10-Q 1 a13-8437_110q.htm 10-Q

Table of Contents

 

 

 

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

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

Commission file number:  1-3285

 

3M COMPANY

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

41-0417775

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

3M Center, St. Paul, Minnesota

 

55144

(Address of principal executive offices)

 

(Zip Code)

 

(651) 733-1110

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer x

Accelerated filer o

 

 

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

Smaller reporting company o

 

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

 

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

 

Class

 

Outstanding at March 31, 2013

Common Stock, $0.01 par value per share

 

690,194,620 shares

 

This document (excluding exhibits) contains 70 pages.

The table of contents is set forth on page 2.

The exhibit index begins on page 67.

 

 

 



Table of Contents

 

3M COMPANY

Form 10-Q for the Quarterly Period Ended March 31, 2013

TABLE OF CONTENTS

 

 

 

 

BEGINNING
PAGE

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

ITEM 1.

Financial Statements

 

 

 

 

 

 

 

 

 

Index to Financial Statements:

 

 

 

 

Consolidated Statement of Income

 

3

 

 

Consolidated Statement of Comprehensive Income

 

4

 

 

Consolidated Balance Sheet

 

5

 

 

Consolidated Statement of Cash Flows

 

6

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Note 1.   Significant Accounting Policies

 

7

 

 

Note 2.   Acquisitions

 

9

 

 

Note 3.   Goodwill and Intangible Assets

 

10

 

 

Note 4.   Supplemental Equity and Comprehensive Income Information

 

12

 

 

Note 5.   Income Taxes

 

15

 

 

Note 6.   Marketable Securities

 

16

 

 

Note 7.   Pension and Postretirement Benefit Plans

 

18

 

 

Note 8.   Derivatives

 

19

 

 

Note 9.   Fair Value Measurements

 

26

 

 

Note 10. Commitments and Contingencies

 

30

 

 

Note 11. Stock-Based Compensation

 

39

 

 

Note 12. Business Segments

 

43

 

 

Report of Independent Registered Public Accounting Firm

 

45

 

 

 

 

 

 

ITEM 2.

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

 

 

 

 

Index to Management’s Discussion and Analysis:

 

 

 

 

Overview

 

46

 

 

Results of Operations

 

49

 

 

Performance by Business Segment

 

51

 

 

Financial Condition and Liquidity

 

57

 

 

Cautionary Note Concerning Factors That May Affect Future Results

 

62

 

 

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

 

62

 

 

 

 

 

 

ITEM 4.

Controls and Procedures

 

63

 

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

 

64

 

 

 

 

 

 

ITEM 1A.

Risk Factors

 

64

 

 

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

66

 

 

 

 

 

 

ITEM 3.

Defaults Upon Senior Securities

 

66

 

 

 

 

 

 

ITEM 4.

Mine Safety Disclosures

 

66

 

 

 

 

 

 

ITEM 5.

Other Information

 

66

 

 

 

 

 

 

ITEM 6.

Exhibits

 

67

 

 

2



Table of Contents

 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended March 31, 2013

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

 

 

 

Three months ended

 

 

 

March 31,

 

(Millions, except per share amounts)

 

2013

 

2012

 

Net sales

 

$

  7,634

 

$

  7,486

 

Operating expenses

 

 

 

 

 

Cost of sales

 

3,969

 

3,889

 

Selling, general and administrative expenses

 

1,589

 

1,552

 

Research, development and related expenses

 

430

 

411

 

Total operating expenses

 

5,988

 

5,852

 

Operating income

 

1,646

 

1,634

 

 

 

 

 

 

 

Interest expense and income

 

 

 

 

 

Interest expense

 

39

 

40

 

Interest income

 

(10

)

(9

)

Total interest expense — net

 

29

 

31

 

 

 

 

 

 

 

Income before income taxes

 

1,617

 

1,603

 

Provision for income taxes

 

470

 

462

 

Net income including noncontrolling interest

 

$

  1,147

 

$

  1,141

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

18

 

16

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

  1,129

 

$

  1,125

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — basic

 

691.1

 

696.8

 

Earnings per share attributable to 3M common shareholders — basic

 

$

  1.63

 

$

  1.61

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — diluted

 

702.1

 

706.1

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

  1.61

 

$

  1.59

 

 

 

 

 

 

 

Cash dividends paid per 3M common share

 

$

  0.635

 

$

  0.59

 

 

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

 

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Table of Contents

 

3M Company and Subsidiaries

Consolidated Statement of Comprehensive Income

(Unaudited)

 

 

 

Three months ended

 

 

 

March 31,

 

(Millions)

 

2013

 

2012

 

Net income including noncontrolling interest

 

$

1,147

 

$

1,141

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Cumulative translation adjustment

 

(398

)

134

 

Defined benefit pension and postretirement plans adjustment

 

85

 

97

 

Debt and equity securities, unrealized gain (loss)

 

 

3

 

Cash flow hedging instruments, unrealized gain (loss)

 

24

 

(15

)

Total other comprehensive income (loss), net of tax

 

(289

)

219

 

Comprehensive income (loss) including noncontrolling interest

 

858

 

1,360

 

Comprehensive (income) loss attributable to noncontrolling interest

 

20

 

5

 

Comprehensive income (loss) attributable to 3M

 

$

878

 

$

1,365

 

 

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

 

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Table of Contents

 

3M Company and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

 

 

 

March 31,

 

December 31,

 

(Dollars in millions, except per share amount)

 

2013

 

2012

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

2,928

 

$

2,883

 

Marketable securities — current

 

1,448

 

1,648

 

