UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2007

 

Commission file number 1-3285

 

3M COMPANY

 

Principal executive offices: 3M Center, St. Paul, Minnesota 55144

Telephone number: (651) 733-1110

 

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 the filing requirements for the past 90 days.  Yes  x    No  o

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

 

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

Shares of common stock outstanding at June 30, 2007: 715,811,722.

This document (excluding exhibits) contains 47 pages.
The table of contents is set forth on page 2.
The exhibit index begins on page 45.

3M COMPANY
Form 10-Q for the Quarterly Period Ended June 30, 2007
TABLE OF CONTENTS

					PAGE
PART I		FINANCIAL INFORMATION
ITEM 1.		Financial Statements
		Index to Financial Statements:
		Consolidated Statement of Income			3
		Consolidated Balance Sheet			4
		Consolidated Statement of Cash Flows			5
		Notes to Consolidated Financial Statements
		Note 1.	Basis of Presentation		6
		Note 2.	Acquisition and Divestitures		7
		Note 3.	Goodwill and Intangible Assets		8
		Note 4.	Restructuring Actions		9
		Note 5.	Supplemental Stockholders’ Equity and Comprehensive Income Information		12
		Note 6.	Income Taxes		13
		Note 7.	Derivatives and Other Financial Instruments		13
		Note 8.	Marketable Securities		14
		Note 9.	Long-Term Debt and Short-Term Borrowings		15
		Note 10.	Pension and Postretirement Benefit Plans		15
		Note 11.	Commitments and Contingencies		16
		Note 12.	Management Stock Ownership Program (MSOP) and General Employees’ Stock Purchase Plan (GESPP)		21
		Note 13.	Business Segments		23
		Note 14.	Review Report of Independent Registered Public Accounting Firm		25
		Report of Independent Registered Public Accounting Firm			26
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
		Index to Management’s Discussion and Analysis:
		Overview			27
		Results of Operations			29
		Performance by Business Segment			32
		Financial Condition and Liquidity			38
		Forward-Looking Statements			42
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk			42
ITEM 4.		Controls and Procedures			42
PART II		OTHER INFORMATION
ITEM 1.		Legal Proceedings			43
ITEM 1A.		Risk Factors			43
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			43
ITEM 3.		Defaults Upon Senior Securities			43
ITEM 4.		Submission of Matters to a Vote of Security Holders			44
ITEM 5.		Other Information			45
ITEM 6.		Exhibits			45

 

2

3M COMPANY
FORM 10-Q
For the Quarterly Period Ended June 30, 2007

PART I.  Financial Information

Item 1.  Financial Statements.

Consolidated Statement of Income

(Unaudited)

3M Company and Subsidiaries

		Three months ended						Six months ended
		June 30						June 30
(Millions, except per share amounts)		2007			2006			2007			2006
Net sales		$	6,142		$	5,688		$	12,079		$	11,283
Operating expenses
Cost of sales		3,175			2,840			6,197			5,561
Selling, general and administrative expenses		1,286			1,322			2,567			2,505
Research, development and related expenses		352			351			671			673
Gain on sale of businesses		(68		)	—			(854		)	—
Total		4,745			4,513			8,581			8,739
Operating income		1,397			1,175			3,498			2,544
Interest expense and income
Interest expense		48			25			86			47
Interest income		(29		)	(14		)	(57		)	(22		)
Total		19			11			29			25
Income before income taxes and minority interest		1,378			1,164			3,469			2,519
Provision for income taxes		445			272			1,153			715
Minority interest		16			10			31			23
Net income		$	917		$	882		$	2,285		$	1,781
Weighted average common shares outstanding—basic		718.4			755.1			723.9			754.7
Earnings per share—basic		$	1.28		$	1.17		$	3.16		$	2.36
Weighted average common shares outstanding—diluted		731.7			770.4			736.5			769.5
Earnings per share—diluted		$	1.25		$	1.15		$	3.10		$	2.31
Cash dividends paid per common share		$	0.48		$	0.46		$	0.96		$	0.92

 

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

3

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Consolidated Balance Sheet

(Unaudited)

