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10-Q
3M CO filed this Form 10-Q on 11/01/2012
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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)

 

DELAWARE

 

41-0417775

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

3M Center, St. Paul, Minnesota

 

55144

(Address of principal executive offices)

 

(Zip Code)

 

(651) 733-1110

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

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

 

Smaller reporting company o

 

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

 

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

 

Class

 

Outstanding at September 30, 2012

Common Stock, $0.01 par value per share

 

691,931,278 shares

 

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

 

2



Table of Contents

 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended September 30, 2012

PART I.  Financial Information

 

Item 1Financial 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.

 

3



Table of Contents

 

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.

 

4


 


Table of Contents

 

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.

 

5



Table of Contents

 

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.

 

6



Table of Contents

 

3M Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1.  Significant Accounting Policies

 

Basis of Presentation

 

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

 

7



Table of Contents

 

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.

 

8



Table of Contents

 

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.

 

9


 


Table of Contents

 

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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Table of Contents

 

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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Table of Contents

 

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

 

 

12



Table of Contents

 

Three months ended September 30, 2011

 

 

 

 

 

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, 2011

 

$

17,742

 

$

3,692

 

$

27,110

 

$

(10,511

)

$

(2,961

)

$

412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,103

 

 

 

1,088

 

 

 

 

 

15

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(490

)

 

 

 

 

 

 

(507

)

17

 

Defined benefit pension and post-retirement plans adjustment

 

77

 

 

 

 

 

 

 

77

 

 

Debt and equity securities - unrealized gain (loss)

 

(2

)

 

 

 

 

 

 

(2

)

 

Cash flow hedging instruments - unrealized gain/(loss)

 

54

 

 

 

 

 

 

 

54

 

 

Total other comprehensive income (loss), net of tax

 

(361

)

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(388

)

 

 

(388

)

 

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

42

 

42

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(837

)

 

 

 

 

(837

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

111

 

 

 

(26

)

137

 

 

 

 

 

Balance at September 30, 2011

 

$

17,412

 

$

3,734

 

$

27,784

 

$

(11,211

)

$

(3,339

)

$

444

 

 

Nine months ended September 30, 2011

 

 

 

 

 

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, 2010

 

$

16,017

 

$

3,477

 

$

25,995

 

$

(10,266

)

$

(3,543

)

$

354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

3,383

 

 

 

3,329

 

 

 

 

 

54

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(14

)

 

 

 

 

 

 

(34

)

20

 

Defined benefit pension and post-retirement plans adjustment

 

207

 

 

 

 

 

 

 

206

 

1

 

Debt and equity securities - unrealized gain (loss)

 

(5

)

 

 

 

 

 

 

(5

)

 

Cash flow hedging instruments - unrealized gain/(loss)

 

37

 

 

 

 

 

 

 

37

 

 

Total other comprehensive income (loss), net of tax

 

225

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(1,171

)

 

 

(1,171

)

 

 

 

 

 

 

Business combination allocation to noncontrolling interest

 

56

 

 

 

 

 

 

 

 

 

56

 

Purchase and sale of subsidiary shares - net

 

(42

)

(1

)

 

 

 

 

 

 

(41

)

Stock-based compensation, net of tax impacts

 

258

 

258

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(2,181

)

 

 

 

 

(2,181

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

867

 

 

 

(369

)

1,236

 

 

 

 

 

Balance at September 30, 2011

 

$

17,412

 

$

3,734

 

$

27,784

 

$

(11,211

)

$

(3,339

)

$

444

 

 

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Accumulated Other Comprehensive Income (Loss) Attributable to 3M

 

 

 

September 30,

 

December 31,

 

(Millions)

 

2012

 

2011

 

Cumulative translation adjustment

 

$

324

 

$

114

 

Defined benefit pension and postretirement plans adjustment

 

(4,864

)

(5,155

)

Debt and equity securities, unrealized gain (loss)

 

(2

)

(6

)

Cash flow hedging instruments, unrealized gain (loss)