Accounts receivable — net

 

4,418

 

4,061

 

Inventories

 

 

 

 

 

Finished goods

 

1,775

 

1,754

 

Work in process

 

1,179

 

1,186

 

Raw materials and supplies

 

865

 

897

 

Total inventories

 

3,819

 

3,837

 

Other current assets

 

1,242

 

1,201

 

Total current assets

 

13,855

 

13,630

 

 

 

 

 

 

 

Marketable securities — non-current

 

1,452

 

1,162

 

Investments

 

161

 

163

 

Property, plant and equipment

 

22,468

 

22,525

 

Less: Accumulated depreciation

 

(14,150

)

(14,147

)

Property, plant and equipment — net

 

8,318

 

8,378

 

Goodwill

 

7,247

 

7,385

 

Intangible assets — net

 

1,840

 

1,925

 

Prepaid pension benefits

 

19

 

16

 

Other assets

 

1,137

 

1,217

 

Total assets

 

$

34,029

 

$

33,876

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

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

 

$

1,072

 

$

1,085

 

Accounts payable

 

1,820

 

1,762

 

Accrued payroll

 

466

 

701

 

Accrued income taxes

 

392

 

371

 

Other current liabilities

 

2,187

 

2,281

 

Total current liabilities

 

5,937

 

6,200

 

 

 

 

 

 

 

Long-term debt

 

4,864

 

4,916

 

Pension and postretirement benefits

 

3,014

 

3,086

 

Other liabilities

 

1,686

 

1,634

 

Total liabilities

 

$

15,501

 

$

15,836

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

3M Company shareholders’ equity:

 

 

 

 

 

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

 

$

9

 

$

9

 

Additional paid-in capital

 

4,179

 

4,044

 

Retained earnings

 

31,073

 

30,679

 

Treasury stock, at cost: 253,838,436 shares at March 31, 2013; 256,941,406 shares at December 31, 2012

 

(12,178

)

(12,407

)

Accumulated other comprehensive income (loss)

 

(5,001

)

(4,750

)

Total 3M Company shareholders’ equity

 

18,082

 

17,575

 

Noncontrolling interest

 

446

 

465

 

Total equity

 

$

18,528

 

$

18,040

 

Total liabilities and equity

 

$

34,029

 

$

33,876

 

 

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

 

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Table of Contents

 

3M Company and Subsidiaries

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

Three months ended

 

 

 

March 31,

 

(Millions)

 

2013

 

2012

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income including noncontrolling interest

 

$

1,147

 

$

1,141

 

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

 

 

 

 

 

Depreciation and amortization

 

336

 

313

 

Company pension and postretirement contributions

 

(68

)

(337

)

Company pension and postretirement expense

 

138

 

180

 

Stock-based compensation expense

 

103

 

103

 

Deferred income taxes

 

61

 

44

 

Excess tax benefits from stock-based compensation

 

(34

)

(28

)

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

(447

)

(431

)

Inventories

 

(28

)

(96

)

Accounts payable

 

97

 

118

 

Accrued income taxes (current and long-term)

 

99

 

221

 

Product and other insurance receivables and claims

 

(8

)

(74

)

Other — net

 

(402

)

(326

)

Net cash provided by operating activities

 

994

 

828

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

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

 

(324

)

(261

)

Proceeds from sale of PP&E and other assets

 

10

 

4

 

Purchases of marketable securities and investments

 

(1,767

)

(900

)

Proceeds from sale of marketable securities and investments

 

786

 

539

 

Proceeds from maturities of marketable securities

 

885

 

574

 

Other investing

 

5

 

1

 

Net cash used in investing activities

 

(405

)

(43

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Change in short-term debt — net

 

(13

)

(18

)

Repayment of debt (maturities greater than 90 days)

 

(5

)

(15

)

Proceeds from debt (maturities greater than 90 days)

 

9

 

6

 

Purchases of treasury stock

 

(805

)

(524

)

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

 

738

 

213

 

Dividends paid to shareholders

 

(440

)

(410

)

Excess tax benefits from stock-based compensation

 

34

 

28

 

Other — net

 

(4

)

(2

)

Net cash used in financing activities

 

(486

)

(722

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(58

)

50

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

45

 

113

 

Cash and cash equivalents at beginning of year

 

2,883

 

2,219

 

Cash and cash equivalents at end of period

 

$

2,928

 

$

2,332

 

 

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

 

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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 2012 Annual Report on Form 10-K. However, as described in Note 12, effective in the first quarter of 2013, the Company completed a realignment of its business segments to better serve global markets and customers. In addition, during the first quarter of 2013, 3M realigned its geographic area reporting to include Puerto Rico in the United States rather than in the Latin America/Canada region. The Company has begun to report comparative results under the new business segment and geographic area structure with the filing of this Quarterly Report on Form 10-Q. In the second quarter of 2013, the Company plans to revise its business segment and geographic area disclosures in its 2012 Annual Report on Form 10-K via a Current Report on Form 8-K to reflect these realignments.

