10-Q 1 a13-13757_110q.htm 10-Q

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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 June 30, 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 June 30, 2013

Common Stock, $0.01 par value per share

 

683,468,043 shares

 

This document (excluding exhibits) contains 76 pages.

The table of contents is set forth on page 2.

The exhibit index begins on page 73.

 

 

 



Table of Contents

 

3M COMPANY

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

 

9

 

 

Note 3.   Goodwill and Intangible Assets

 

10

 

 

Note 4.   Supplemental Equity and Comprehensive Income Information

 

12

 

 

Note 5.   Supplemental Cash Flow Information

 

17

 

 

Note 6.   Income Taxes

 

18

 

 

Note 7.   Marketable Securities

 

19

 

 

Note 8.   Pension and Postretirement Benefit Plans

 

21

 

 

Note 9.   Derivatives

 

23

 

 

Note 10. Fair Value Measurements

 

31

 

 

Note 11. Commitments and Contingencies

 

35

 

 

Note 12. Stock-Based Compensation

 

44

 

 

Note 13. Business Segments

 

48

 

 

Report of Independent Registered Public Accounting Firm

 

50

 

 

 

 

 

 

ITEM 2.

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

 

 

 

 

Index to Management’s Discussion and Analysis:

 

 

 

 

Overview

 

51

 

 

Results of Operations

 

54

 

 

Performance by Business Segment

 

57

 

 

Financial Condition and Liquidity

 

63

 

 

Cautionary Note Concerning Factors That May Affect Future Results

 

68

 

 

 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

 

68

 

 

 

 

 

 

ITEM 4.

Controls and Procedures

 

69

 

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

 

 

ITEM 1.

Legal Proceedings

 

70

 

 

 

 

 

 

ITEM 1A.

Risk Factors

 

70

 

 

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

72

 

 

 

 

 

 

ITEM 3.

Defaults Upon Senior Securities

 

72

 

 

 

 

 

 

ITEM 4.

Mine Safety Disclosures

 

72

 

 

 

 

 

 

ITEM 5.

Other Information

 

72

 

 

 

 

 

 

ITEM 6.

Exhibits

 

73

 

 

2



Table of Contents

 

3M COMPANY

FORM 10-Q

For the Quarterly Period Ended June 30, 2013

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

3M Company and Subsidiaries

Consolidated Statement of Income

(Unaudited)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(Millions, except per share amounts)

 

2013

 

2012

 

2013

 

2012

 

Net sales

 

$

7,752

 

$

7,534

 

$

15,386

 

$

15,020

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

4,013

 

3,870

 

7,982

 

7,759

 

Selling, general and administrative expenses

 

1,610

 

1,528

 

3,199

 

3,080

 

Research, development and related expenses

 

427

 

408

 

857

 

819

 

Total operating expenses

 

6,050

 

5,806

 

12,038

 

11,658

 

Operating income

 

1,702

 

1,728

 

3,348

 

3,362

 

 

 

 

 

 

 

 

 

 

 

Interest expense and income

 

 

 

 

 

 

 

 

 

Interest expense

 

41

 

43

 

80

 

83

 

Interest income

 

(10

)

(10

)

(20

)

(19

)

Total interest expense — net

 

31

 

33

 

60

 

64

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

1,671

 

1,695

 

3,288

 

3,298

 

Provision for income taxes

 

458

 

509

 

928

 

971

 

Net income including noncontrolling interest

 

$

1,213

 

$

1,186

 

$

2,360

 

$

2,327

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to noncontrolling interest

 

16

 

19

 

34

 

35

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,197

 

$

1,167

 

$

2,326

 

$

2,292

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — basic

 

688.2

 

694.3

 

689.6

 

695.5

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.74

 

$

1.68

 

$

3.37

 

$

3.30

 

 

 

 

 

 

 

 

 

 

 

Weighted average 3M common shares outstanding — diluted

 

