
9 Months Ended
Sep. 30,
2009
2008
Cash Flows
 
 
Cash and Cash Equivalents, Period Increase (Decrease) [Abstract]
 
 
Cash Flows from Operating Activities
 
 
Net income including noncontrolling interest
$ 2,293 
$ 2,979 
Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities
 
 
Depreciation and amortization
859 
846 
Company pension and postretirement contributions
(285)
(342)
Company pension and postretirement expense
162 
77 
Stock-based compensation expense
176 
164 
(Gain)/loss from sale of businesses
 
23 
Deferred income taxes
194 
58 
Excess tax benefits from stock-based compensation
(4)
(21)
Changes in assets and liabilities
 
 
Accounts receivable
(311)
(369)
Inventories
469 
(179)
Accounts payable
60 
(36)
Accrued income taxes
205 
(98)
Product and other insurance receivables and claims
22 
130 
Other - net
57 
176 
Net cash provided by operating activities
3,897 
3,408 
Cash Flows from Investing Activities
 
 
Purchases of property, plant and equipment (PP&E)
(629)
(1,008)
Proceeds from sale of PP&E and other assets
62 
80 
Acquisitions, net of cash acquired
(67)
(834)
Purchases of marketable securities and investments
(1,314)
(2,091)
Proceeds from sale of marketable securities and investments
532 
1,239 
Proceeds from maturities of marketable securities
339 
517 
Proceeds from sale of businesses
88 
Other investing
(6)
 
Net cash used in investing activities
(1,076)
(2,009)
Cash Flows from Financing Activities
 
 
Change in short-term debt - net
(545)
1,562 
Repayment of debt (maturities greater than 90 days)
(89)
(930)
Proceeds from debt (maturities greater than 90 days)
 
862 
Purchases of treasury stock
(10)
(1,597)
Reissuances of treasury stock
291 
257 
Dividends paid to stockholders
(1,070)
(1,052)
Distributions to noncontrolling interest
 
(23)
Excess tax benefits from stock-based compensation
21 
Other - net
(3)
Net cash used in financing activities
(1,417)
(903)
Effect of exchange rate changes on cash and cash equivalents
(14)
(152)
Net increase (decrease) in cash and cash equivalents
1,390 
344 
Cash and cash equivalents at beginning of year
1,849 
1,896 
Cash and cash equivalents at end of period
$ 3,239 
$ 2,240 
Significant Accounting Policies
NOTE 1. Significant Accounting Policies

NOTE 1.  Significant Accounting Policies

 

Basis of Presentation

 

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

 

Certain amounts presented for prior periods have been reclassified to conform to the current year presentation. As discussed later in Note 1, effective January 1, 2009, 3M adopted two new accounting standards related to noncontrolling interests in consolidated financial statements and the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). Both of these new accounting standards required retrospective application. In addition, 3M reclassified balance sheet amounts related to life insurance policies from investments to other assets; reclassified current and non-current balance sheet amounts related to income taxes between deferred income taxes and accrued income taxes; and reclassified amounts between unearned compensation and additional paid-in-capital, both of which are within stockholders’ equity.

 

As described in 3M’s Current Report on Form 8-K filed May 13, 2009 (which updated 3M’s 2008 Annual Report on Form 10-K) and 3M’s Quarterly Report on Form 10-Q for the period ended March 31, 2009, during the first quarter of 2009 the Company reorganized its business segments and as discussed above, also reclassified certain amounts presented for prior periods to conform to the current year presentation. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its Current Report on Form 8-K filed May 13, 2009.

 

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

 

Foreign Currency Translation

 

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 13, 2009 (which updated 3M’s 2008 Annual Report on Form 10-K), 3M generally considers local currencies as the functional currencies outside the United States. The Company has a subsidiary in Venezuela with operating income representing less than 1.5 percent of 3M’s consolidated operating income for both 2008 and the nine-month period ended September 30, 2009. 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, an economy is considered highly inflationary when its cumulative inflation is approximately 100 percent or more over a three-year period. 3M evaluates the potential highly inflationary status of Venezuela’s economy by considering both the Consumer Price Index (which largely is associated with the cities of Caracas and Maracaibo) and the National Consumer Price Index (developed commencing in 2008 and covering the entire country of Venezuela). Through September 30, 2009, this evaluation indicated that Venezuela was approaching a highly inflationary status. Under ASC 830, 3M will likely be required to use the dollar as the functional currency of its Venezuelan subsidiary as of the beginning of the applicable fiscal quarter, should the Venezuelan economy be considered highly inflationary in a future fiscal quarter.