 

Foreign Currency Translation

 

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

 

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

 

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

 

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

 

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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 (4.1 million average options for the three months ended March 31, 2013 and 19.2 million average options for the three months ended March 31, 2012). The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 

 

 

Three months ended

 

 

 

March 31,

 

(Amounts in millions, except per share amounts)

 

2013

 

2012

 

Numerator:

 

 

 

 

 

Net income attributable to 3M

 

$

1,129

 

$

1,125

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — basic

 

691.1

 

696.8

 

 

 

 

 

 

 

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

 

11.0

 

9.3

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — diluted

 

702.1

 

706.1

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.63

 

$

1.61

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

1.61

 

$

1.59

 

 

New Accounting Pronouncements

 

In December 2011, the FASB issued ASU No. 2011-11, Disclosures About Offsetting Assets and Liabilities, and in January 2013 issued ASU No. 2013-01, Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities. These standards created new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its derivative instruments, repurchase agreements, and securities lending transactions. Certain disclosures of the amounts of certain instruments subject to enforceable master netting arrangements are required, irrespective of whether the entity has elected to offset those instruments in the statement of financial position. For 3M, these ASUs were effective January 1, 2013 with retrospective application required. The additional disclosures required by these ASUs are included in Note 8. Since these standards impact disclosure requirements only, their adoption did not have a material impact on 3M’s consolidated results of operations or financial condition.

 

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

 

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under this standard, entities are required to disclose additional information with respect to changes in accumulated other comprehensive income (AOCI) balances by component and significant items reclassified out of AOCI. Expanded disclosures for presentation of changes in AOCI involve disaggregating the total change of each component of other comprehensive income (for example, unrealized gains or losses on available for sale marketable securities) as well as presenting separately for each such component the portion of change in AOCI related to (1) amounts reclassified into income and (2) current-period other comprehensive income. Additionally, for amounts reclassified into income, disclosure in one location is required, based upon each specific AOCI component, of the amounts impacting individual income statement line items. Disclosure of the income statement line item impacts is

 

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required only for components of AOCI reclassified into income in their entirety. Therefore, disclosure of the income statement line items affected by AOCI components such as net periodic benefit costs is not included. The disclosures required with respect to income statement line item impacts are to be made in either the notes to the consolidated financial statements or parenthetically on the face of the financial statements. For 3M, this ASU was effective beginning January 1, 2013. The additional disclosures required by this ASU are included in Note 4. Because this standard only impacts presentation and disclosure requirements, its adoption did not have a material impact on 3M’s consolidated results of operations or financial condition.

 

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

 

NOTE 2.  Acquisitions

 

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

 

There were no business combinations that closed during the three months ended March 31, 2013. Adjustments in the first quarter of 2013 to the preliminary purchase price allocations of other acquisitions within the allocation period were not material and primarily related to the 2012 acquisition of Ceradyne, Inc. The allocations of purchase price related to the acquisitions of the business purchased from Federal Signal Corp. in September 2012 and Ceradyne, Inc. in November 2012 are considered preliminary, largely with respect to certain acquired property, plant and equipment; intangible assets; and tax-related assets and liabilities. Refer to Note 2 in 3M’s 2012 Annual Report on Form 10-K for more information on 3M’s 2012 acquisitions.

 

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NOTE 3.  Goodwill and Intangible Assets

 

There were no acquisitions that closed during the first three months of 2013. The acquisition activity in the following table includes the net impacts of adjustments to the preliminary allocation of purchase price for prior year acquisitions, which decreased goodwill by $6 million. The amounts in the “Translation and other” column in the following table primarily relate to changes in foreign currency exchange rates. The goodwill balances by business segment as of December 31, 2012 and March 31, 2013, follow:

 

Goodwill

 

 

 

December 31, 2012

 

Acquisition

 

Translation

 

March 31, 2013

 

(Millions)

 

Balance

 

activity

 

and other

 

Balance

 

Industrial

 

$

2,174

 

$

(6

)

$

(47

)

$

2,121

 

Safety and Graphics

 

1,751

 

 

(29

)

1,722

 

Electronics and Energy

 

1,622

 

 

(22

)

1,600

 

Health Care

 

1,598

 

 

(26

)

1,572

 

Consumer

 

240

 

 

(8

)

232

 

Total Company

 

$

7,385

 

$

(6

)

$

(132

)

$

7,247

 

 

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

 

Acquired Intangible Assets

 

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

 

 

 

March 31,

 

December 31,

 

(Millions)

 

2013

 

2012

 

Patents

 

$

591

 

$

596

 

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

 

2,423

 

2,456

 

Total gross carrying amount

 

$

3,014

 

$

3,052

 

 

 

 

 

 

 

Accumulated amortization — patents

 

(425

)

(421

)

Accumulated amortization — other

 

(874

)

(833

)

Total accumulated amortization

 

$

(1,299

)

$

(1,254

)

 

 

 

 

 

 

Total finite-lived intangible assets — net

 

$

1,715

 

$

1,798

 

 

 

 

 

 

 

Non-amortizable intangible assets (tradenames)

 

125

 

127

 

Total intangible assets — net

 

$

1,840

 

$

1,925

 

 

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Table of Contents

 

Amortization expense for acquired intangible assets for the three months ended March 31, 2013 and 2012 follows:

 

 

 

Three months ended

 

 

 

March 31,

 

(Millions)

 

2013

 

2012

 

Amortization expense

 

$

60

 

$

58

 

 

The table below shows expected amortization expense for acquired amortizable intangible assets recorded as of March 31, 2013:

 

 

 

Remainder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of

 

 

 

 

 

 

 

 

 

 

 

After

 

(Millions)

 

2013

 

2014

 

2015

 

2016

 

2017

 

2018

 

2018

 

Amortization expense

 

$

178

 

$

211

 

$

197

 

$

184

 

$

168

 

$

152

 

$

625

 

 

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.