699.1

 

702.6

 

700.6

 

704.4

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

1.71

 

$

1.66

 

$

3.32

 

$

3.25

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per 3M common share

 

$

0.635

 

$

0.59

 

$

1.27

 

$

1.18

 

 

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

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(Millions)

 

2013

 

2012

 

2013

 

2012

 

Net income including noncontrolling interest

 

$

1,213

 

$

1,186

 

$

2,360

 

$

2,327

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(279

)

(335

)

(677

)

(201

)

Defined benefit pension and postretirement plans adjustment

 

91

 

98

 

176

 

195

 

Debt and equity securities, unrealized gain (loss)

 

(4

)

(2

)

(4

)

1

 

Cash flow hedging instruments, unrealized gain (loss)

 

8

 

23

 

32

 

8

 

Total other comprehensive income (loss), net of tax

 

(184

)

(216

)

(473

)

3

 

Comprehensive income (loss) including noncontrolling interest

 

1,029

 

970

 

1,887

 

2,330

 

Comprehensive (income) loss attributable to noncontrolling interest

 

3

 

(30

)

23

 

(25

)

Comprehensive income (loss) attributable to 3M

 

$

1,032

 

$

940

 

$

1,910

 

$

2,305

 

 

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)

 

 

 

June 30,

 

December 31,

 

(Dollars in millions, except per share amount)

 

2013

 

2012

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

2,942

 

$

2,883

 

Marketable securities — current

 

1,310

 

1,648

 

Accounts receivable — net

 

4,542

 

4,061

 

Inventories

 

 

 

 

 

Finished goods

 

1,792

 

1,754

 

Work in process

 

1,222

 

1,186

 

Raw materials and supplies

 

905

 

897

 

Total inventories

 

3,919

 

3,837

 

Other current assets

 

1,270

 

1,201

 

Total current assets

 

13,983

 

13,630

 

 

 

 

 

 

 

Marketable securities — non-current

 

1,542

 

1,162

 

Investments

 

154

 

163

 

Property, plant and equipment

 

22,417

 

22,525

 

Less: Accumulated depreciation

 

(14,088

)

(14,147

)

Property, plant and equipment — net

 

8,329

 

8,378

 

Goodwill

 

7,231

 

7,385

 

Intangible assets — net

 

1,786

 

1,925

 

Prepaid pension benefits

 

22

 

16

 

Other assets

 

1,083

 

1,217

 

Total assets

 

$

34,130

 

$

33,876

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Current liabilities

 

 

 

 

 

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

 

$

1,062

 

$

1,085

 

Accounts payable

 

1,920

 

1,762

 

Accrued payroll

 

589

 

701

 

Accrued income taxes

 

460

 

371

 

Other current liabilities

 

2,304

 

2,281

 

Total current liabilities

 

6,335

 

6,200

 

 

 

 

 

 

 

Long-term debt

 

4,884

 

4,916

 

Pension and postretirement benefits

 

2,909

 

3,086

 

Other liabilities

 

1,683

 

1,634

 

Total liabilities

 

$

15,811

 

$

15,836

 

 

 

 

 

 

 

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

 

4,243

 

4,044

 

Retained earnings

 

31,716

 

30,679

 

Treasury stock, at cost: 260,565,013 shares at June 30, 2013; 256,941,406 shares at December 31, 2012

 

(12,926

)

(12,407

)

Accumulated other comprehensive income (loss)

 

(5,166

)

(4,750

)

Total 3M Company shareholders’ equity

 

17,876

 

17,575

 

Noncontrolling interest

 

443

 

465

 

Total equity

 

$

18,319

 

$

18,040

 

 

 

 

 

 

 

Total liabilities and equity

 

$

34,130

 

$

33,876

 

 

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)

 

 

 

Six months ended

 

 

 

June 30,

 

(Millions)

 

2013

 

2012

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income including noncontrolling interest