3M Company and Subsidiaries

		June 30			Dec. 31
(Dollars in millions, except per share amounts)		2007			2006
Assets
Current assets
Cash and cash equivalents		$	1,348		$	1,447
Marketable securities—current		531			471
Accounts receivable—net		3,620			3,102
Inventories
Finished goods		1,296			1,235
Work in process		884			795
Raw materials and supplies		599			571
Total inventories		2,779			2,601
Other current assets		1,176			1,325
Total current assets		9,454			8,946
Marketable securities—non-current		567			166
Investments		285			314
Property, plant and equipment		17,466			17,017
Less: Accumulated depreciation		(11,347		)	(11,110		)
Property, plant and equipment—net		6,119			5,907
Goodwill		4,244			4,082
Intangible assets—net		743			708
Prepaid pension and postretirement benefits		457			395
Other assets		947			776
Total assets		$	22,816		$	21,294
Liabilities and Stockholders’ Equity
Current liabilities
Short-term borrowings and current portion of long-term debt		$	2,669		$	2,506
Accounts payable		1,472			1,402
Accrued payroll		555			520
Accrued income taxes		841			1,134
Other current liabilities		1,838			1,761
Total current liabilities		7,375			7,323
Long-term debt		1,766			1,047
Other liabilities		3,403			2,965
Total liabilities		$	12,544		$	11,335
Commitments and contingencies (Note 11)
Stockholders’ equity
Common stock par value, $.01 par value, 944,033,056 shares issued		9			9
Additional paid-in capital		2,662			2,484
Retained earnings		19,319			17,933
Treasury stock, at cost; 228,221,334 shares at June 30, 2007; 209,670,254 shares at Dec. 31, 2006		(9,941		)	(8,456		)
Unearned compensation		(119		)	(138		)
Accumulated other comprehensive income (loss)		(1,658		)	(1,873		)
Stockholders’ equity—net		10,272			9,959
Total liabilities and stockholders’ equity		$	22,816		$	21,294

 

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

4

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Consolidated Statement of Cash Flows

(Unaudited)

3M Company and Subsidiaries

		Six months ended
		June 30
(Dollars in millions)		2007			2006
Cash Flows from Operating Activities
Net income		$	2,285		$	1,781
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		533			479
Company pension and postretirement contributions		(114		)	(98		)
Company pension and postretirement expense		128			198
Stock-based compensation expense		129			118
Gain from sale of businesses		(854		)	—
Deferred income tax provision		(232		)	(68		)
Excess tax benefits from stock-based compensation		(47		)	(31		)
Changes in assets and liabilities
Accounts receivable		(470		)	(270		)
Inventories		(139		)	(352		)
Accounts payable		55			71
Accrued income taxes (current and long-term)		259			(243		)
Product and other insurance receivables and claims		112			8
Other—net		39			(175		)
Net cash provided by operating activities		1,684			1,418
Cash Flows from Investing Activities
Purchases of property, plant and equipment (PP&E)		(652		)	(451		)
Proceeds from sale of PP&E and other assets		27			25
Acquisitions, net of cash acquired		(194		)	(88		)
Purchases of marketable securities and investments		(4,391		)	(2,072		)
Proceeds from sale of marketable securities and investments		3,720			1,700
Proceeds from maturities of marketable securities		242			47
Proceeds from sale of businesses		897			—
Net cash used in investing activities		(351		)	(839		)
Cash Flows from Financing Activities
Change in short-term debt—net		(53		)	489
Repayment of debt (maturities greater than 90 days)		(871		)	(148		)
Proceeds from debt (maturities greater than 90 days)		1,812			—
Purchases of treasury stock		(2,199		)	(778		)
Reissuances of treasury stock		483			375
Dividends paid to stockholders		(696		)	(695		)
Distributions to minority interests		(10		)	(10		)
Excess tax benefits from stock-based compensation		47			31
Other—net		(2		)	(15		)
Net cash used in financing activities		(1,489		)	(751		)
Effect of exchange rate changes on cash and cash equivalents		57			87
Net increase (decrease) in cash and cash equivalents		(99		)	(85		)
Cash and cash equivalents at beginning of year		1,447			1,072
Cash and cash equivalents at end of period		$	1,348		$	987

 

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

5

3M Company and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1.  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 25, 2007 (which updated 3M’s 2006 Annual Report on Form 10-K) and 3M’s Quarterly Report on Form 10-Q for the period ended March 31, 2007, during the first quarter of 2007 the Company reorganized its business segments (refer to Note 13). 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 25, 2007.