 

(6

)

22

 

Total accumulated other comprehensive income (loss)

 

$

(4,548

)

$

(5,025

)

 

Components of Comprehensive Income (Loss) Attributable to 3M

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

(Millions)

 

2012

 

2011

 

2012

 

2011

 

Net income attributable to 3M

 

$

1,161

 

$

1,088

 

$

3,453

 

$

3,329

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation

 

380

 

(489

)

211

 

(63

)

Tax effect

 

21

 

(18

)

(1

)

29

 

Cumulative translation - net of tax

 

401

 

(507

)

210

 

(34

)

 

 

 

 

 

 

 

 

 

 

Defined benefit pension and postretirement plans adjustment

 

153

 

120

 

460

 

358

 

Tax effect

 

(57

)

(43

)

(169

)

(152

)

Defined benefit pension and postretirement plans adjustment - net of tax

 

96

 

77

 

291

 

206

 

 

 

 

 

 

 

 

 

 

 

Debt and equity securities, unrealized gain (loss)

 

4

 

(3

)

6

 

(8

)

Tax effect

 

(1

)

1

 

(2

)

3

 

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

 

3

 

(2

)

4

 

(5

)

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments, unrealized gain (loss)

 

(57

)

85

 

(44

)

59

 

Tax effect

 

21

 

(31

)

16

 

(22

)

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

 

(36

)

54

 

(28

)

37

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss) attributable to 3M

 

$

1,625

 

$

710

 

$

3,930

 

$

3,533

 

 

Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income. Reclassifications to earnings from accumulated other comprehensive income including noncontrolling interest that related to pension and postretirement expense in the income statement were $153 million pre-tax ($96 million after-tax) for the three months ended September 30, 2012, $460 million pre-tax ($291 million after-tax) for the nine months ended September 30, 2012, $117 million pre-tax ($77 million after-tax) for the three months ended September 30, 2011, and $355 million pre-tax ($207 million after-tax) for the nine months ended September 30, 2011. These pension and postretirement expense pre-tax 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. Cash flow hedging instruments reclassifications are provided in Note 9. Reclassifications to earnings from accumulated other comprehensive income that related to realized losses due to sales or impairments (net of realized gains) for debt and equity securities were not material for the three months ended September 30, 2012, $1 million pre-tax ($1 million after-tax) for the nine months ended September 30, 2012, $4 million pre-tax ($2 million after-tax) for the three months ended September 30, 2011, and $2 million pre-tax ($1 million after-tax) for the nine months ended September 30, 2011. Income taxes are not provided for foreign translation relating to permanent investments in international subsidiaries, but tax effects within cumulative translation does include impacts from items such as net investment hedge transactions.

 

Purchase and Sale of Subsidiary Shares

 

As discussed in Note 2 in 3M’s 2011 Annual Report on Form 10-K, in early March 2011, 3M acquired a controlling interest in Winterthur Technologie AG (Winterthur), making Winterthur a consolidated subsidiary as of this business acquisition date. As of this business acquisition date, noncontrolling interest related to Winterthur totaled $56 million. Subsequent to this business acquisition date, 3M purchased additional outstanding shares of its Winterthur subsidiary increasing 3M’s ownership interest from approximately 86 percent as of the business acquisition date to approximately 98 percent as of

 

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Table of Contents

 

September 30, 2011, and subsequently to 100 percent as of December 31, 2011. The $50 million of cash paid in the first nine months of 2011 as a result of these additional purchases of Winterthur shares was classified as other financing activity in the consolidated statement of cash flows. These additional purchases did not result in a material transfer from noncontrolling interest to 3M Company shareholders’ equity. In addition, during the first nine months of 2011 and 2012, 3M sold a noncontrolling interest in a newly formed subsidiary and purchased the remaining noncontrolling interest of another subsidiary, both for immaterial amounts, which were also classified as other financing activities in the consolidated statement of cash flows.

 

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Table of Contents

 

NOTE 5.  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 2003.