 

$

2,360

 

$

2,327

 

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

 

 

 

 

 

Depreciation and amortization

 

671

 

634

 

Company pension and postretirement contributions

 

(171

)

(672

)

Company pension and postretirement expense

 

275

 

335

 

Stock-based compensation expense

 

150

 

145

 

Deferred income taxes

 

37

 

86

 

Excess tax benefits from stock-based compensation

 

(51

)

(41

)

Changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

(628

)

(553

)

Inventories

 

(167

)

(268

)

Accounts payable

 

199

 

150

 

Accrued income taxes (current and long-term)

 

166

 

226

 

Product and other insurance receivables and claims

 

19

 

(63

)

Other — net

 

(187

)

(89

)

Net cash provided by operating activities

 

2,673

 

2,217

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

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

 

(718

)

(619

)

Proceeds from sale of PP&E and other assets

 

18

 

8

 

Acquisitions, net of cash acquired

 

 

(144

)

Purchases of marketable securities and investments

 

(3,000

)

(2,311

)

Proceeds from sale of marketable securities and investments

 

1,464

 

1,027

 

Proceeds from maturities of marketable securities

 

1,484

 

1,181

 

Proceeds from sale of businesses

 

8

 

 

Other investing

 

4

 

4

 

Net cash used in investing activities

 

(740

)

(854

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Change in short-term debt — net

 

(12

)

(34

)

Repayment of debt (maturities greater than 90 days)

 

(12

)

(18

)

Proceeds from debt (maturities greater than 90 days)

 

11

 

1,244

 

Purchases of treasury stock

 

(1,995

)

(1,163

)

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

 

1,103

 

479

 

Dividends paid to shareholders

 

(876

)

(820

)

Excess tax benefits from stock-based compensation

 

51

 

41

 

Other — net

 

3

 

 

Net cash used in financing activities

 

(1,727

)

(271

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(147

)

(3

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

59

 

1,089

 

Cash and cash equivalents at beginning of year

 

2,883

 

2,219

 

Cash and cash equivalents at end of period

 

$

2,942

 

$

3,308

 

 

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.

 

As described in 3M’s Current Report on Form 8-K dated May 16, 2013 (which updated 3M’s 2012 Annual Report on Form 10-K) and 3M’s Quarterly Report on Form 10-Q for the period ended March 31, 2013, during the first quarter of 2013 the Company completed a realignment of its business segments to better serve global markets and customers (refer to Note 13 herein). 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 Latin America/Canada region. Segment and geographic information presented herein reflects the impact of these changes for all periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its Current Report on Form 8-K dated May 16, 2013.

 

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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Table of Contents

 

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 (3.7 million average options for the three months ended June 30, 2013; 3.9 million average options for the six months ended June 30, 2013; 21.3 million average options for the three months ended June 30, 2012; and 20.3 million average options for the six months ended June 30, 2012). The computations for basic and diluted earnings per share follow:

 

Earnings Per Share Computations

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(Amounts in millions, except per share amounts)

 

2013 

 

2012 

 

2013 

 

2012

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to 3M

 

$

1,197

 

$

1,167

 

$

2,326

 

$

2,292

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — basic 

 

688.2

 

694.3

 

689.6

 

695.5

 

 

 

 

 

 

 

 

 

 

 

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

 

10.9

 

8.3

 

11.0

 

8.9

 

 

 

 

 

 

 

 

 

 

 

Denominator for weighted average 3M common shares outstanding — diluted 

 

699.1

 

702.6

 

700.6

 

704.4

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to 3M common shareholders — basic

 

$

1.74

 

$

1.68

 

$

3.37

 

$

3.30

 

Earnings per share attributable to 3M common shareholders — diluted

 

$

1.71

 

$

1.66

 

$

3.32

 

$

3.25

 

 

New Accounting Pronouncements

 

In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 9. 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

 

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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 debt and equity 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 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 and Divestitures

 

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 six months ended June 30, 2013. Adjustments in the first half 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 allocation of purchase price related to the acquisition of Ceradyne, Inc. in November 2012 is 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 Current Report on Form 8-K dated May 16, 2013 (which updated 3M’s 2012 Annual Report on Form 10-K) for more information on 3M’s 2012 acquisitions.