 

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Table of Contents

 

NOTE 4.  Supplemental Equity and Comprehensive Income Information

Consolidated Statement of Changes in Equity

 

Three months ended March 31, 2013

 

 

 

 

 

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, 2012

 

$

18,040

 

$

4,053

 

$

30,679

 

$

(12,407

)

$

(4,750

)

$

465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,147

 

 

 

1,129

 

 

 

 

 

18

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(398

)

 

 

 

 

 

 

(360

)

(38

)

Defined benefit pension and post-retirement plans adjustment

 

85

 

 

 

 

 

 

 

85

 

 

Debt and equity securities - unrealized gain (loss)

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

24

 

 

 

 

 

 

 

24

 

 

Total other comprehensive income (loss), net of tax

 

(289

)

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(440

)

 

 

(440

)

 

 

 

 

 

 

Sale of subsidiary shares

 

8

 

7

 

 

 

 

 

 

 

1

 

Stock-based compensation, net of tax impacts

 

128

 

128

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(807

)

 

 

 

 

(807

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

741

 

 

 

(295

)

1,036

 

 

 

 

 

Balance at March 31, 2013

 

$

18,528

 

$

4,188

 

$

31,073

 

$

(12,178

)

$

(5,001

)

$

446

 

 

Three months ended March 31, 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

 

1,141

 

 

 

1,125

 

 

 

 

 

16

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

134

 

 

 

 

 

 

 

155

 

(21

)

Defined benefit pension and post-retirement plans adjustment

 

97

 

 

 

 

 

 

 

97

 

 

Debt and equity securities - unrealized gain (loss)

 

3

 

 

 

 

 

 

 

3

 

 

Cash flow hedging instruments - unrealized gain (loss)

 

(15

)

 

 

 

 

 

 

(15

)

 

Total other comprehensive income (loss), net of tax

 

219

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(410

)

 

 

(410

)

 

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

127

 

127

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(534

)

 

 

 

 

(534

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

214

 

 

 

(205

)

419

 

 

 

 

 

Balance at March 31, 2012

 

$

16,619

 

$

3,903

 

$

28,858

 

$

(11,794

)

$

(4,785

)

$

437

 

 

12



Table of Contents

 

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

 

Three months ended March 31, 2013

 

(Millions)

 

Cumulative
Translation
Adjustment

 

Defined Benefit
Pension and
Postretirement
Plans
Adjustment

 

Debt and
Equity
Securities,
Unrealized
Gain (Loss)

 

Cash Flow
Hedging
Instruments,
Unrealized
Gain (Loss)

 

Total
Accumulated
Other
Comprehensive
Income
(Loss)

 

Balance at December 31, 2012, net of tax

 

$

230

 

$

(4,955

)

$

(2

)

$

(23

)

$

(4,750

)

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

(324

)

 

 

(70

)

(394

)

Amounts reclassified out

 

 

143

 

 

108

 

251

 

Total other comprehensive income (loss), before tax

 

(324

)

143

 

 

38

 

(143

)

Tax effect

 

(36

)

(58

)

 

(14

)

(108

)

Total other comprehensive income (loss), net of tax

 

(360

)

85

 

 

24

 

(251

)

Balance at March 31, 2013, net of tax

 

$

(130

)

$

(4,870

)

$

(2

)

$

1

 

$

(5,001

)

 

Three months ended March 31, 2012

 

(Millions)

 

Cumulative
Translation
Adjustment

 

Defined Benefit
Pension and
Postretirement
Plans
Adjustment

 

Debt and
Equity
Securities,
Unrealized
Gain (Loss)

 

Cash Flow
Hedging
Instruments,
Unrealized
Gain (Loss)

 

Total
Accumulated
Other
Comprehensive
Income
(Loss)

 

Balance at December 31, 2011, net of tax

 

$

114

 

$

(5,155

)

$

(6

)

$

22

 

$

(5,025

)

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

155

 

 

4

 

(28

)

131

 

Amounts reclassified out

 

 

153

 

1

 

4

 

158

 

Total other comprehensive income (loss), before tax

 

155

 

153

 

5

 

(24

)

289

 

Tax effect

 

 

(56

)

(2

)

9

 

(49

)

Total other comprehensive income (loss), net of tax

 

155

 

97

 

3

 

(15

)

240

 

Balance at March 31, 2012, net of tax

 

$

269

 

$

(5,058

)

$

(3

)

$

7

 

$

(4,785

)

 

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

 

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Table of Contents

 

Reclassifications out of Accumulated Other Comprehensive Income Attributable to 3M

 

 

 

Amount Reclassified from

 

 

 

(Millions)

 

Accumulated Other Comprehensive Income

 

 

 

Details about Accumulated Other
Comprehensive Income Components

 

Three months ended
March 31, 2013

 

Three months ended
March 31, 2012

 

Location on Income Statement

 

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

 

 

 

 

 

 

 

Transition asset

 

$

1

 

$

1

 

See Note 7

 

Prior service benefit

 

20

 

20

 

See Note 7

 

Net actuarial loss

 

(164

)

(174

)

See Note 7

 

Total before tax

 

(143

)

(153

)

 

 

Tax effect

 

58

 

56

 

Provision for income taxes

 

Net of tax

 

$

(85

)

$

(97

)

 

 

 

 

 

 

 

 

 

 

Debt and equity security gains (losses)

 

 

 

 

 

 

 

Sales or impairments of securities

 

$

 

$

(1

)

Selling, general and administrative expenses

 

Total before tax

 

 

(1

)

 

 

Tax effect

 

 

 

Provision for income taxes

 

Net of tax

 

$

 

$

(1

)

 

 

 

 

 

 

 

 

 

 

Cash flow hedging instruments gains (losses)

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

$

(6

)

$

 

Cost of sales

 

Foreign currency forward contracts

 

(101

)

 

Interest expense

 

Commodity price swap contracts

 

(1

)

(4

)

Cost of sales

 

Total before tax

 

(108

)

(4

)

 

 

Tax effect

 

39

 

1

 

Provision for income taxes

 

Net of tax

 

$

(69

)

$

(3

)

 

 

Total reclassifications for the period, net of tax

 

$

(154

)

$

(101

)

 

 

 

Sale of Subsidiary Shares

 

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

 

14



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 2004.

