SEC Filings

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

Commission file number:  1-3285

 

3M COMPANY

(Exact name of registrant as specified in its charter)

 

 

(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.

 

 

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.

 

 

This document (excluding exhibits) contains 77 pages.

The table of contents is set forth on page 2.

The exhibit index begins on page 74.

 

 

 

Table of Contents

 

3M COMPANY

Form 10-Q for the Quarterly Period Ended September 30, 2012

TABLE OF CONTENTS

 

		BEGINNING PAGE
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Index to Financial Statements:
	Consolidated Statement of Income	3
	Consolidated Statement of Comprehensive Income	4
	Consolidated Balance Sheet	5
	Consolidated Statement of Cash Flows	6
	Notes to Consolidated Financial Statements
	Note 1.   Significant Accounting Policies	7
	Note 2.   Acquisitions	9
	Note 3.   Goodwill and Intangible Assets	10
	Note 4.   Supplemental Equity and Comprehensive Income Information	12
	Note 5.   Income Taxes	16
	Note 6.   Marketable Securities	18
	Note 7.   Long-Term Debt and Short-Term Borrowings	20
	Note 8.   Pension and Postretirement Benefit Plans	21
	Note 9.  Derivatives	23
	Note 10. Fair Value Measurements	29
	Note 11. Commitments and Contingencies	33
	Note 12. Stock-Based Compensation	42
	Note 13. Business Segments	46
	Report of Independent Registered Public Accounting Firm	48
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Index to Management’s Discussion and Analysis:
	Overview	49
	Results of Operations	52
	Performance by Business Segment	56
	Financial Condition and Liquidity	62
	Cautionary Note Concerning Factors That May Affect Future Results	66
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	67
ITEM 4.	Controls and Procedures	70
PART II	OTHER INFORMATION
ITEM 1.	Legal Proceedings	71
ITEM 1A.	Risk Factors	71
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73
ITEM 3.	Defaults Upon Senior Securities	73
ITEM 4.	Mine Safety Disclosures	73
ITEM 5.	Other Information	73
ITEM 6.	Exhibits	74

 

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3M COMPANY

FORM 10-Q

For the Quarterly Period Ended September 30, 2012

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

 

		Three months ended						Nine months ended
		September 30,						September 30,
(Millions, except per share amounts)		2012			2011			2012			2011
Net sales		$	7,497		$	7,531		$	22,517		$	22,522
Operating expenses
Cost of sales		3,935			4,027			11,694			11,869
Selling, general and administrative expenses		1,487			1,534			4,567			4,648
Research, development and related expenses		397			389			1,216			1,191
Total operating expenses		5,819			5,950			17,477			17,708
Operating income		1,678			1,581			5,040			4,814
Interest expense and income
Interest expense		44			48			127			141
Interest income		(10		)	(10		)	(29		)	(29		)
Total interest expense — net		34			38			98			112
Income before income taxes		1,644			1,543			4,942			4,702
Provision for income taxes		464			440			1,435			1,319
Net income including noncontrolling interest		$	1,180		$	1,103		$	3,507		$	3,383
Less: Net income attributable to noncontrolling interest		19			15			54			54
Net income attributable to 3M		$	1,161		$	1,088		$	3,453		$	3,329
Weighted average 3M common shares outstanding — basic		693.0			707.7			694.7			710.9
Earnings per share attributable to 3M common shareholders — basic		$	1.68		$	1.54		$	4.97		$	4.68
Weighted average 3M common shares outstanding — diluted		703.1			715.5			703.9			722.8
Earnings per share attributable to 3M common shareholders — diluted		$	1.65		$	1.52		$	4.91		$	4.61
Cash dividends paid per 3M common share		$	0.59		$	0.55		$	1.77		$	1.65

 

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

 

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3M Company and Subsidiaries

Consolidated Statement of Comprehensive Income

(Unaudited)

 

		Three months ended						Nine months ended
		September 30,						September 30,
(Millions)		2012			2011			2012			2011
Net income including noncontrolling interest		$	1,180		$	1,103		$	3,507		$	3,383
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment		412			(490		)	211			(14		)
Defined benefit pension and postretirement plans adjustment		96			77			291			207
Debt and equity securities, unrealized gain (loss)		3			(2		)	4			(5		)
Cash flow hedging instruments, unrealized gain (loss)		(36		)	54			(28		)	37
Total other comprehensive income (loss), net of tax		475			(361		)	478			225
Comprehensive income (loss) including noncontrolling interest		1,655			742			3,985			3,608
Comprehensive (income) loss attributable to noncontrolling interest		(30		)	(32		)	(55		)	(75		)
Comprehensive income (loss) attributable to 3M		$	1,625		$	710		$	3,930		$	3,533