 

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 (43.0 million average options for the three months ended September 30, 2009; 62.1 million average options for the nine months ended September 30, 2009; 43.7 million average options for the three months ended September 30, 2008; 34.5 million average options for the nine months ended September 30, 2008). The conditions for conversion related to the Company’s “Convertible Notes” were not met (refer to 3M’s Current Report on Form 8-K filed May 13, 2009, 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
Sept. 30

 

Nine months ended
Sept. 30

 

(Amounts in millions, except per share amounts)

 

2009

 

2008

 

2009

 

2008

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

957

 

$

991

 

$

2,258

 

$

2,924

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — basic

 

702.8

 

695.5

 

697.7

 

701.3

 

 

 

 

 

 

 

 

 

 

 

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

 

8.0

 

7.6

 

4.6

 

9.4

 

 

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — diluted

 

710.8

 

703.1

 

702.3

 

710.7

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.36

 

$

1.43

 

$

3.24

 

$

4.17

 

Earnings per share attributable to 3M common shareholders — diluted

 

1.35

 

1.41

 

3.21

 

4.11

 

 

New Accounting Standards

 

In June 2009, the Financial Accounting Standards Board (FASB) issued a standard that established the FASB Accounting Standards CodificationTM (ASC) and amended the hierarchy of generally accepted accounting principles (GAAP) such that the ASC became the single source of authoritative nongovernmental U.S. GAAP. The ASC did not change current U.S. GAAP, but was intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All previously existing accounting standard documents were superseded and all other accounting literature not included in the ASC is considered non-authoritative. New accounting standards issued subsequent to June 30, 2009 are communicated by the FASB through Accounting Standards Updates (ASUs). For 3M, the ASC was effective July 1, 2009. This standard did not have an impact on 3M’s consolidated results of operations or financial condition. However, throughout the notes to the consolidated financial statements references that were previously made to various former authoritative U.S. GAAP pronouncements have been changed to coincide with the appropriate section of the ASC.

 

In September 2006, the FASB issued an accounting standard codified in ASC 820, Fair Value Measurements and Disclosures. This standard established a single definition of fair value and a framework for measuring fair value, set out a fair value hierarchy to be used to classify the source of information used in fair value measurements, and required disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. This standard applies under other accounting standards that require or permit fair value measurements. As disclosed in the notes included in 3M’s Current Report on Form 8-K filed May 13, 2009, 3M adopted the standard as amended by subsequent FASB standards beginning January 1, 2008 on a prospective basis. One of the amendments deferred the effective date for one year relative to nonfinancial assets and liabilities that are measured at fair value, but are recognized or disclosed at fair value on a nonrecurring basis. This deferral applied to such items as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) or nonfinancial long-lived asset groups measured at fair value for an impairment assessment.  These remaining aspects of the fair value measurement standard were adopted by the Company prospectively beginning January 1, 2009 and did not have a material impact on 3M’s consolidated results of operations or financial condition.  Refer to Note 10 for additional disclosures of assets and liabilities that are measured at fair value on a nonrecurring basis as a result of this adoption.

 

In December 2007, the FASB issued and, in April 2009, amended a new business combinations standard codified within ASC 805, which changed the accounting for business acquisitions. Accounting for business combinations under this standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. For 3M, this standard was effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. This standard had no immediate impact upon adoption by 3M, and was applied to the business combinations disclosed in Note 2 that were completed post-2008 and to applicable adjustments to acquired entity deferred tax items occurring after December 31, 2008.

 

In December 2007, the FASB issued a new standard which established the accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability (as was previously the case); that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements. For 3M, the standard was effective beginning January 1, 2009. The provisions of the standard were applied to all NCIs prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented. As a result, upon adoption, 3M retroactively reclassified the “Minority interest in subsidiaries” balance previously included in the “Other liabilities” section of the consolidated balance sheet to a new component of equity with respect to NCIs in consolidated subsidiaries. The adoption also impacted certain captions previously used on the consolidated statement of income, largely identifying net income including NCI and net income attributable to 3M.  Additional disclosures required by this standard are also included in Note 5. The adoption of this standard did not have a material impact on 3M’s consolidated financial position or results of operations.

 

In December 2007, the FASB ratified a standard related to accounting for collaborative arrangements which discusses how parties to a collaborative arrangement (which does not establish a legal entity within such arrangement) should account for various activities. The standard indicates that costs incurred and revenues generated from transactions with third parties (i.e. parties outside of the collaborative arrangement) should be reported by the collaborators on the respective line items in their income statements pursuant to ASC 605-45, Principle Agent Considerations. Additionally, the guidance provides that income statement characterization of payments between the participants in a collaborative arrangement should be based upon existing authoritative standards; analogy to such standards if not within their scope; or a reasonable, rational, and consistently applied accounting policy election. This guidance was effective for 3M beginning January 1, 2009 and applied retrospectively to all periods presented for collaborative arrangements existing as of the date of adoption. The adoption of this standard did not have a material impact on 3M’s consolidated results of operations or financial condition.