 

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

 

Currently, the Company is under examination by the IRS for its U.S. federal income tax returns for the years 2011, 2012, and 2013. It is anticipated that the IRS will complete its examination of the Company for 2011 by the end of the third quarter of 2013, for 2012 by the end of the first quarter of 2014, and for 2013 by the end of the first quarter of 2015. As of March 31, 2013, the IRS has not proposed any significant adjustments to any of the Company’s tax positions for which the Company is not adequately reserved.

 

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

 

3M anticipates changes to the Company’s uncertain tax positions due to the closing of various audit years mentioned above. Currently, the Company is not able to reasonably estimate the amount by which the liability for unrecognized tax benefits will increase or decrease during the next 12 months as a result of the ongoing income tax authority examinations. The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of March 31, 2013 and December 31, 2012, respectively, are $198 million and $185 million.

 

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense. The Company recognized in the consolidated statement of income on a gross basis approximately $4 million of expense and $3 million of benefit for the three months ended March 31, 2013 and March 31, 2012, respectively. At March 31, 2013 and December 31, 2012, accrued interest and penalties in the consolidated balance sheet on a gross basis were $46 million and $44 million, respectively. Included in these interest and penalty amounts are interest and penalties related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

 

The effective tax rate for the first quarter of 2013 was 29.1 percent, compared to 28.8 percent in the first quarter of 2012, an increase of 0.3 percentage points. This included an increase in the effective tax rate of 3.6 percentage points year-on-year, which largely related to adjustments to 3M’s income tax reserves in the first quarter of 2012. This increase was partially offset by factors which decreased the Company’s effective tax rate by 3.3 percentage points year-on-year, which included the combination of the reinstatement of the U.S. research and development credit in 2013, and international taxes. The international tax benefit was largely due to the estimated current year geographic mix of income before taxes.

 

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

 

15



Table of Contents

 

uncertainty regarding their realizability exits. As of March 31, 2013 and December 31, 2012, the Company had valuation allowances of $28 million and $29 million on its deferred tax assets, respectively.

 

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).

 

 

 

March 31,

 

December 31,

 

(Millions)

 

2013

 

2012

 

 

 

 

 

 

 

U.S. government agency securities

 

$

336

 

$

162

 

Foreign government agency securities

 

21

 

16

 

Corporate debt securities

 

301

 

471

 

Commercial paper

 

95

 

116

 

Certificates of deposit/time deposits

 

42

 

41

 

U.S. treasury securities

 

54

 

54

 

U.S. municipal securities

 

15

 

13

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

479

 

567

 

Credit card related

 

61

 

123

 

Equipment lease related

 

43

 

54

 

Other

 

1

 

31

 

Asset-backed securities total

 

584

 

775

 

 

 

 

 

 

 

Current marketable securities

 

$

1,448

 

$

1,648

 

 

 

 

 

 

 

U.S. government agency securities

 

$

196

 

$

125

 

Foreign government agency securities

 

71

 

51

 

Corporate debt securities

 

475

 

494

 

Certificates of deposit/time deposits

 

20

 

 

U.S. treasury securities

 

2

 

18

 

U.S. municipal securities

 

13

 

14

 

Auction rate securities

 

7

 

7

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

506

 

375

 

Credit card related

 

82

 

34

 

Equipment lease related

 

54

 

36

 

Other

 

26

 

8

 

Asset-backed securities total

 

668

 

453

 

 

 

 

 

 

 

Non-current marketable securities

 

$

1,452

 

$

1,162

 

 

 

 

 

 

 

Total marketable securities

 

$

2,900

 

$

2,810

 

 

Classification of marketable securities as current or non-current is dependent upon management’s intended holding period, the security’s maturity date and liquidity considerations based on market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current. At March 31, 2013, gross unrealized losses totaled approximately $6 million (pre-tax), while gross unrealized gains totaled approximately $2 million (pre-tax). At December 31, 2012, gross unrealized losses totaled approximately $6 million (pre-tax), while gross unrealized gains totaled approximately $3 million (pre-tax). Refer to Note 4 for a table that provides the net realized gains (losses) related to sales or impairments of debt and equity securities, which includes marketable securities. The gross amounts of the realized gains or losses were not material. Cost of securities sold use the first in, first out (FIFO) method. Since these marketable securities are classified as available-for-sale securities, changes in fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into earnings upon sale or “other-than-temporary” impairment.

 

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Table of Contents

 

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

 

The balances at March 31, 2013 for marketable securities by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

(Millions)

 

March 31, 2013

 

 

 

 

 

Due in one year or less

 

$

704

 

Due after one year through three years

 

1,526

 

Due after three years through five years

 

651

 

Due after five years

 

19

 

 

 

 

 

Total marketable securities

 

$

2,900

 

 

3M has a diversified marketable securities portfolio of $2.900 billion as of March 31, 2013. Within this portfolio, current and long-term asset-backed securities (estimated fair value of $1.252 billion) primarily include interests in automobile loans and credit cards. At March 31, 2013, one asset-backed security with a fair market value of approximately $4 million was rated Aa2 by Moody’s and AA by Fitch. All remaining 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 $7 million at both March 31, 2013 and December 31, 2012. Gross unrealized losses within accumulated other comprehensive income related to auction rate securities totaled $6 million (pre-tax) at both March 31, 2013 and December 31, 2012. As of March 31, 2013, auction rate securities associated with these balances have been in a loss position for more than 12 months. Since the second half of 2007, these auction rate securities failed to auction due to sell orders exceeding buy orders. Liquidity for these auction-rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 7, 28, 35, or 90 days. The funds associated with failed auctions will not be accessible until a successful auction occurs or a buyer is found outside of the auction process. Refer to Note 9 for a table that reconciles the beginning and ending balances of auction rate securities.