 

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

 

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3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

		September 30,			December 31,
(Dollars in millions, except per share amount)		2012			2011
Assets
Current assets
Cash and cash equivalents		$	3,029		$	2,219
Marketable securities — current		1,989			1,461
Accounts receivable — net		4,409			3,867
Inventories
Finished goods		1,783			1,536
Work in process		1,163			1,061
Raw materials and supplies		896			819
Total inventories		3,842			3,416
Other current assets		1,225			1,277
Total current assets		14,494			12,240
Marketable securities — non-current		1,400			896
Investments		142			155
Property, plant and equipment		22,042			21,166
Less: Accumulated depreciation		(14,103		)	(13,500		)
Property, plant and equipment — net		7,939			7,666
Goodwill		7,216			7,047
Intangible assets — net		1,847			1,916
Prepaid pension benefits		47			40
Other assets		1,394			1,656
Total assets		$	34,479		$	31,616
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt		$	1,506		$	682
Accounts payable		1,805			1,643
Accrued payroll		684			676
Accrued income taxes		301			355
Other current liabilities		2,299			2,085
Total current liabilities		6,595			5,441
Long-term debt		4,852			4,484
Pension and postretirement benefits		3,114			3,972
Other liabilities		1,777			1,857
Total liabilities		$	16,338		$	15,754
Commitments and contingencies (Note 11)
Equity
3M Company shareholders’ equity:
Common stock par value, $.01 par value, 944,033,056 shares issued		$	9		$	9
Additional paid-in capital		3,998			3,767
Retained earnings		30,150			28,348
Treasury stock, at cost: 252,101,778 shares at September 30, 2012; 249,063,015 shares at December 31, 2011		(11,965		)	(11,679		)
Accumulated other comprehensive income (loss)		(4,548		)	(5,025		)
Total 3M Company shareholders’ equity		17,644			15,420
Noncontrolling interest		497			442
Total equity		$	18,141		$	15,862
Total liabilities and equity		$	34,479		$	31,616

 

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

 

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3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

 

		Nine months ended
		September 30,
(Millions)		2012			2011
Cash Flows from Operating Activities
Net income including noncontrolling interest		$	3,507		$	3,383
Adjustments to reconcile net income including noncontrolling interest to net cash provided by operating activities
Depreciation and amortization		956			919
Company pension and postretirement contributions		(918		)	(373		)
Company pension and postretirement expense		490			400
Stock-based compensation expense		181			210
Deferred income taxes		89			(37		)
Excess tax benefits from stock-based compensation		(53		)	(52		)
Changes in assets and liabilities
Accounts receivable		(493		)	(557		)
Inventories		(368		)	(364		)
Accounts payable		141			(30		)
Accrued income taxes (current and long-term)		(48		)	212
Product and other insurance receivables and claims		(11		)	(45		)
Other — net		89			(120		)
Net cash provided by operating activities		3,562			3,546
Cash Flows from Investing Activities
Purchases of property, plant and equipment (PP&E)		(977		)	(862		)
Proceeds from sale of PP&E and other assets		15			12
Acquisitions, net of cash acquired		(248		)	(531		)
Purchases of marketable securities and investments		(4,313		)	(2,592		)
Proceeds from sale of marketable securities and investments		1,778			1,042
Proceeds from maturities of marketable securities		1,597			1,353
Other investing		14			(6		)
Net cash used in investing activities		(2,134		)	(1,584		)
Cash Flows from Financing Activities
Change in short-term debt — net		(36		)	(13		)
Repayment of debt (maturities greater than 90 days)		(18		)	(474		)
Proceeds from debt (maturities greater than 90 days)		1,251			1,108
Purchases of treasury stock		(1,490		)	(2,207		)
Proceeds from issuance of treasury stock pursuant to stock option and benefit plans		772			865
Dividends paid to shareholders		(1,228		)	(1,171		)
Excess tax benefits from stock-based compensation		53			52
Other — net		(18		)	(58		)
Net cash used in financing activities		(714		)	(1,898		)
Effect of exchange rate changes on cash and cash equivalents		96			(65		)
Net increase (decrease) in cash and cash equivalents		810			(1		)
Cash and cash equivalents at beginning of year		2,219			3,377
Cash and cash equivalents at end of period		$	3,029		$	3,376

 

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

 

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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. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its 2011 Annual Report on Form 10-K.