 

Divestitures:

 

In June 2013, 3M (Consumer Business) completed the sale of its Scientific Anglers and Ross Reels businesses to The Orvis Company, Inc. based in Manchester, Vermont.

 

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NOTE 3.  Goodwill and Intangible Assets

 

There were no acquisitions that closed during the first six 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 increased goodwill by $2 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 June 30, 2013, follow:

 

Goodwill

 

 

 

December 31, 2012

 

Acquisition

 

Translation

 

June 30, 2013

 

(Millions)

 

Balance

 

activity

 

and other

 

Balance

 

Industrial

 

$

2,174

 

$

2

 

$

(62

)

$

2,114

 

Safety and Graphics

 

1,751

 

 

(38

)

1,713

 

Electronics and Energy

 

1,622

 

 

(21

)

1,601

 

Health Care

 

1,598

 

 

(24

)

1,574

 

Consumer

 

240

 

 

(11

)

229

 

Total Company

 

$

7,385

 

$

2

 

$

(156

)

$

7,231

 

 

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

 

As discussed in Note 13, 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 six months ended June 30, 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 June 30, 2013, and December 31, 2012, follow:

 

 

 

June 30,

 

December 31,

 

(Millions)

 

2013

 

2012

 

Patents

 

$

593

 

$

596

 

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

 

2,424

 

2,456

 

Total gross carrying amount

 

$

3,017

 

$

3,052

 

 

 

 

 

 

 

Accumulated amortization — patents

 

(435

)

(421

)

Accumulated amortization — other

 

(922

)

(833

)

Total accumulated amortization

 

$

(1,357

)

$

(1,254

)

 

 

 

 

 

 

Total finite-lived intangible assets — net

 

$

1,660

 

$

1,798

 

 

 

 

 

 

 

Non-amortizable intangible assets (primarily tradenames)

 

126

 

127

 

Total intangible assets — net

 

$

1,786

 

$

1,925

 

 

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Amortization expense for acquired intangible assets for the three-month and six-month periods ended June 30, 2013 and 2012 follows:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(Millions)

 

2013

 

2012

 

2013

 

2012

 

Amortization expense

 

$

60

 

$

58

 

$

120

 

$

116

 

 

The table below shows expected amortization expense for acquired amortizable intangible assets recorded as of June 30, 2013:

 

(Millions)

 

Remainder
of
2013

 

2014

 

2015

 

2016

 

2017

 

2018

 

After
2018

 

Amortization expense

 

$

119

 

$

212

 

$

198

 

$

184

 

$

169

 

$

152

 

$

626

 

 

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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NOTE 4.  Supplemental Equity and Comprehensive Income Information

Consolidated Statement of Changes in Equity

 

Three months ended June 30, 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 March 31, 2013

 

$

18,528

 

$

4,188

 

$

31,073

 

$

(12,178

)

$

(5,001

)

$

446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,213

 

 

 

1,197

 

 

 

 

 

16

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(279

)

 

 

 

 

 

 

(260

)

(19

)

Defined benefit pension and post-retirement plans adjustment

 

91

 

 

 

 

 

 

 

91

 

 

Debt and equity securities - unrealized gain (loss)

 

(4

)

 

 

 

 

 

 

(4

)

 

Cash flow hedging instruments - unrealized gain/(loss)

 

8

 

 

 

 

 

 

 

8

 

 

Total other comprehensive income (loss), net of tax

 

(184

)

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(436

)

 

 

(436

)

 

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

64

 

64

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(1,232

)

 

 