Significant Accounting Policies

Earnings per share:  The difference in the weighted average shares outstanding for calculating basic and diluted earnings per share is attributable to the dilution associated with the Company’s stock-based compensation plans.  Certain Management Stock Ownership Program (MSOP) options outstanding were not included in the computation of diluted earnings per share because they would not have had a dilutive effect (26.6 million average options for the three months ended June 30, 2007; 31.0 million average options for the six months ended June 30, 2007; 30.2 million average options for the three months ended June 30, 2006; 27.4 million average options for the six months ended June 30, 2006). The conditions for conversion related to the Company’s “Convertible Notes” were not met (refer to 3M’s Current Report on Form 8-K dated May 25, 2007, Note 10 to the Consolidated Financial Statements, for more detail); accordingly, there was no impact on 3M’s diluted earnings per share. If the conditions for conversion are met, 3M may choose to pay in cash and/or common stock; however, if this occurs, the Company has the intent and ability to settle this debt security in cash. 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)		2007			2006			2007			2006
Numerator:
Net income		$	917		$	882		$	2,285		$	1,781
Denominator:
Denominator for weighted average common shares outstanding—basic		718.4			755.1			723.9			754.7
Dilution associated with the Company’s stock-based compensation plans		13.3			15.3			12.6			14.8
Denominator for weighted average common shares outstanding—diluted		731.7			770.4			736.5			769.5
Earnings per share—basic		$	1.28		$	1.17		$	3.16		$	2.36
Earnings per share—diluted		1.25			1.15			3.10			2.31

 

New Accounting Pronouncements

In February 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 155, “Hybrid Instruments.”  SFAS No. 155 amends SFAS No. 133 and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 also resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155: a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and e) amends SFAS No. 140 to eliminate the

6

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prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The Company adopted SFAS No. 155 effective January 1, 2007; however, there was no material impact.

In June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” This interpretation was effective as of January 1, 2007. Refer to Note 6 for additional information concerning this standard.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a single definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy to be used to classify the source of information used in fair value measurements, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. SFAS No. 157 is effective for all fiscal years beginning after November 15, 2007 (January 1, 2008 for 3M) and is to be applied prospectively. The Company is currently evaluating the impacts and disclosures of this standard, but would not expect SFAS No. 157 to have a material impact on 3M’s consolidated results of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits an entity to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (January 1, 2008 for 3M) and interim periods within those fiscal years. At the effective date, an entity may elect the fair value option for eligible items that exist at that date. The entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. The Company is currently evaluating the impacts and disclosures of this standard, but would not expect SFAS No. 159 to have a material impact on 3M’s consolidated results of operations or financial condition.

In June 2007, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” that would require nonrefundable advance payments made by the Company for future R&D activities to be capitalized and recognized as an expense as the goods or services are received by the Company. EITF Issue No. 07-3 is effective for 3M with respect to new arrangements entered into beginning January 1, 2008. The Company is currently evaluating the impacts and disclosures of this standard, but would not expect EITF Issue No. 07-3 to have a material impact on 3M’s consolidated results of operations or financial condition.

NOTE 2.  Acquisitions and Divestitures

Divestitures:

In January 2007, 3M completed the sale of its global branded pharmaceuticals business in Europe to Meda AB. 3M received proceeds of $817 million for this transaction and recognized, net of assets sold, a pre-tax gain of $786 million (recorded in the Health Care segment) in the first quarter of 2007. In December 2006, 3M completed the sale of its global branded pharmaceuticals business in the United States, Canada, and Latin America region and the Asia Pacific region, including Australia and South Africa. In connection with all of these transactions, 3M’s Drug Delivery Systems Division (DDSD) entered into agreements whereby it became a source of supply to the acquiring companies. Because of the extent of 3M cash flows from these agreements in relation to those of the disposed-of businesses, the operations of the branded pharmaceuticals business are not classified as discontinued operations.

In June 2007, 3M completed the sale of its Opticom Priority Control Systems and Canoga Traffic Detection businesses to TorQuest Partners Inc., a Toronto-based investment firm. 3M received proceeds of $80 million for this transaction and recognized, net of assets sold, transaction and other costs, a pre-tax gain of $68 million (recorded in the Display and Graphics segment) in the second quarter of 2007.