 

17



Table of Contents

 

NOTE 7.  Pension and Postretirement Benefit Plans

 

Net periodic benefit cost is recorded in cost of sales, selling, general and administrative expenses, and research, development and related expenses. Components of net periodic benefit cost and other supplemental information for the three months ended March 31, 2013 and 2012 follow:

 

Benefit Plan Information

 

 

 

Three months ended March 31,

 

 

 

Qualified and Non-qualified

 

 

 

 

 

 

 

Pension Benefits

 

Postretirement

 

 

 

United States

 

International

 

Benefits

 

(Millions)

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

Net periodic benefit cost (benefit)

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

64

 

$

63

 

$

36

 

$

31

 

$

20

 

$

19

 

Interest cost

 

150

 

147

 

61

 

61

 

22

 

22

 

Expected return on plan assets

 

(261

)

(248

)

(75

)

(73

)

(22

)

(21

)

Amortization of transition (asset) obligation

 

 

 

(1

)

(1

)

 

 

Amortization of prior service cost (benefit)

 

1

 

2

 

(4

)

(4

)

(17

)

(18

)

Amortization of net actuarial (gain) loss

 

100

 

117

 

40

 

30

 

24

 

27

 

Net periodic benefit cost (benefit)

 

$

54

 

$

81

 

$

57

 

$

44

 

$

27

 

$

29

 

Settlements, curtailments, special termination benefits and other

 

 

26

 

 

 

 

 

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

 

$

54

 

$

107

 

$

57

 

$

44

 

$

27

 

$

29

 

 

For the three months ended March 31, 2013, contributions totaling $67 million were made to the Company’s U.S. and international pension plans and $1 million to its postretirement plans. For total year 2013, the Company expects to contribute approximately $400 million to $600 million of cash to its U.S. and international pension and postretirement plans. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2013. Therefore, the amount of future discretionary pension contributions could vary significantly depending on the U.S. plans’ funded status and the anticipated tax deductibility of the contributions. Future contributions will also depend on market conditions, interest rates and other factors. 3M’s annual measurement date for pension and postretirement assets and liabilities is December 31 each year, which is also the date used for the related annual measurement assumptions.

 

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

 

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

 

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Table of Contents

 

NOTE 8.  Derivatives

 

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

 

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

 

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

 

Cash Flow Hedges:

 

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

 

Cash Flow Hedging - Foreign Currency Forward and Option Contracts: The Company enters into foreign exchange forward and option contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies and certain intercompany financing transactions. These transactions are designated as cash flow hedges. The settlement or extension of these derivatives will result in reclassifications (from accumulated other comprehensive income) to earnings in the period during which the hedged transactions affect earnings. Generally, 3M dedesignates these cash flow hedge relationships in advance of the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for dedesignated hedges remains in accumulated other comprehensive income until the forecasted transaction occurs. Changes in the value of derivative instruments after dedesignation are recorded in earnings and are included in the Derivatives Not Designated as Hedging Instruments section below. Hedge ineffectiveness and the amount excluded from effectiveness testing recognized in income on cash flow hedges were not material for the three months ended March 31, 2013 and 2012. The maximum length of time over which 3M hedges its exposure to the variability in future cash flows for a majority of the forecasted transactions is 12 months and, accordingly, at March 31, 2013, the majority of the Company’s open foreign exchange forward and option contracts had maturities of one year or less. The dollar equivalent gross notional amount of the Company’s foreign exchange forward and option contracts designated as cash flow hedges at March 31, 2013 was approximately $5.9 billion.

 

Cash Flow Hedging - Commodity Price Management: The Company manages commodity price risks through negotiated supply contracts, price protection agreements and forward physical contracts. The Company uses commodity price swaps relative to natural gas as cash flow hedges of forecasted transactions to manage price volatility. The related mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of sales in the period during which the hedged transaction affects earnings. Generally, the length of time over which 3M hedges its exposure to the variability in future cash flows for its forecasted natural gas transactions is 12 months. No significant commodity cash flow hedges were discontinued and hedge ineffectiveness was not material for the three months ended March 31, 2013 and 2012. The dollar equivalent gross notional amount of the Company’s natural gas commodity price swaps designated as cash flow hedges at March 31, 2013 was $14 million.

 

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

 

As of March 31, 2013, the Company had a balance of $1 million associated with the after-tax net unrealized gain associated with cash flow hedging instruments recorded in accumulated other comprehensive income. This net gain

 

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includes a $3 million balance (loss) related to a floating-to-fixed interest rate swap (discussed in the preceding paragraph), which is being amortized over the five-year life of the note. 3M expects to reclassify a majority of the remaining balance to earnings over the next 12 months (with the impact offset by cash flows from underlying hedged items).