 

 

(1,232

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

366

 

 

 

(118

)

484

 

 

 

 

 

Balance at June 30, 2013

 

$

18,319

 

$

4,252

 

$

31,716

 

$

(12,926

)

$

(5,166

)

$

443

 

 

Six months ended June 30, 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

 

2,360

 

 

 

2,326

 

 

 

 

 

34

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(677

)

 

 

 

 

 

 

(620

)

(57

)

Defined benefit pension and post-retirement plans adjustment

 

176

 

 

 

 

 

 

 

176

 

 

Debt and equity securities - unrealized gain (loss)

 

(4

)

 

 

 

 

 

 

(4

)

 

Cash flow hedging instruments - unrealized gain/(loss)

 

32

 

 

 

 

 

 

 

32

 

 

Total other comprehensive income (loss), net of tax

 

(473

)

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(876

)

 

 

(876

)

 

 

 

 

 

 

Sale of subsidiary shares

 

8

 

7

 

 

 

 

 

 

 

1

 

Stock-based compensation, net of tax impacts

 

192

 

192

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(2,039

)

 

 

 

 

(2,039

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

1,107

 

 

 

(413

)

1,520

 

 

 

 

 

Balance at June 30, 2013

 

$

18,319

 

$

4,252

 

$

31,716

 

$

(12,926

)

$

(5,166

)

$

443

 

 

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Table of Contents

 

Three months ended June 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 March 31, 2012

 

$

16,619

 

$

3,903

 

$

28,858

 

$

(11,794

)

$

(4,785

)

$

437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,186

 

 

 

1,167

 

 

 

 

 

19

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(335

)

 

 

 

 

 

 

(346

)

11

 

Defined benefit pension and post-retirement plans adjustment

 

98

 

 

 

 

 

 

 

98

 

 

Debt and equity securities - unrealized gain (loss)

 

(2

)

 

 

 

 

 

 

(2

)

 

Cash flow hedging instruments - unrealized gain/(loss)

 

23

 

 

 

 

 

 

 

23

 

 

Total other comprehensive income (loss), net of tax

 

(216

)

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(410

)

 

 

(410

)

 

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

60

 

60

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(633

)

 

 

 

 

(633

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

267

 

 

 

(150

)

417

 

 

 

 

 

Balance at June 30, 2012

 

$

16,873

 

$

3,963

 

$

29,465

 

$

(12,010

)

$

(5,012

)

$

467

 

 

Six months ended June 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

 

2,327

 

 

 

2,292

 

 

 

 

 

35

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(201

)

 

 

 

 

 

 

(191

)

(10

)

Defined benefit pension and post-retirement plans adjustment

 

195

 

 

 

 

 

 

 

195

 

 

Debt and equity securities - unrealized gain (loss)

 

1

 

 

 

 

 

 

 

1

 

 

Cash flow hedging instruments - unrealized gain/(loss)

 

8

 

 

 

 

 

 

 

8

 

 

Total other comprehensive income (loss), net of tax

 

3

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(820

)

 

 

(820

)

 

 

 

 

 

 

Stock-based compensation, net of tax impacts

 

187

 

187

 

 

 

 

 

 

 

 

 

Reacquired stock

 

(1,167

)

 

 

 

 

(1,167

)

 

 

 

 

Issuances pursuant to stock option and benefit plans

 

481

 

 

 

(355

)

836

 

 

 

 

 

Balance at June 30, 2012

 

$

16,873

 

$

3,963

 

$

29,465

 

$

(12,010

)

$

(5,012

)

$

467

 

 

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Table of Contents

 

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

 

Three months ended June 30, 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 March 31, 2013, net of tax

 

$

(130

)

$

(4,870

)

$

(2

)

$

1

 

$

(5,001

)

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

(260

)

 

(6

)

(42

)

(308

)

Amounts reclassified out

 

 

144

 

 

54

 

198

 