 

In March 2008, the FASB issued an accounting standard related to disclosures about derivative instruments and hedging activities, codified in ASC 815, which requires additional disclosures about an entity’s strategies and objectives for using derivative instruments; the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under ASC 815,  and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. Certain disclosures are also required with respect to derivative features that are credit-risk-related. The standard was effective for 3M beginning January 1, 2009 on a prospective basis. The additional disclosures required by this standard are included in Note 9.

 

In April 2008, the FASB issued an accounting standard which amended the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under ASC 350, Intangibles - Goodwill and Other.  This new standard applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. Under this standard, entities estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension. For 3M, this standard required certain additional disclosures beginning January 1, 2009 (which are included in Notes 2 and 3) and application to useful life estimates prospectively for intangible assets acquired after December 31, 2008. The adoption of this standard did not have a material impact on 3M’s consolidated results of operations or financial condition.

 

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

 

In November 2008, the FASB ratified a standard related to certain equity method investment accounting considerations. The standard indicates, among other things, that transaction costs for an investment should be included in the cost of the equity-method investment (and not expensed) and shares subsequently issued by the equity-method investee that reduce the investor’s ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through earnings. For 3M, the standard was effective for transactions occurring after December 31, 2008. The adoption of this standard did not have a material impact on 3M’s consolidated results of operations or financial condition.

 

In November 2008, the FASB ratified an accounting standard related to intangible assets acquired in a business combination or asset acquisition that an entity does not intend to use or intends to hold to prevent others from obtaining access (a defensive intangible asset). Under the standard a defensive intangible asset needs to be accounted for as a separate unit of accounting and would be assigned a useful life based on the period over which the asset diminishes in value. For 3M, the standard was effective for transactions occurring after December 31, 2008. The Company considered this standard in terms of intangible assets acquired in business combinations or asset acquisitions that closed after December 31, 2008.

 

In December 2008, the FASB issued an accounting standard regarding a company’s disclosures about postretirement benefit plan assets.  This standard requires additional disclosures about plan assets for sponsors of defined benefit pension and postretirement plans including expanded information regarding investment strategies, major categories of plan assets, and concentrations of risk within plan assets. Additionally, this standard requires disclosures similar to those required for fair value measurements and disclosures under ASC 820 with respect to the fair value of plan assets such as the inputs and valuation techniques used to measure fair value and information with respect to classification of plan assets in terms of the hierarchy of the source of information used to determine their value (see Note 10). The disclosures under this standard are required for annual periods ending after December 15, 2009. 3M is currently evaluating the requirements of these additional disclosures.

 

In April 2009, the FASB issued an accounting standard which provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly declined and (2) identifying transactions that are not orderly. The standard also amended certain disclosure provisions for fair value measurements and disclosures in ASC 820 to require, among other things, disclosures in interim periods of the inputs and valuation techniques used to measure fair value as well as disclosure of the hierarchy of the source of underlying fair value information on a disaggregated basis by specific major category of investment. For 3M, this standard was effective prospectively beginning April 1, 2009. The adoption of this standard did not have a material impact on 3M’s consolidated results of operations or financial condition. The additional disclosures required by this standard are included in Note 10.

 

In April 2009, the FASB issued an accounting standard which modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The standard also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the standard, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). The standard further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. The standard requires entities to initially apply its provisions to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulated other comprehensive income. For 3M, this standard was effective beginning April 1, 2009. The adoption of this standard did not have a material impact on 3M’s consolidated results of operations or financial condition. Additional disclosures required by this standard are included in Note 7.

 

In April 2009, the FASB issued an accounting standard regarding interim disclosures about fair value of financial instruments. The standard essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the standard requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. This standard was effective for 3M beginning April 1, 2009 on a prospective basis. The additional disclosures required by this standard are included in Note 10.

 

In May 2009, the FASB issued a new accounting standard regarding subsequent events. This standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under the new standard, as under previous practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. This standard added an additional required disclosure relative to the date through which subsequent events have been evaluated and whether that is the date on which the financial statements were issued. For 3M, this standard was effective beginning April 1, 2009. The additional disclosures required by this standard are included in Note 1.