7

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Acquisitions:

During the six months ended June 30, 2007, 3M completed seven business combinations for a total purchase price of $194 million, net of cash acquired, plus approximately 150 thousand shares of 3M common stock, which had a market value of approximately $13 million. Purchased identifiable intangible assets of $42 million for these acquisitions will be amortized on a straight-line basis over lives ranging from two to 10 years (weighted-average life of eight years).

The seven business combinations are summarized as follows:

1) In February 2007, 3M (Industrial and Transportation Business) purchased certain assets of Accuspray Application Technologies Inc., a manufacturer of spray paint equipment with a wide array of spray guns for architectural, automotive refinishing, industrial and woodworking applications.

2) In February 2007, 3M (Industrial and Transportation Business) purchased Sealed Air Corporation’s 50 percent interest in PolyMask Corporation, a joint venture between 3M and Sealed Air that produces protective films.  The acquisition of Sealed Air’s interest results in 100 percent ownership by 3M.

3) In February 2007, 3M (Health Care Business) purchased 100 percent of the outstanding shares of Acolyte Biomedica Ltd., a Salisbury, U.K.-based provider of an automated microbial detection platform that aids in the rapid detection, diagnosis, and treatment of infectious diseases.

4) In May 2007, 3M (Safety, Security and Protection Services Business) purchased 100 percent of the outstanding shares of E Wood Holdings PLC, a North Yorkshire, UK-based manufacturer of high performance protective coatings for oil, gas, water, rail and automotive industries.

5) In May 2007, 3M (Electro and Communications Business) purchased certain assets of Innovative Paper Technologies LLC, a manufacturer of inorganic-based technical papers, boards and laminates for a wide variety of high temperature applications and Powell LLC, a supplier of non-woven polyester mats for the electrical industry.

6) In May 2007, 3M (Health Care Business) purchased certain assets of Articulos de Papel DMS Chile, a Santiago, Chile-based manufacturer of disposable surgical packs, drapes, gowns and kits.

7) In June 2007, 3M (Industrial and Transportation Business) purchased certain assets of Diamond Productions Inc., a manufacturer of superabrasive diamond and cubic boron nitride wheels and tools for dimensioning and finishing hard-to-grind materials in metalworking, woodworking and stone fabrication markets in exchange for approximately 150 thousand shares of 3M common stock, which had a market value of $13 million at the acquisition measurement date and was previously held as 3M treasury stock.

Pro forma information related to the above acquisitions is not included because the impact on the Company’s consolidated results of operations is not considered to be material. In-process research and development charges associated with these acquisitions was not material.

NOTE 3.  Goodwill and Intangible Assets

As discussed in Note 13, 3M made certain changes to its business segments effective in the first quarter of 2007, which are reflected in the goodwill balances presented below. For those changes that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact to reporting units. SFAS No. 142 requires that goodwill be tested for impairment at least annually and when reporting units are changed. During the first quarter of 2007, the Company completed its assessment of any potential goodwill impairment under this new structure and determined that no impairment existed.

Purchased goodwill related to acquisitions closed in the first six months of 2007 and purchase accounting adjustments for previously closed acquisitions totaled $134 million, $18 million of which is deductible for tax purposes. The goodwill balance by business segment as of December 31, 2006 and June 30, 2007, follow:

Goodwill

		Dec. 31,									June 30,
		2006			Acquisition			Translation			2007
(Millions)		balance			activity			and other			balance
Industrial and Transportation		$	1,302		$	40		$	10		$	1,352
Health Care		713			23			10			746
Display and Graphics		886			—			—			886
Consumer and Office		89			—			(1		)	88
Safety, Security and Protection Services		525			56			7			588
Electro and Communications		567			15			2			584
Total Company		$	4,082		$	134		$	28		$	4,244

 

8

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Acquired Intangible Assets

The carrying amount and accumulated amortization of acquired intangible assets as of June 30, 2007, and December 31, 2006, follow:

		June 30			Dec. 31
(Millions)		2007			2006
Patents		$	433		$	419
Other amortizable intangible assets (primarily tradenames and customer related intangibles)		710			641
Non-amortizable intangible assets (tradenames)		69			68
Total gross carrying amount		$	1,212		$	1,128
Accumulated amortization—patents		(284		)	(266		)
Accumulated amortization—other		(185		)	(154		)
Total accumulated amortization		(469		)	(420		)
Total intangible assets—net		$	743		$	708

 

Amortization expense for acquired intangible assets for the three-month and six-month periods ended June 30, 2007 and 2006 follows:

		Three months ended						Six months ended
		June 30						June 30
(Millions)		2007			2006			2007			2006
Amortization expense		$	21		$	14		$	42		$	29

 

The table below shows expected amortization expense for acquired intangible assets recorded as of June 30, 2007:

		Last 2
		Quarters															After
(Millions)		2007			2008			2009			2010			2011			2012
Amortization expense		$	45		$	82		$	79		$	71		$	65		$	332

 

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.