 

The IRS completed its field examination of the Company’s U.S. federal income tax returns for the years 2005 through 2007 in the fourth quarter of 2009. The Company protested certain IRS positions within these tax years and entered into the administrative appeals process with the IRS during the first quarter of 2010. During the first quarter of 2010, the IRS completed its field examination of the Company’s U.S. federal income tax return for the 2008 year. The Company protested certain IRS positions for 2008 and entered into the administrative appeals process with the IRS during the second quarter of 2010. During the first quarter of 2011, the IRS completed its field examination of the Company’s U.S. federal income tax return for the 2009 year. The Company protested certain IRS positions for 2009 and entered into the administrative appeals process with the IRS during the second quarter of 2011. During the first quarter of 2012, the IRS completed its field examination of the Company’s U.S. federal income tax return for the 2010 year. The Company protested certain IRS positions for 2010 and entered into the administrative appeals process with the IRS during the second quarter of 2012.

 

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

 

During the first quarter of 2010, the Company paid the agreed upon assessments for the 2005 tax year. During the second quarter of 2010, the Company paid the agreed upon assessments for the 2008 tax year. During the second quarter of 2011, the Company received a refund from the IRS for the 2004 tax year. During the first quarter of 2012, the Company paid the agreed upon assessments for the 2010 tax year. Payments relating to other proposed assessments arising from the 2005 through 2012 examinations may not be made until a final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also limited audit activity in several U.S. state and foreign jurisdictions.

 

3M anticipates changes to the Company’s uncertain tax positions due to the closing of various audit years mentioned above. Currently, the Company is not able to reasonably estimate the amount by which the liability for unrecognized tax benefits will increase or decrease during the next 12 months as a result of the ongoing income tax authority examinations. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate are $210 million and $295 million as of September 30, 2012 and December 31, 2011, respectively.

 

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized in the consolidated statement of income on a gross basis approximately $3 million of benefit for both the three months ended September 30, 2012 and September 30, 2011, and approximately $8 million of benefit and an immaterial impact for the nine months ended September 30, 2012 and September 30, 2011, respectively. At September 30, 2012 and December 31, 2011, accrued interest and penalties in the consolidated balance sheet on a gross basis were $48 million and $56 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

 

The effective tax rate for the third quarter of 2012 was 28.2 percent, compared to 28.6 percent in the third quarter of 2011, a decrease of 0.4 percentage points. The effective tax rate for the first nine months of 2012 was 29.0 percent, compared to 28.1 percent in the first nine months of 2011, an increase of 0.9 percentage points. Various factors increased or decreased the effective tax rate when compared to the same periods last year. The primary factors which increased the Company’s effective tax rate year-on-year included international taxes, specifically with respect to the corporate reorganization of a wholly owned international subsidiary (which benefited 2011), and the lapse of the U.S. research and development credit. These and other factors, when compared to the same periods last year, increased the effective tax rate in the third quarter and first nine months of 2012 by 2.5 and 1.6 percentage points, respectively. Factors which decreased the Company’s effective tax rate year-on-year included international taxes as a result of changes to the geographic mix of

 

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Table of Contents

 

income before taxes, benefits from certain realized credits, and adjustments to its income tax reserves. These factors, when compared to the same periods last year, decreased the effective tax rate in the third quarter and first nine months of 2012 by 2.9 and 0.7 percentage points, respectively.

 

The provision for income taxes is determined using the asset and liability approach. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exits. As of September 30, 2012 and December 31, 2011, the Company had valuation allowances of $31 million and $82 million on its deferred tax assets, respectively. The valuation allowance was reduced in the first quarter of 2012 due to the closure of audits with certain taxing authorities.

 

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Table of Contents

 

NOTE 6.  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).