 

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 (6.3 million average options for the three months ended September 30, 2012; 15.6 million average options for the nine months ended September 30, 2012; 29.7 million average options for the three months ended September 30, 2011; and 12.3 million average options for the nine months ended September 30, 2011). The computations for basic and diluted earnings per share follow:

 

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Earnings Per Share Computations

 

		Three months ended						Nine months ended
		September 30,						September 30,
(Amounts in millions, except per share amounts)		2012			2011			2012			2011
Numerator:
Net income attributable to 3M		$	1,161		$	1,088		$	3,453		$	3,329
Denominator:
Denominator for weighted average 3M common shares outstanding — basic		693.0			707.7			694.7			710.9
Dilution associated with the Company’s stock-based compensation plans		10.1			7.8			9.2			11.9
Denominator for weighted average 3M common shares outstanding — diluted		703.1			715.5			703.9			722.8
Earnings per share attributable to 3M common shareholders — basic		$	1.68		$	1.54		$	4.97		$	4.68
Earnings per share attributable to 3M common shareholders — diluted		$	1.65		$	1.52		$	4.91		$	4.61

 

New Accounting Pronouncements

 

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

 

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

 

In December 2011, the FASB issued ASU No. 2011-11, Disclosures About Offsetting Assets and Liabilities, which creates new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. Certain disclosures of the amounts of certain instruments subject to enforceable master netting arrangements or similar agreements would be required, irrespective of whether the entity has elected to offset those instruments in the statement of financial position. For 3M, the ASU is effective January 1, 2013 with retrospective application required. Since this standard impacts disclosure requirements only, its adoption will not have a material impact on 3M’s consolidated results of operations or financial condition.

 

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

 

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NOTE 2.  Acquisitions

 

3M makes acquisitions of certain businesses from time to time that the Company feels align with its strategic intent with respect to, among other factors, growth markets and adjacent product lines or technologies. Goodwill resulting from business combinations is largely attributable to the existing workforce of the acquired businesses and synergies expected to arise after 3M’s acquisition of these businesses. In addition to business combinations, 3M periodically acquires certain tangible and/or intangible assets and purchases interests in certain enterprises that do not otherwise qualify for accounting as business combinations. These transactions are largely reflected as additional asset purchase and investment activity.

 

During the nine months ended September 30, 2012, the purchase price paid for business combinations (net of cash acquired) aggregated to $248 million. The allocations of purchase price related to the acquisitions of CodeRyte, Inc. in April 2012 and the business purchased from Federal Signal Corp. in September 2012 are considered preliminary, largely with respect to tax-related items and certain other assets and liabilities. Adjustments in the first nine months of 2012 to the preliminary purchase price allocations of other acquisitions within the allocation period were not material and primarily related to the 2011 acquisitions of Winterthur Technologie AG and the business acquired from GPI Group. Refer to Note 2 in 3M’s 2011 Annual Report on Form 10-K for more information on 3M’s 2011 acquisitions.

 

In April 2012, 3M (Health Care Business) purchased all of the outstanding shares of CodeRyte, Inc., an industry leader in clinical natural processing technology and computer-assisted coding solutions for healthcare outpatient providers, which is headquartered in Bethesda, Maryland.

 

In September 2012, 3M (Display and Graphics Business) purchased the net assets of Federal Signal Technologies Group from Federal Signal Corp., for a total purchase price of approximately $104 million. This business focuses on electronic toll collection and parking management hardware and software services, with primary facilities spread throughout the United States and in the U.K.

 

For acquisitions which closed in the first nine months of 2012, purchased identifiable finite-lived intangible assets totaled $95 million. These assets will be amortized on a straight-line basis over a weighted-average life of 12 years (lives ranging from 2 to 15 years). Acquired in-process research and development and 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 acquisitions was not included because the impact on the Company’s consolidated results of operations was not considered to be material.

 

In December 2011, 3M (Consumer and Office Business) entered into a definitive agreement to acquire the Office and Consumer Products business of Avery Dennison Corp. (Avery). 3M and Avery withdrew from the regulatory approval process for this acquisition in September 2012 and subsequently announced that they had terminated this agreement in October 2012.

 

In October 2012, 3M (Industrial and Transportation Business) announced that it had entered into a definitive agreement to acquire Ceradyne, Inc. (Ceradyne) and commenced its cash tender offer for all outstanding shares of Ceradyne at a price of $35.00 per share. The tender offer is scheduled to expire on November 27, 2012, unless extended. The proposed transaction has an aggregate value of approximately $860 million, or approximately $670 million net of cash, cash equivalents, short-term investments and debt. Ceradyne, headquartered in Costa Mesa, California, is involved in the development and production of advanced technical ceramics for demanding applications in the automotive, oil and gas, solar, industrial, electronics and defense industries. The transaction is expected to be completed in the fourth quarter of 2012, subject to customary closing conditions including any necessary regulatory approvals.