 

In June 2009, the FASB issued 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 is effective for new transfers of financial assets beginning January 1, 2010. Because 3M historically does not have significant transfers of financial assets, the adoption of this standard is not expected to have a material impact on 3M’s consolidated results of operations or financial condition.

 

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

 

In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value, which provides additional guidance on how companies should measure liabilities at fair value under ASC 820. The ASU clarifies that the quoted price for an identical liability should be used. However, if such information is not available, a entity may use, the quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities traded as assets, or another valuation technique (such as the market or income approach). The ASU also indicates that the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer and indicates circumstances in which quoted prices for an identical liability or quoted price for an identical liability traded as an asset may be considered level 1 fair value measurements (see Note 10 for a description of level 1 measurements). For 3M, this ASU is effective October 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on 3M’s consolidated results of operations or financial condition.

 

In September 2009, the FASB issued ASU No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), that amends ASC 820 to provide guidance on measuring the fair value of certain alternative investments such as hedge funds, private equity funds and venture capital funds. The ASU indicates that, under certain circumstance, the fair value of such investments may be determined using net asset value (NAV) as a practical expedient, unless it is probable the investment will be sold at something other than NAV. In those situations, the practical expedient cannot be used and disclosure of the remaining actions necessary to complete the sale is required. The ASU also requires additional disclosures of the attributes of all investments within the scope of the new guidance, regardless of whether an entity used the practical expedient to measure the fair value of any of its investments. For 3M, this ASU is effective October 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on 3M’s consolidated results of operations or financial condition.

 

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

 

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

Acquisitions
NOTE 2. Acquisitions

NOTE 2.  Acquisitions

 

During the nine months ended September 30, 2009, 3M completed four business combinations. The purchase price paid for these business combinations (net of cash acquired) and certain acquisition costs and contingent consideration paid for pre-2009 business combinations during the nine months ended September 30, 2009 aggregated to $67 million.

 

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

 

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

 

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

 

(4) In July 2009, 3M (Consumer and Office Business) purchased the ACE® branded (and related brands) elastic bandage and supports product lines and thermometer product line, which are sold broadly through consumer channels in North America.

 

Purchased identifiable intangible assets related to the four acquisitions which closed in the first nine months of 2009 totaled $28 million. This included $20 million of identifiable intangible assets that will be amortized on a straight-line basis over a weighted-average life of 8 years (lives ranging from 3 to 12 years) and $8 million of indefinite-lived intangible assets related to the well-recognized ACE® brand. 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.

Goodwill and Intangible Assets
NOTE 3. Goodwill and Intangible Assets

NOTE 3.  Goodwill and Intangible Assets

 

Purchased goodwill related to the four acquisitions which closed in the first nine months of 2009 totaled $15 million, $9 million of which is deductible for tax purposes. The acquisition activity in the following table also includes the impacts of adjustments to the preliminary allocation of purchase price and certain acquisition costs and contingent consideration for pre-2009 acquisitions, which reduced goodwill by $48 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, 2008 and September 30, 2009, follow:

 

Goodwill

 

(Millions)

 

Dec. 31, 2008
Balance

 

Acquisition
activity

 

Translation
and other

 

Sept. 30, 2009
Balance

 

Industrial and Transportation

 

$

1,692

 

$

(5

)

$

62

 

$

1,749

 

Health Care

 

988

 

5

 

23

 

1,016

 

Consumer and Office

 

155

 

10

 

(13

)

152

 

Safety, Security and Protection Services

 

1,202

 

6

 

66

 

1,274

 

Display and Graphics

 

1,042

 

(48

)

(4

)

990

 

Electro and Communications

 

674

 

(1

)

7

 

680

 

Total Company

 

$

5,753

 

$

(33

)

$

141

 

$

5,861

 

 

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

 

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

 

Acquired Intangible Assets

 

For the nine months ended September 30, 2009, intangible assets (excluding goodwill) acquired through business combinations increased balances by $93 million, of which approximately $65 million related to adjustments to preliminary allocations of purchase price on pre-2009 acquisitions. Balances are also impacted by changes in foreign currency exchange rates. The carrying amount and accumulated amortization of acquired intangible assets as of September 30, 2009, and December 31, 2008, follow:

 

(Millions)

 

Sept. 30
2009

 

Dec. 31
2008

 

Patents

 

$

459

 

$

475

 

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

 

1,518

 

1,381

 

Non-amortizable intangible assets (tradenames)

 

145

 

130

 

Total gross carrying amount

 

$

2,122

 

$

1,986

 

 

 

 

 

 

 

Accumulated amortization — patents

 

(332

)

(318

)

Accumulated amortization — other

 

(398

)

(270

)

Total accumulated amortization

 

(730

)

(588

)

Total intangible assets — net

 

$

1,392

 

$

1,398

 

 

Amortization expense for acquired intangible assets for the three and nine months ended September 30, 2009 and 2008 follows:

 

 

 

Three months ended
Sept. 30

 

Nine months ended
Sept. 30

 

(Millions)

 

2009

 

2008

 

2009

 

2008

 

Amortization expense

 

$

47

 

$

33

 

$

134

 

$

89

 

 

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

 

(Millions)

 

Last
Quarter
2009

 

2010

 

2011

 

2012

 

2013

 

After
2013

 

Amortization expense

 

$

47

 

$

164

 

$

134

 

$

128

 

$

121

 

$

653

 

 

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.