NOTE 4.  Restructuring Actions

During the fourth quarter of 2006 and the first six months of 2007, management approved and committed to undertake the following restructuring actions:

·                  Pharmaceuticals business actions—employee-related, asset impairment and other costs pertaining to the Company’s exit of its branded pharmaceuticals operations. These costs included severance and benefits for pharmaceuticals business employees who are not obtaining employment with the buyers as well as impairment charges associated with certain assets not transferred to the buyers.

·                  Overhead reduction actions—employee-related costs for severance and benefits, costs associated with actions to reduce the Company’s cost structure.

·                  Business-specific actions—employee-related costs for severance and benefits, fixed and intangible asset impairments, certain contractual obligations, and expenses from the exit of certain product lines.

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The Company adjusted the 2006 restructuring actions cost estimates in the first and second quarter of 2007.  Components of these restructuring actions include: 

Restructuring Actions

		Employee-			Contract
		Related Items			Terminations			Asset
(Millions)		And Benefits			and Other			Impairments			Total
Accrued balances as of December 31, 2006:
Pharmaceuticals business actions		$	78		$	6		$	—		$	84
Overhead reduction actions		100			—			—			100
Business-specific actions		30			8			—			38
Total accrued balance		$	208		$	14		$	—		$	222
Expenses (credits) incurred in Q1 2007:
Pharmaceuticals business actions		$	(8	)	$	(4	)	$	—		$	(12	)
Overhead reduction actions		5			—			—			5
Business-specific actions		4			4			11			19
Total Q1 2007 expense		$	1		$	—		$	11		$	12
Non-cash (charges) credits in Q1 2007:
Pharmaceuticals business actions		$	(21	)	$	4		$	—		$	(17	)
Overhead reduction actions		(5		)	—			—			(5		)
Business-specific actions		(5		)	(4		)	(11		)	(20		)
Total Q1 2007 non-cash		$	(31	)	$	—		$	(11	)	$	(42	)
Cash payments in Q1 2007:
Pharmaceuticals business actions		$	(19	)	$	(6	)	$	—		$	(25	)
Overhead reduction actions		(40		)	—			—			(40		)
Business-specific actions		(9		)	—			—			(9		)
Total Q1 2007 cash payments		$	(68	)	$	(6	)	$	—		$	(74	)
Accrued balances as of March 31, 2007:
Pharmaceuticals business actions		$	30		$	—		$	—		$	30
Overhead reduction actions		60			—			—			60
Business-specific actions		20			8			—			28
Total accrued balance		$	110		$	8		$	—		$	118
Expenses (credits) incurred in Q2 2007:
Pharmaceuticals business actions		$	(2	)	$	—		$	—		$	(2	)
Overhead reduction actions		—			—			—			—
Business-specific actions		11			—			24			35
Total Q2 2007 expense		$	9		$	—		$	24		$	33
Non-cash (charges) credits in Q2 2007:
Pharmaceuticals business actions		$	—		$	—		$	—		$	—
Overhead reduction actions		—			—			—			—
Business-specific actions		(5		)	—			(24		)	(29		)
Total Q2 2007 non-cash		$	(5	)	$	—		$	(24	)	$	(29	)
Cash payments in Q2 2007:
Pharmaceuticals business actions		$	(5	)	$	—		$	—		$	(5	)
Overhead reduction actions		(31		)	—			—			(31		)
Business-specific actions		(6		)	—			—			(6		)
Total Q2 2007 cash payments		$	(42	)	$	—		$	—		$	(42	)

 

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Accrued balances as of June 30, 2007:
Pharmaceuticals business actions		$	23		$	—		$	—		$	23
Overhead reduction actions		29			—			—			29
Business-specific actions		20			8			—			28
Total accrued balance		$	72		$	8		$	—		$	80

 

Income statement line in which the above 2007 expenses (credits) are reflected:

 