Total other comprehensive income (loss), before tax

 

(260

)

144

 

(6

)

12

 

(110

)

Tax effect

 

 

(53

)

2

 

(4

)

(55

)

Total other comprehensive income (loss), net of tax

 

(260

)

91

 

(4

)

8

 

(165

)

Balance at June 30, 2013, net of tax

 

$

(390

)

$

(4,779

)

$

(6

)

$

9

 

$

(5,166

)

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 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

 

(584

)

 

(6

)

(112

)

(702

)

Amounts reclassified out

 

 

287

 

 

162

 

449

 

Total other comprehensive income (loss), before tax

 

(584

)

287

 

(6

)

50

 

(253

)

Tax effect

 

(36

)

(111

)

2

 

(18

)

(163

)

Total other comprehensive income (loss), net of tax

 

(620

)

176

 

(4

)

32

 

(416

)

Balance at June 30, 2013, net of tax

 

$

(390

)

$

(4,779

)

$

(6

)

$

9

 

$

(5,166

)

 

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Table of Contents

 

Three months ended June 30, 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 March 31, 2012, net of tax

 

$

269

 

$

(5,058

)

$

(3

)

$

7

 

$

(4,785

)

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

Amounts before reclassifications

 

(324

)

 

(3

)

29

 

(298

)

Amounts reclassified out

 

 

154

 

 

8

 

162

 

Total other comprehensive income (loss), before tax

 

(324

)

154

 

(3

)

37

 

(136

)

Tax effect

 

(22

)

(56

)

1

 

(14

)

(91

)

Total other comprehensive income (loss), net of tax

 

(346

)

98

 

(2

)

23

 

(227

)

Balance at June 30, 2012, net of tax

 

$

(77

)

$

(4,960

)

$

(5

)

$

30

 

$

(5,012

)

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 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

 

(169

)

 

1

 

1

 

(167

)

Amounts reclassified out

 

 

307

 

1

 

12

 

320

 

Total other comprehensive income (loss), before tax

 

(169

)

307

 

2

 

13

 

153

 

Tax effect

 

(22

)

(112

)

(1

)

(5

)

(140

)

Total other comprehensive income (loss), net of tax

 

(191

)

195

 

1

 

8

 

13

 

Balance at June 30, 2012, net of tax

 

$

(77

)

$

(4,960

)

$

(5

)

$

30

 

$

(5,012

)

 

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

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

Comprehensive Income Components

 

2013

 

2012

 

2013

 

2012

 

Location on Income Statement

 

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

 

 

 

 

 

 

 

 

 

 

 

Transition asset

 

$

 

$

 

$

1

 

$

1

 

See Note 8

 

Prior service benefit

 

20

 

22

 

40

 

42

 

See Note 8

 

Net actuarial loss

 

(164

)

(176

)

(328

)

(350

)

See Note 8

 

Total before tax

 

(144

)

(154

)

(287

)

(307

)

 

 

Tax effect

 

53

 

56

 

111

 

112

 

Provision for income taxes

 

Net of tax

 

$

(91

)

$

(98

)

$

(176

)

$

(195

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(3

)

$

9

 

$

(9

)

$

9

 

Cost of sales

 

Foreign currency forward contracts

 

(52

)

(13

)

(153

)

(13

)

Interest expense

 

Commodity price swap contracts

 

1

 

(4

)

 

(8

)

Cost of sales

 

Total before tax

 

(54

)

(8

)

(162

)

(12

)

 

 

Tax effect

 

19

 

3

 

58

 

4

 

Provision for income taxes

 

Net of tax

 

$

(35

)

$

(5

)

$

(104

)

$

(8

)

 

 

Total reclassifications for the period, net of tax

 

$

(126

)

$

(103

)

$

(280

)

$

(204

)

 

 

 

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 sales resulted in an increase in 3M Company shareholder’s equity of $7 million and an increase in noncontrolling interest of $1 million.