Restructuring Actions and Exit Activities
NOTE 4. Restructuring Actions and Exit Activities

NOTE 4.  Restructuring Actions and Exit Activities

 

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

 

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

 

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

 

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

 

2008 and 2009 Restructuring Actions:

 

During the fourth quarter of 2008 and the first 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. Refer to 3M’s Current Report on Form 8-K filed May 13, 2009, Note 4, for additional information on these 2008 restructuring actions.

 

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

 

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

 

·                  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 $13 million non-cash charge related to a pension settlement in Japan (discussed further in Note 8), 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 and a roll-forward of associated balances are summarized as follows:

 

(Millions)

 

Employee-
Related Items/
Benefits/other

 

Asset
Impairments

 

Total

 

 

 

 

 

 

 

 

 

Expense incurred in fourth quarter 2008

 

$

186

 

$

43

 

$

229

 

Non-cash charges in fourth quarter 2008

 

$

 

$

(43

)

$

(43

)

 

 

 

 

 

 

 

 

Expense incurred in first quarter 2009:

 

 

 

 

 

 

 

Industrial and Transportation

 

$

22

 

$

1

 

$

23

 

Health Care

 

4

 

 

4

 

Consumer and Office

 

2

 

 

2

 

Safety, Security and Protection Services

 

4

 

 

4

 

Display and Graphics

 

1

 

5

 

6

 

Electro and Communications

 

3

 

 

3

 

Corporate and Unallocated

 

25

 

 

25

 

First quarter 2009 expense

 

$

61

 

$

6

 

$

67

 

 

 

 

 

 

 

 

 

Non-cash charges in first quarter 2009

 

$

 

(6

)

$

(6

)

Cash payments in first quarter 2009

 

(107

)

 

(107

)

Accrued liability balance at March 31, 2009

 

$

140

 

$

 

$

140

 

 

 

 

 

 

 

 

 

Expense incurred in second quarter 2009:

 

 

 

 

 

 

 

Industrial and Transportation

 

$

40

 

$

4

 

$

44

 

Health Care

 

15

 

 

15

 

Consumer and Office

 

11

 

 

11

 

Safety, Security and Protection Services

 

13

 

 

13

 

Display and Graphics

 

10

 

8

 

18

 

Electro and Communications

 

7

 

 

7

 

Corporate and Unallocated

 

7

 

1

 

8

 

Second quarter 2009 expense

 

$

103

 

$

13

 

$

116

 

 

 

 

 

 

 

 

 

Non-cash charges in second quarter 2009

 

$

(21

)

$

(13

)

$

(34

)

Cash payments in second quarter 2009

 

(67

)

 

(67

)

Accrued liability balance at June 30, 2009

 

$

155

 

$

 

$

155

 

 

 

 

 

 

 

 

 

Net expense (credit) incurred in third quarter 2009:

 

 

 

 

 

 

 

Industrial and Transportation

 

$

21

 

$

 

$

21

 

Health Care

 

1

 

 

1

 

Consumer and Office

 

 

 

 

Safety, Security and Protection Services

 

 

 

 

Display and Graphics

 

(2

)

 

(2

)

Electro and Communications

 

1

 

 

1

 

Corporate and Unallocated

 

5

 

 

5

 

Third quarter 2009 expense

 

$

26

 

$

 

$

26

 

 

 

 

 

 

 

 

 

Non-cash charges in third quarter 2009

 

$

(13

)

$

 

$

(13

)

Cash payments in third quarter 2009

 

(36

)

 

(36

)

Accrued liability balance at September 30, 2009

 

$

132

 

$

 

$

132

 

 

The majority of the remaining employee related items and benefits associated with these actions are expected to be paid out in cash in the fourth quarter of 2009 and into 2010.  As discussed in Note 8, a $21 million non-cash charge related to special termination benefits was recorded in the second quarter of 2009 that related to the approximately 700 participants who accepted the voluntary early retirement incentive program offer. Also, as discussed in Note 8, a $13 million non-cash charge related to a pension settlement in Japan was recorded in the third quarter of 2009.