 

 

 

September 30,

 

December 31,

 

(Millions)

 

2012

 

2011

 

 

 

 

 

 

 

U.S. government agency securities

 

$

316

 

$

119

 

Foreign government agency securities

 

3

 

8

 

Corporate debt securities

 

499

 

413

 

Commercial paper

 

396

 

30

 

Certificates of deposit/time deposits

 

76

 

49

 

U.S. treasury securities

 

34

 

 

U.S. municipal securities

 

20

 

9

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

454

 

530

 

Credit card related

 

143

 

244

 

Equipment lease related

 

32

 

54

 

Other

 

16

 

5

 

Asset-backed securities total

 

645

 

833

 

 

 

 

 

 

 

Current marketable securities

 

$

1,989

 

$

1,461

 

 

 

 

 

 

 

U.S. government agency securities

 

$

410

 

$

361

 

Foreign government agency securities

 

61

 

15

 

Corporate debt securities

 

492

 

255

 

U.S. treasury securities

 

18

 

34

 

U.S. municipal securities

 

14

 

5

 

Auction rate securities

 

6

 

4

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

320

 

188

 

Credit card related

 

33

 

24

 

Equipment lease related

 

38

 

10

 

Other

 

8

 

 

Asset-backed securities total

 

399

 

222

 

 

 

 

 

 

 

Non-current marketable securities

 

$

1,400

 

$

896

 

 

 

 

 

 

 

Total marketable securities

 

$

3,389

 

$

2,357

 

 

Classification of marketable securities as current or non-current is dependent upon management’s intended holding period, the security’s maturity date and liquidity considerations based on market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current. At September 30, 2012, gross unrealized losses totaled approximately $7 million (pre-tax), while gross unrealized gains totaled approximately $4 million (pre-tax). At December 31, 2011, gross unrealized losses totaled approximately $12 million (pre-tax), while gross unrealized gains totaled approximately $3 million (pre-tax). Gross realized gains and losses on sales or maturities of marketable securities for the first nine months of 2012 and 2011 were not material. Cost of securities sold use the first in, first out (FIFO) method. Since these marketable securities are classified as available-for-sale securities, changes in fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into earnings upon sale or “other-than-temporary” impairment.

 

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

 

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Table of Contents

 

The balances at September 30, 2012 for marketable securities by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

(Millions)

 

September 30, 2012

 

 

 

 

 

Due in one year or less

 

$

1,244

 

Due after one year through three years

 

1,026

 

Due after three years through five years

 

1,118

 

Due after five years

 

1

 

 

 

 

 

Total marketable securities

 

$

3,389

 

 

3M has a diversified marketable securities portfolio of $3.389 billion as of September 30, 2012. Within this portfolio, current and long-term asset-backed securities (estimated fair value of $1.044 billion) primarily include interests in automobile loans and credit cards. At September 30, 2012, all asset-backed securities were rated AAA or A-1+ by Standard & Poor’s and/or Aaa or P-1 by Moody’s and/or AAA or F1+ by Fitch.

 

3M’s marketable securities portfolio includes auction rate securities that represent interests in investment grade credit default swaps; however, currently these holdings comprise less than one percent of this portfolio. The estimated fair value of auction rate securities was $6 million and $4 million as of September 30, 2012 and December 31, 2011, respectively. Gross unrealized losses within accumulated other comprehensive income related to auction rate securities totaled $7 million (pre-tax) and $9 million (pre-tax) as of September 30, 2012 and December 31, 2011, respectively. As of September 30, 2012, auction rate securities associated with these balances have been in a loss position for more than 12 months. Since the second half of 2007, these auction rate securities failed to auction due to sell orders exceeding buy orders. Liquidity for these auction-rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 7, 28, 35, or 90 days. The funds associated with failed auctions will not be accessible until a successful auction occurs or a buyer is found outside of the auction process. Refer to Note 10 for a table that reconciles the beginning and ending balances of auction rate securities.