 

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NOTE 5.  Supplemental Cash Flow Information

 

Transactions related to investing and financing activities with significant non-cash components are as follows:

 

·                  During the second quarter of 2013, the Company’s Sumitomo 3M Limited subsidiary moved its administrative headquarters to a new leased location and sold the former site under an installment sale arrangement. As a result, at the time of the closing of the sale transaction, the Company received certain cash proceeds (included in proceeds from sale of property, plant and equipment in the consolidated statement of cash flows) and recorded a note receivable (due in quarterly installments through the first quarter of 2016) of $78 million and deferred profit of $49 million (both based on the foreign currency exchange rate at the time of closing). Remaining quarterly installments are due through the first quarter of 2016 and will be included in other investing activities in the consolidated statement of cash flows. Deferred profit is reduced and recognized into income in connection with such quarterly installments.

 

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NOTE 6.  Income Taxes

 

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 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 fourth 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 June 30, 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 June 30, 2013 and December 31, 2012, respectively, are $190 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 $1 million of expense and $1 million of benefit for the three months ended June 30, 2013 and June 30, 2012, respectively, and approximately $5 million in expense and $5 million of benefit for the six months ended June 30, 2013 and June 30, 2012, respectively. At June 30, 2013 and December 31, 2012, accrued interest and penalties in the consolidated balance sheet on a gross basis were $47 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 second quarter of 2013 was 27.4 percent, compared to 30.1 percent in the second quarter of 2012, a decrease of 2.7 percentage points. This decrease was due to several factors, which included benefits realized for certain future deductions, international taxes (with this international tax benefit largely due to the estimated current year geographic mix of income before taxes), the reinstatement of the U.S. research and development credit in 2013, and adjustments to 3M’s income tax reserves.

 

The effective tax rate for the first six months of 2013 was 28.2 percent, compared to 29.5 percent in the first six months of 2012, a decrease of 1.3 percentage points. Factors which decreased the Company’s effective tax rate by 3.0 percentage points for the first six months of 2013 compared to the same period for 2012 included international taxes (with this international tax benefit largely due to the estimated current year geographic mix of income before taxes), benefits

 

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Table of Contents

 

realized for certain future deductions, and the reinstatement of the U.S. research and development credit in 2013. This decrease was partially offset by a 1.7 percentage point increase as a result of adjustments to 3M’s reserves for the first six months of 2013 when compared to the same period for 2012.

 

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 June 30, 2013 and December 31, 2012, the Company had valuation allowances of $27 million and $29 million on its deferred tax assets, respectively.

 

NOTE 7.  Marketable Securities

 

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

 

 

 

June 30,

 

December 31,

 

(Millions)

 

2013

 

2012

 

 

 

 

 

 

 

U.S. government agency securities

 

$

158

 

$

162

 

Foreign government agency securities

 

11

 

16

 

Corporate debt securities

 

283

 

471

 

Commercial paper

 

165

 

116

 

Certificates of deposit/time deposits

 

57

 

41

 

U.S. treasury securities

 

54

 

54

 

U.S. municipal securities

 

12

 

13

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

479

 

567

 

Credit card related

 

38

 

123

 

Equipment lease related

 

42

 

54

 

Other

 

11

 

31

 

Asset-backed securities total

 

570

 

775

 

 

 

 

 

 

 

Current marketable securities

 

$

1,310

 

$

1,648

 

 

 

 

 

 

 

U.S. government agency securities

 

$

207

 

$

125

 

Foreign government agency securities

 

62

 

51

 

Corporate debt securities

 

523

 

494

 

Certificates of deposit/time deposits

 

20

 

 

U.S. treasury securities

 

49

 

18

 

U.S. municipal securities

 

 

14

 

Auction rate securities

 

10

 

7

 

Asset-backed securities:

 

 

 

 

 

Automobile loan related

 

417

 

375