		Q1 2007			Q2 2007			YTD 2007
Cost of sales		$	10		$	31		$	41
Selling, general and administrative expenses		7			3			10
Research, development and related expenses		(5		)	(1		)	(6		)
Total		$	12		$	33		$	45

 

The amount of expenses (credits) incurred in 2007 associated with the above are reflected in the Company’s business segments as follows:

		Q1 2007			Q2 2007			YTD 2007
Industrial and Transportation		$	—		$	2		$	2
Health Care		(7		)	(2		)	(9		)
Electro and Communications		19			—			19
Display and Graphics		—			4			4
Safety, Security and Protection Services		—			29			29
Total		$	12		$	33		$	45

 

Actions with respect to the above activities are expected to be substantially completed in 2007 and additional charges and adjustments are not expected to be material.

In connection with this targeted restructuring plan, the Company eliminated a total of approximately 1,900 positions from various functions within the Company. Approximately 390 positions were pharmaceuticals business employees, approximately 960 positions related primarily to corporate staff overhead reductions, and approximately 550 positions were business-specific reduction actions. Of the 1,900 employment reductions, about 58% are in the United States, 21% in Europe, 12% in Latin America and Canada, and 9% in the Asia Pacific area. As a result of the second-quarter 2007 phase-out of operations at a New Jersey roofing granule facility and the sale of the Company’s Opticom Priority Control Systems and Canoga Traffic Detection businesses, the Company eliminated approximately 100 additional positions.

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

Non-cash employee-related charges in 2007 primarily relate to special termination pension and medical benefits granted to certain U.S. eligible employees. These pension and medical benefits were reflected as a component of the benefit obligation of the Company’s pension and medical plans as of June 30, 2007.

Contract termination and other charges primarily reflect costs to terminate a contract before the end of its term (measured at fair value at the time the Company provided notice to the counterparty) or costs that will continue to be incurred under the contract for its remaining term without economic benefit to the Company.

First-quarter 2007 business-specific asset impairment charges primarily related to the Company’s decision to close an Electro and Communications facility in Wisconsin. Asset impairment charges in the first quarter of 2007 associated with the business-specific actions included $10 million related to property, plant and equipment and $1 million related to intangible assets. Second-quarter 2007 business-specific asset impairment charges of $24 million related to property, plant and equipment are associated with the Company’s decision to phase-out operations at a New Jersey roofing granule facility (Safety, Security and Protection Services segment). Impairment charges related to intangible assets and property, plant and equipment reflect the excess of the assets’ carrying values over their fair values.

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NOTE 5.  Supplemental Stockholders’ Equity and Comprehensive Income Information

Accumulated Other Comprehensive Income (Loss)

		June 30,			Dec. 31,
(Millions)		2007			2006
Cumulative translation—net		$	361		$	210
Defined benefit pension plans adjustment—net		(2,003		)	(2,067		)
Debt and equity securities, unrealized gain—net		6			2
Cash flow hedging instruments, unrealized gain (loss)—net		(22		)	(18		)
Total accumulated other comprehensive income (loss)		($1,658		)	($1,873		)

 

No income tax provision is required for the translation of foreign currency financial statements into U.S. dollars. Reclassification adjustments are made to avoid double counting in comprehensive income items that are also recorded as part of net income. Reclassification adjustments for cash flow hedging instruments are discussed in Note 7 and reclassification adjustments for the defined benefit pension plans adjustment are discussed in Note 10.

TOTAL COMPREHENSIVE INCOME

		Three months ended
		June 30
(Millions)		2007			2006
Net Income		$	917		$	882
Other comprehensive income (loss)
Cumulative translation—net of $2 million tax provision in 2007 and net of $1 million tax provision in 2006		78			161
Defined benefit pension plans adjustment—net of $18 million tax effect in 2007		30			—
Debt and equity securities, unrealized gain (loss)—net of immaterial tax impact		2			—
Cash flow hedging instruments, unrealized gain (loss)—net of $6 million tax benefit in 2007 and net of $8 million tax benefit in 2006		(19		)	(18		)
Total comprehensive income		$	1,008		$	1,025

 