Supplemental Equity and Comprehensive Income Information
NOTE 5. Supplemental Equity and Comprehensive Income Information

NOTE 5.  Supplemental Equity and Comprehensive Income Information

 

Consolidated Statement of Changes in Equity

 

3M Company and Subsidiaries

Three months ended September 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 June 30, 2009

 

$

11,221

 

$

3,142

 

$

22,707

 

$

(11,341

)

$

(22

)

$

(3,683

)

$

418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

971

 

 

 

957

 

 

 

 

 

 

 

14

 

Cumulative translation adjustment

 

328

 

 

 

 

 

 

 

 

 

303

 

25

 

Defined benefit pension and postretirement plans adjustment

 

48

 

 

 

 

 

 

 

 

 

43

 

5

 

Debt and equity securities - unrealized gain (loss)

 

3

 

 

 

 

 

 

 

 

 

3

 

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

(24

)

 

 

 

 

 

 

 

 

(24

)

 

 

Total comprehensive income

 

1,326

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(361

)

 

 

(361

)

 

 

 

 

 

 

 

 

Transfer to noncontrolling interest

 

 

(87

)

 

 

 

 

 

 

(10

)

97

 

Amortization of unearned compensation

 

22

 

 

 

 

 

 

 

22

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

43

 

43

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(4

)

 

 

 

 

(4

)

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

672

 

 

 

(51

)

723

 

 

 

 

 

 

 

Balance at September 30, 2009

 

$

12,919

 

$

3,098

 

$

23,252

 

$

(10,622

)

$

 

$

(3,368

)

$

559

 

 

3M Company and Subsidiaries

Nine months ended September 30, 2009

 

 

 

 

 

3M Company Shareholders

 

 

 

(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 including noncontrolling interest

 

2,293

 

 

 

2,258

 

 

 

 

 

 

 

35

 

Cumulative translation adjustment

 

336

 

 

 

 

 

 

 

 

 

338

 

(2

)

Defined benefit pension and postretirement plans adjustment

 

48

 

 

 

 

 

 

 

 

 

43

 

5

 

Debt and equity securities - unrealized gain (loss)

 

8

 

 

 

 

 

 

 

 

 

8

 

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

(101

)

 

 

 

 

 

 

 

 

(101

)

 

 

Total comprehensive income

 

2,584

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(1,070

)

 

 

(1,070

)

 

 

 

 

 

 

 

 

Transfer to noncontrolling interest

 

 

(87

)

 

 

 

 

 

 

(10

)

97

 

Amortization of unearned compensation

 

40

 

 

 

 

 

 

 

40

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

170

 

170

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(9

)

 

 

 

 

(9

)

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

900

 

 

 

(163

)

1,063

 

 

 

 

 

 

 

Balance at September 30, 2009

 

$

12,919

 

$

3,098

 

$

23,252

 

$

(10,622

)

$

 

$

(3,368

)

$

559

 

 

Consolidated Statement of Changes in Equity

 

3M Company and Subsidiaries

Three months ended September 30, 2008

 

 

 

 

 

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 June 30, 2008

 

$

12,902

 

$

2,935

 

$

21,414

 

$

(11,302

)

$

(61

)

$

(451

)

$

367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

1,010

 

 

 

991

 

 

 

 

 

 

 

19

 

Cumulative translation adjustment

 

(675

)

 

 

 

 

 

 

 

 

(672

)

(3

)

Defined benefit pension and postretirement plans adjustment

 

23

 

 

 

 

 

 

 

 

 

23

 

 

Debt and equity securities - unrealized gain (loss)

 

(7

)

 

 

 

 

 

 

 

 

(7

)

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

42

 

 

 

 

 

 

 

 

 

42

 

 

 

Total comprehensive income

 

393

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(359

)

 

 

(348

)

 

 

 

 

 

 

(11

)

Amortization of unearned compensation

 

21

 

 

 

 

 

 

 

21

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

41

 

41

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(472

)

 

 

 

 

(472

)

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

47

 

 

 

(10

)

57

 

 

 

 

 

 

 

Balance at September 30, 2008

 

$

12,573

 

$

2,976

 

$

22,047

 

$

(11,717

)

$

(40

)

$

(1,065

)

$

372

 

 

3M Company and Subsidiaries

Nine months ended September 30, 2008

 

 

 

 

 

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, 2007

 

$

12,072

 

$

2,798

 

$

20,295

 

$

(10,520

)

$

(79

)

$

(747

)

$

325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income including noncontrolling interest

 

2,979

 

 

 