 

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Table of Contents

 

NOTE 7.  Long-Term Debt and Short-Term Borrowings

 

The Company has a “well-known seasoned issuer” shelf registration statement, effective August 5, 2011, which registers an indeterminate amount of debt or equity securities for future sales. In September 2011, in connection with this August 5, 2011 shelf registration statement, 3M established a $3 billion medium-term notes program (Series F), from which 3M issued $1 billion aggregate principal amount of five-year fixed rate medium-term notes with a coupon rate of 1.375%. In June 2012, 3M issued $650 million aggregate principal amount of five-year fixed rate medium-notes due 2017 with a coupon rate of 1.000% and $600 million aggregate principal amount of ten-year fixed rate medium-term notes due 2022 with a coupon rate of 2.000%, which were both issued from this $3 billion medium-term notes program (Series F). The designated use of these proceeds is for general corporate purposes.

 

In September 2012, 3M entered into a $1.5 billion, five-year multi-currency revolving credit agreement, which amended the existing agreement that was entered into in August 2011. This amended agreement extended the expiration date from August 2016 to September 2017. This credit agreement includes a provision under which 3M may request an increase of up to $500 million, bringing the total facility up to $2 billion (at the lenders’ discretion). This facility was undrawn at September 30, 2012. In August 2012, 3M entered into a $150 million, one-year committed letter of credit facility with HSBC Bank USA, which replaced the one-year $200 million committed credit facility that was entered into in August 2011. As of September 30, 2012, 3M letters of credit issued under this $150 million committed facility totaled $120 million. Apart from the committed facilities, an additional $100 million in stand-alone letters of credit was also issued and outstanding at September 30, 2012. These letters of credit are utilized in connection with normal business activities. Under both the $1.5 billion and $150 million credit agreements, the Company is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the same period. At September 30, 2012, this ratio was approximately 44 to 1.

 

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Table of Contents

 

NOTE 8.  Pension and Postretirement Benefit Plans

 

Components of net periodic benefit cost and other supplemental information for the three and nine months ended September 30, 2012 and 2011 follow:

 

Benefit Plan Information

 

 

 

Three months ended September 30,

 

 

 

Qualified and Non-qualified

 

 

 

 

 

 

 

Pension Benefits

 

Postretirement

 

 

 

United States

 

International

 

Benefits

 

(Millions)

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Net periodic benefit cost (benefit)

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

64

 

$

51

 

$

31

 

$

27

 

$

19

 

$

16

 

Interest cost

 

147

 

157

 

61

 

62

 

22

 

23

 

Expected return on plan assets

 

(248

)

(231

)

(73

)

(70

)

(21

)

(20

)

Amortization of transition (asset) obligation

 

 

 

 

 

 

 

Amortization of prior service cost (benefit)

 

1

 

2

 

(4

)

(3

)

(18

)

(18

)

Amortization of net actuarial (gain) loss

 

117

 

83

 

30

 

28

 

27

 

25

 

Net periodic benefit cost (benefit)

 

$

81

 

$

62

 

$

45

 

$

44

 

$

29

 

$

26

 

Settlements, curtailments, special termination benefits and other

 

 

 

 

 

 

 

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

 

$

81

 

$

62

 

$

45

 

$

44

 

$

29

 

$

26

 

 

 

 

Nine months ended September 30,

 

 

 

Qualified and Non-qualified

 

 

 

 

 

 

 

Pension Benefits

 

Postretirement

 

 

 

United States

 

International

 

Benefits

 

(Millions)

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Net periodic benefit cost (benefit)

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

191

 

$

154

 

$

93

 

$

83

 

$

58

 

$

46

 

Interest cost

 

440

 

470

 

184

 

186

 

65

 

69

 

Expected return on plan assets

 

(744

)

(695

)

(219

)

(209

)

(64

)

(59

)

Amortization of transition (asset) obligation

 

 

 

(1

)

 

 

 

Amortization of prior service cost (benefit)

 

4

 

8

 

(13

)

(10

)

(54

)

(54

)

Amortization of net actuarial (gain) loss

 

352

 

250

 

90

 

84

 

82

 

77

 

Net periodic benefit cost (benefit)

 

$

243

 

$