 

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

 

Three months ended March 31, 2013

 

(Millions)

 

Pretax Gain (Loss)
Recognized in Other
Comprehensive
Income on Effective
Portion of Derivative

 

Pretax Gain (Loss) Recognized in
Income on Effective Portion of
Derivative as a Result of
Reclassification from
Accumulated Other
Comprehensive Income

 

Ineffective Portion of Gain
(Loss) on Derivative and
Amount Excluded from
Effectiveness Testing
Recognized in Income

 

Derivatives in Cash Flow Hedging Relationships

 

Amount

 

Location

 

Amount

 

Location

 

Amount

 

Foreign currency forward/option contracts

 

$

31

 

Cost of sales

 

$

(6

)

Cost of sales

 

$

 

Foreign currency forward contracts

 

(103

)

Interest expense

 

(101

)

Interest expense

 

 

Commodity price swap contracts

 

2

 

Cost of sales

 

(1

)

Cost of sales

 

 

Total

 

$

(70

)

 

 

$

(108

)

 

 

$

 

 

Three months ended March 31, 2012

 

(Millions)

 

Pretax Gain (Loss)
Recognized in Other
Comprehensive
Income on Effective
Portion of Derivative

 

Pretax Gain (Loss) Recognized in
Income on Effective Portion of
Derivative as a Result of
Reclassification from
Accumulated Other
Comprehensive Income

 

Ineffective Portion of Gain
(Loss) on Derivative and
Amount Excluded from
Effectiveness Testing
Recognized in Income

 

Derivatives in Cash Flow Hedging Relationships

 

Amount

 

Location

 

Amount

 

Location

 

Amount

 

Foreign currency forward/option contracts

 

$

(24

)

Cost of sales

 

$

 

Cost of sales

 

$

 

Foreign currency forward contracts

 

1

 

Interest expense

 

 

Interest expense

 

 

Commodity price swap contracts

 

(5

)

Cost of sales

 

(4

)

Cost of sales

 

 

Total

 

$

(28

)

 

 

$

(4

)

 

 

$

 

 

Fair Value Hedges:

 

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

 

Fair Value Hedging - Interest Rate Swaps: The Company manages interest expense using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The mark-to-market of these fair value hedges is recorded as gains or losses in interest expense and is offset by the gain or loss of the underlying debt instrument, which also is recorded in interest expense. These fair value hedges are highly effective and, thus, there is no impact on earnings due to hedge ineffectiveness. The dollar equivalent (based on inception date foreign currency exchange rates) gross notional amount of the Company’s interest rate swaps at March 31, 2013 was $342 million.

 

At March 31, 2013, the Company had interest rate swaps designated as fair value hedges of underlying fixed rate obligations. In July 2007, in connection with the issuance of a seven-year Eurobond for an amount of 750 million Euros, the Company completed a fixed-to-floating interest rate swap on a notional amount of 400 million Euros as a fair value hedge of a portion of the fixed interest rate Eurobond obligation. In August 2010, the Company terminated 150 million Euros of the notional amount of this swap. As a result, a gain of 18 million Euros, recorded as part of the balance of the underlying debt, is amortized over this debt’s remaining life. Prior to termination of the applicable portion of the interest rate swap, the mark-to-market of the hedge instrument was recorded as gains or losses in interest expense and was offset by the gain or loss on carrying value of the underlying debt instrument. Consequently, the subsequent amortization of the 18 million Euros recorded as part of the underlying debt balance is not part of gain on hedged items recognized in income in the tables below.

 

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Table of Contents

 

The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments designated as fair value hedges and similar information relative to the hedged items are as follows:

 

Three months ended March 31, 2013

 

 

 

Gain (Loss) on Derivative

 

Gain (Loss) on Hedged Item

 

(Millions)

 

Recognized in Income

 

Recognized in Income

 

Derivatives in Fair Value Hedging Relationships

 

Location

 

Amount

 

Location

 

Amount

 

Interest rate swap contracts

 

Interest expense

 

$

(5

)

Interest expense

 

$

5

 

Total

 

 

 

$

(5

)

 

 

$

5

 

 

Three months ended March 31, 2012

 

 

 

Gain (Loss) on Derivative

 

Gain (Loss) on Hedged Item

 

(Millions)

 

Recognized in Income

 

Recognized in Income

 

Derivatives in Fair Value Hedging Relationships

 

Location

 

Amount

 

Location

 

Amount

 

Interest rate swap contracts

 

Interest expense

 

$

(1

)

Interest expense

 

$

1

 

Total

 

 

 

$

(1

)

 

 

$

1

 

 

Net Investment Hedges:

 

As circumstances warrant, the Company uses cross currency swaps, forwards and foreign currency denominated debt to hedge portions of the Company’s net investments in foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in cumulative translation within other comprehensive income. The remainder of the change in value of such instruments is recorded in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. At March 31, 2013, there were no cross currency swaps and foreign currency forward contracts designated as net investment hedges.

 

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

 

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

 

Three months ended March 31, 2013

 

Derivative and Nonderivative Instruments in Net Investment Hedging
Relationships

 

Pretax Gain (Loss)
Recognized as Cumulative
Translation within Other
Comprehensive Income
on Effective Portion of
Instrument

 

Ineffective Portion of Gain
(Loss) on Instrument and
Amount Excluded from
Effectiveness Testing
Recognized in Income

 

(Millions)

 

Amount

 

Location

 

Amount

 

Foreign currency denominated debt

 

$

(41

)

N/A

 

$

 

Total

 

$

(41

)

 

 

$

 

 

Three months ended March 31, 2012

 

Derivative and Nonderivative Instruments in Net Investment Hedging
Relationships

 

Pretax Gain (Loss)
Recognized as Cumulative
Translation within Other
Comprehensive Income
on Effective Portion of
Instrument