2,924

 

 

 

 

 

 

 

55

 

Cumulative translation adjustment

 

(429

)

 

 

 

 

 

 

 

 

(443

)

14

 

Defined benefit pension and postretirement plans adjustment

 

69

 

 

 

 

 

 

 

 

 

68

 

1

 

Debt and equity securities - unrealized gain (loss)

 

(10

)

 

 

 

 

 

 

 

 

(10

)

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

67

 

 

 

 

 

 

 

 

 

67

 

 

 

Total comprehensive income

 

2,676

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(1,075

)

 

 

(1,052

)

 

 

 

 

 

 

(23

)

Amortization of unearned compensation

 

39

 

 

 

 

 

 

 

39

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

178

 

178

 

 

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(1,589

)

 

 

 

 

(1,589

)

 

 

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

272

 

 

 

(120

)

392

 

 

 

 

 

 

 

Balance at September 30, 2008

 

$

12,573

 

$

2,976

 

$

22,047

 

$

(11,717

)

$

(40

)

$

(1,065

)

$

372

 

 

Consolidated Statement of Comprehensive Income (Loss)

 

 

 

Three months ended Sept. 30

 

Nine months ended Sept. 30

 

(Millions)

 

2009

 

2008

 

2009

 

2008

 

Net income including noncontrolling interest

 

$

971

 

$

1,010

 

$

2,293

 

$

2,979

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

328

 

(675

)

336

 

(429

)

Defined benefit pension and postretirement plans adjustment

 

48

 

23

 

48

 

69

 

Debt and equity securities, unrealized gain (loss)

 

3

 

(7

)

8

 

(10

)

Cash flow hedging instruments, unrealized gain (loss)

 

(24

)

42

 

(101

)

67

 

Total other comprehensive income (loss), net of tax

 

355

 

(617

)

291

 

(303

)

Comprehensive income (loss) including noncontrolling interest

 

1,326

 

393

 

2,584

 

2,676

 

Comprehensive (income) loss attributable to noncontrolling interest

 

(44

)

(16

)

(38

)

(70

)

Comprehensive income (loss) attributable to 3M

 

$

1,282

 

$

377

 

2,546

 

$

2,606

 

 

Accumulated Other Comprehensive Income (Loss) Attributable to 3M

 

 

 

Sept. 30,

 

Dec. 31,

 

(Millions)

 

2009

 

2008

 

Cumulative translation adjustment

 

$

179

 

$

(146

)

Defined benefit pension and postretirement plans adjustment

 

(3,479

)

(3,525

)

Debt and equity securities, unrealized gain (loss)

 

(11

)

(19

)

Cash flow hedging instruments, unrealized gain (loss)

 

(57

)

44

 

Total accumulated other comprehensive income (loss)

 

$

(3,368

)

$

(3,646

)

 

Components of Comprehensive Income (Loss) Attributable to 3M

 

 

 

Three months ended
Sept. 30,

 

Nine months ended
Sept. 30,

 

(Millions)

 

2009

 

2008

 

2009

 

2008

 

Net income attributable to 3M

 

$

957

 

$

991

 

$

2,258

 

$

2,924

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation

 

237

 

(600

)

311

 

(390

)

Tax effect

 

66

 

(72

)

27

 

(53

)

Cumulative translation - net of tax

 

303

 

(672

)

338

 

(443

)

 

 

 

 

 

 

 

 

 

 

Defined benefit pension and postretirement plans adjustment

 

62

 

20

 

57

 

88

 

Tax effect

 

(19

)

3

 

(14

)

(20

)

Defined benefit pension and postretirement plans adjustment - net of tax

 

43

 

23

 

43

 

68

 

 

 

 

 

 

 

 

 

 

 

Debt and equity securities, unrealized gain (loss)

 

5

 

(11

)

13

 

(15

)

Tax effect

 

(2

)

4

 

(5

)

5

 

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

 

3

 

(7

)

8

 

(10

)

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments, unrealized gain (loss)

 

(38

)

57

 

(163

)

102

 

Tax effect

 

14

 

(15

)

62

 

(35

)

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

 

(24

)

42

 

(101

)

67

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss) attributable to 3M

 

$

1,282

 

$

377

 

$

2,546

 

$

2,606

 

 

Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income. 3M had no such reclassification adjustments attributable to noncontrolling interest. As disclosed in Note 8, for the three and nine months ended September 30, 2009, $36 million pre-tax ($23 million after tax) and $106 million pre-tax ($68 million after tax), respectively, were reclassified to earnings from accumulated other comprehensive income attributable to 3M to pension and postretirement expense in the income statement. These pension and postretirement expense amounts are shown in the table in Note 8 as amortization of transition (asset) obligation, amortization of prior service cost (benefit) and amortization of net actuarial (gain) loss. In addition, reclassification adjustments include the third quarter 2009 Japan pension settlement as discussed in Note 8. Reclassifications to earnings from accumulated other comprehensive income for debt and equity securities, which primarily include marketable securities, were not material for the three and nine months ended September 30, 2009. Refer to Note 9 for a table that recaps pre-tax cash flow hedging instruments reclassifications. Income taxes are not provided for foreign currency translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation do include impacts from items such as net investment hedge transactions.