 

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NOTE 3.  Goodwill and Intangible Assets

 

Purchased goodwill related to acquisitions that closed during the first nine months of 2012 totaled $127 million, $39 million of which is deductible for tax purposes. The acquisition activity in the following table includes the net impacts of adjustments to the preliminary allocation of purchase price for prior year acquisitions, which increased goodwill by $12 million. The amounts in the “Translation and other” column in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balances by business segment as of December 31, 2011 and September 30, 2012, follow:

 

Goodwill

 

		December 31, 2011			Acquisition			Translation			September 30, 2012
(Millions)		Balance			activity			and other			Balance
Industrial and Transportation		$	1,961		$	6		$	23		$	1,990
Health Care		1,514			88			(5		)	1,597
Consumer and Office		228			6			6			240
Safety, Security and Protection Services		1,675			—			19			1,694
Display and Graphics		993			39			(7		)	1,025
Electro and Communications		676			—			(6		)	670
Total Company		$	7,047		$	139		$	30		$	7,216

 

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.

 

Effective in the first quarter of 2012, 3M made certain product moves across divisions within its business segments, but none were across business segments. For any product moves that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact on goodwill of the associated reporting units. In addition, during the first quarter of 2012, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed.

 

Acquired Intangible Assets

 

For the nine months ended September 30, 2012, gross intangible assets (excluding goodwill) acquired through business combinations increased balances, with this impact largely offset by changes in foreign currency exchange rates. The carrying amount and accumulated amortization of acquired finite-lived intangible assets, in addition to the balance of non-amortizable intangible assets, as of September 30, 2012, and December 31, 2011, follow:

 

		September 30,			December 31,
(Millions)		2012			2011
Patents		$	562		$	561
Other amortizable intangible assets (primarily tradenames and customer related intangibles)		2,338			2,323
Total gross carrying amount		$	2,900		$	2,884
Accumulated amortization — patents		(393		)	(374		)
Accumulated amortization — other		(783		)	(717		)
Total accumulated amortization		$	(1,176	)	$	(1,091	)
Total finite-lived intangible assets — net		$	1,724		$	1,793
Non-amortizable intangible assets (tradenames)		123			123
Total intangible assets — net		$	1,847		$	1,916

 

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Amortization expense for acquired intangible assets for the three-month and nine-month periods ended September 30, 2012 and 2011 follows:

 

		Three months ended						Nine months ended
		September 30,						September 30,
(Millions)		2012			2011			2012			2011
Amortization expense		$	60		$	59		$	176		$	176

 

The table below shows expected amortization expense for acquired amortizable intangible assets recorded as of September 30, 2012:

 

		Remainder
		of																		After
(Millions)		2012			2013			2014			2015			2016			2017			2017
Amortization expense		$	58		$	225		$	201		$	188		$	175		$	160		$	717

 

The expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to 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.

 

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NOTE 4.  Supplemental Equity and Comprehensive Income Information

Consolidated Statement of Changes in Equity

 

Three months ended September 30, 2012

 

					3M Company Shareholders
(Millions)		Total			Common Stock and Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest
Balance at June 30, 2012		$	16,873		$	3,963		$	29,465		$	(12,010	)	$	(5,012	)	$	467
Net income		1,180						1,161									19
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment		412												401			11
Defined benefit pension and post-retirement plans adjustment		96												96			—
Debt and equity securities - unrealized gain (loss)		3												3			—
Cash flow hedging instruments - unrealized gain/(loss)		(36		)										(36		)	—
Total other comprehensive income (loss), net of tax		475
Dividends paid		(408		)				(408		)
Stock-based compensation, net of tax impacts		44			44
Reacquired stock		(316		)							(316		)
Issuances pursuant to stock option and benefit plans		293						(68		)	361
Balance at September 30, 2012		$	18,141		$	4,007		$	30,150		$	(11,965	)	$	(4,548	)	$	497

 

Nine months ended September 30, 2012

 

					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, 2011		$	15,862		$	3,776		$	28,348		$	(11,679	)	$	(5,025	)	$	442
Net income		3,507						3,453									54
Other comprehensive income (loss), net of tax:
Cumulative translation adjustment		211												210			1
Defined benefit pension and post-retirement plans adjustment		291												291			—
Debt and equity securities - unrealized gain (loss)		4												4			—
Cash flow hedging instruments - unrealized gain/(loss)		(28		)										(28		)	—
Total other comprehensive income (loss), net of tax		478
Dividends paid		(1,228		)				(1,228		)
Stock-based compensation, net of tax impacts		231			231
Reacquired stock		(1,483		)							(1,483		)
Issuances pursuant to stock option and benefit plans		774						(423		)	1,197
Balance at September 30, 2012		$	18,141		$	4,007		$	30,150		$	(11,965	)	$	(4,548	)	$	497

 

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