 

Ineffective Portion of Gain
(Loss) on Instrument and
Amount Excluded from
Effectiveness Testing
Recognized in Income

 

(Millions)

 

Amount

 

Location

 

Amount

 

Foreign currency denominated debt

 

$

(40

)

N/A

 

$

 

Total

 

$

(40

)

 

 

$

 

 

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Table of Contents

 

Derivatives Not Designated as Hedging Instruments:

 

Derivatives not designated as hedging instruments include dedesignated foreign currency forward and option contracts that formerly were designated in cash flow hedging relationships (as referenced in the preceding Cash Flow Hedges section). In addition, 3M enters into foreign currency forward contracts and commodity price swaps to offset, in part, the impacts of certain intercompany activities (primarily associated with intercompany licensing arrangements) and fluctuations in costs associated with the use of certain precious metals, respectively. These derivative instruments are not designated in hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings. The dollar equivalent gross notional amount of these forward, option and swap contracts not designated as hedging instruments totaled $1.1 billion as of March 31, 2013. The Company does not hold or issue derivative financial instruments for trading purposes.

 

The location in the consolidated statements of income and amounts of gains and losses related to derivative instruments not designated as hedging instruments are as follows:

 

 

 

Three months ended March 31, 2013

 

Derivatives Not Designated as Hedging Instruments

 

Gain (Loss) on Derivative Recognized in Income

 

(Millions)

 

Location

 

Amount

 

Foreign currency forward/option contracts

 

Cost of sales

 

$

10

 

Foreign currency forward contracts

 

Interest expense

 

21

 

Total

 

 

 

$

31

 

 

 

 

Three months ended March 31, 2012

 

Derivatives Not Designated as Hedging Instruments

 

Gain (Loss) on Derivative Recognized in Income

 

(Millions)

 

Location

 

Amount

 

Foreign currency forward/option contracts

 

Cost of sales

 

$

(15

)

Foreign currency forward contracts

 

Interest expense

 

27

 

Commodity price swap contracts

 

Cost of sales

 

1

 

Total

 

 

 

$

13

 

 

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Table of Contents

 

Location and Fair Value Amount of Derivative Instruments

 

The following tables summarize the fair value of 3M’s derivative instruments, excluding nonderivative instruments used as hedging instruments, and their location in the consolidated balance sheet. Additional information with respect to the fair value of derivative instruments is included in Note 9.

 

March 31, 2013

 

(Millions)

 

Assets

 

Liabilities

 

Fair Value of Derivative Instruments

 

Location

 

Amount

 

Location

 

Amount

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

Other current assets

 

$

58

 

Other current liabilities

 

$

61

 

Commodity price swap contracts

 

Other current assets

 

2

 

Other current liabilities

 

 

Interest rate swap contracts

 

Other assets

 

18

 

Other liabilities

 

 

Total derivatives designated as hedging instruments

 

 

 

$

78

 

 

 

$

61

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

Other current assets

 

$

15

 

Other current liabilities

 

$

25

 

Total derivatives not designated as hedging instruments

 

 

 

$

15

 

 

 

$

25

 

 

 

 

 

 

 

 

 

 

 

Total derivative instruments

 

 

 

$

93

 

 

 

$

86

 

 

December 31, 2012

 

(Millions)

 

Assets

 

Liabilities

 

Fair Value of Derivative Instruments

 

Location

 

Amount

 

Location

 

Amount

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

Other current assets

 

$

39

 

Other current liabilities

 

$

85

 

Commodity price swap contracts

 

Other current assets

 

 

Other current liabilities

 

1

 

Interest rate swap contracts

 

Other assets

 

23

 

Other liabilities

 

 

Total derivatives designated as hedging instruments

 

 

 

$

62

 

 

 

$

86

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency forward/option contracts

 

Other current assets

 

$

10

 

Other current liabilities

 

$

20

 

Total derivatives not designated as hedging instruments

 

 

 

$

10

 

 

 

$

20

 

 

 

 

 

 

 

 

 

 

 

Total derivative instruments

 

 

 

$

72

 

 

 

$

106

 

 

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Table of Contents

 

Credit Risk and Offsetting of Assets and Liabilities of Derivative Instruments

 

The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate swaps, currency swaps, commodity price swaps, and forward and option contracts. However, the Company’s risk is limited to the fair value of the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counterparties. 3M enters into master netting arrangements with counterparties when possible to mitigate credit risk in derivative transactions. A master netting arrangement may allow each counterparty to net settle amounts owed between a 3M entity and the counterparty as a result of multiple, separate derivative transactions. As of March 31, 2013, 3M has International Swaps and Derivatives Association (ISDA) agreements with eight applicable banks and financial institutions which contain netting provisions. In addition to a master agreement with 3M supported by a primary counterparty’s parent guarantee, 3M also has associated credit support agreements in place with six of its primary derivative counterparties which, among other things, provide the circumstances under which either party is required to post eligible collateral (when the market value of transactions covered by these agreements exceeds specified thresholds or if a counterparty’s credit rating has been downgraded to a predetermined rating). The Company does not anticipate nonperformance by any of these counterparties.

 

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

 

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

March 31, 2013

 

 

 

Gross Amount of

 

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

 

 

 

(Millions)

 

Derivative Assets
Presented in the
Consolidated
Balance Sheet

 

Gross Amount of
Eligible Offsetting
Recognized
Derivative Liabilities

 

Cash Collateral
Received

 

Net Amount of
Derivative Assets

 

Derivatives subject to master netting agreements

 

$

91

 

$

26