 

Transfer of Ownership Interest Involving Non-Wholly Owned Subsidiaries

 

During the quarter ended September 30, 2009, a wholly owned subsidiary that, in turn, owned a portion of the Company’s majority owned Sumitomo 3M Limited entity, was transferred to another subsidiary that is majority, rather than wholly, owned. As a result of the transaction, 3M’s effective ownership in Sumitomo 3M Limited was reduced from 75 percent to 71.5 percent. The transfer was effected to further align activities in the associated region and to simplify the Company’s ownership structure. Because the Company retained its controlling interest in the subsidiaries involved, the transfer resulted in a decrease in 3M Company shareholders’ equity and an increase in noncontrolling interest of $97 million. The following table summarizes the effects of this transfer on equity attributable to 3M Company shareholders.

 

(Millions)

 

Three months ended

Sept. 30, 2009

 

Nine months ended

Sept. 30, 2009

 

Net income attributable to 3M

 

$

957

 

$

2,258

 

Transfer to noncontrolling interest

 

(97

)

(97

)

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

 

$

860

 

$

2,161

 

Income Taxes
NOTE 6. Income Taxes

NOTE 6.  Income Taxes

 

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

 

The Internal Revenue Service (IRS) completed its examination of the Company’s U.S. federal income tax returns for the years 2002 through 2004 in the first quarter of 2008. The outcome of the 2002 through 2004 audit cycle impacted the 2001 tax year, which was settled in the second quarter of 2008. Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2005 through 2009. It is anticipated that the IRS will complete its examination of the Company for 2005 through 2007 in the fourth quarter of 2009, for 2008 by the end of the first quarter of 2010, and for 2009 by the end of the first quarter of 2011. As of September 30, 2009, the IRS has not proposed any significant adjustments to the Company’s tax positions for which the Company is not adequately reserved. 3M anticipates changes to the Company’s uncertain tax positions due to the closing of the various audit years mentioned. Currently, the Company is not able to reasonably estimate the amount by which the liability for unrecognized tax benefits will increase or decrease during the next 12 months as a result of the ongoing IRS audits. Payments relating to any proposed assessments arising from the 2005 through 2009 audits may not be made until a final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also limited audit activity in several U.S. state and foreign jurisdictions. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of September 30, 2009 and December 31, 2008, respectively, are $463 million and $334 million.

 

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized in the consolidated statement of income on a gross basis approximately $13 million and $6 million of expense for the three months ended September 30, 2009 and September 30, 2008, respectively, and approximately $19 million and $4 million of expense for the nine months ended September 30, 2009 and September 30, 2008, respectively. At September 30, 2009 and December 31, 2008, accrued interest and penalties in the consolidated balance sheet on a gross basis were $65 million and $47 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

Marketable Securities
NOTE 7. Marketable Securities

NOTE 7.  Marketable Securities

 

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

 

 

 

Sept. 30,

 

Dec. 31,

 

(Millions)

 

2009

 

2008

 

 

 

 

 

 

 

Agency securities

 

$

310

 

$

180

 

Corporate securities

 

139

 

145

 

Asset-backed securities:

 

 

 

 

 

Automobile loans related

 

144

 

24

 

Credit cards related

 

19

 

 

Other

 

29

 

11

 

Asset-backed securities total

 

192

 

35

 

Other securities

 

56

 

13

 

 

 

 

 

 

 

Current marketable securities

 

$

697

 

$

373

 

 

 

 

 

 

 

Agency securities

 

$

82

 

$

200

 

Corporate securities

 

97

 

62

 

Treasury securities

 

114

 

12

 

Asset-backed securities:

 

 

 

 

 

Automobile loans related

 

157

 

25

 

Credit cards related

 

50

 

40

 

Other

 

13

 

11

 

Asset-backed securities total

 

220

 

76

 

Auction rate and other securities

 

6

 

2

 

 

 

 

 

 

 

Non-current marketable securities

 

$

519

 

$

352

 

 

 

 

 

 

 

Total marketable securities

 

$

1,216

 

$