TOTAL COMPREHENSIVE INCOME

		Six months ended
		June 30
(Millions)		2007			2006
Net Income		$	2,285		$	1,781
Other comprehensive income (loss)
Cumulative translation—net of $6 million tax benefit in 2007 and net of $7 million tax provision in 2006		151			265
Defined benefit pension plans adjustment—net of $32 million tax effect in 2007		64			—
Debt and equity securities, unrealized gain (loss)—net of immaterial tax impact		4			(1		)
Cash flow hedging instruments, unrealized gain (loss)—net of $3 million tax benefit in 2007 and net of $22 million tax benefit in 2006		(4		)	(40		)
Total comprehensive income		$	2,500		$	2,005

 

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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 1999. The Internal Revenue Service (IRS) closed its examination of the Company’s U.S. income tax returns for the years 1999 through 2001 in the second quarter of 2006, and it is anticipated that its examination for the Company’s U.S. income tax returns for the years 2002 through 2004 will be completed by the end of 2007. As of June 30, 2007, the IRS has not proposed any significant adjustments to the Company’s tax positions. Currently, the Company is not able to reasonably estimate the amount by which the liability for unrecognized tax benefits will increase or decrease during the next 12 months as a result of the ongoing IRS audit. However, the Company does not anticipate any adjustments that would result in a material change to its financial position. Payments relating to any proposed assessments arising from the 2002 through 2004 audit may not be made until a final agreement is reached between the Company and the IRS on such assessments or upon a final resolution resulting from the administrative appeals process or judicial action. In addition to the U.S. federal examination, there is also limited audit activity in several U.S. state and foreign jurisdictions.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of Interpretation 48, the Company recognized an immaterial increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007, balance of retained earnings. The total amount of unrecognized tax benefits as of January 1, 2007 and June 30, 2007, respectively, are $261 million and $309 million. These amounts at January 1, 2007 and June 30, 2007, respectively, include accrued interest and penalties of $45 million and $59 million, of which $23 million and $29 million are for 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 Company recognizes interest accrued related to unrecognized tax benefits in tax expense.

NOTE 7.  Derivatives and Other Financial Instruments

The Company uses interest rate swaps, currency swaps, and forward and option contracts to manage risks generally associated with foreign exchange rate, interest rate and commodity price fluctuations. As circumstances warrant, the Company also uses cross currency swaps and forwards to hedge portions of the Company’s net investments in foreign operations. For a more detailed discussion of the company’s derivative instruments, refer to 3M’s Current Report on Form 8-K dated May 25, 2007.

The Company enters into foreign exchange forward contracts, options and swaps 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. Based on exchange rates at June 30, 2007, the Company expects to reclassify to earnings over the next 12 months a majority of the cash flow hedging instruments after-tax loss of $22 million (with the impact offset by cash flows from underlying hedged items). Amounts recorded in accumulated other comprehensive income (loss) related to cash flow hedging instruments follow:

Cash Flow Hedging Instruments

		Three months ended						Six months ended
Net of Tax		June 30						June 30
(Millions)		2007			2006			2007			2006
Beginning balance		$	(3	)	$	16		$	(18	)	$	38
Changes in fair value of derivatives		(21		)	(18		)	(11		)	(29		)
Reclassifications to earnings from equity		2			—			7			(11		)
Total activity		(19		)	(18		)	(4		)	(40		)
Ending balance		$	(22	)	$	(2	)	$	(22	)	$	(2	)

 

In June 2006, the Company entered into a $330 million fixed-to-floating interest rate swap to hedge the 30-year bond due in 2028. The Company terminated the swap in March 2007 and the resulting gain will be recognized over the remaining life of the underlying debt. Accordingly, the termination of this swap did not have a material impact on 3M’s consolidated results of operations or financial condition. Refer to Note 9 for discussion of hedges associated with the seven year Eurobond issued in July 2007.

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NOTE 8.  Marketable Securities

The Company invests in auction rate securities, asset-backed securities, and other securities. The following is a summary of amounts recorded on the Consolidated Balance Sheet for marketable securities (current and non-current) at June 30, 2007.

 

Classification of marketable securities as current or non-current is dependent upon management’s intended holding period, the security’s maturity date, or both. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current. Unrealized gains and losses were not material in the first six months of 2007 and 2006. Gross realized gains and gross realized losses on sales of marketable securities were also not material. There were no impairment losses recognized on marketable securities in the first six months of 2007 and 2006. Cost of securities sold or reclassified 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. Other comprehensive income activity for these securities in the first six months of 2007 and 2006 was not material.

The fair value of securities in an unrealized loss position at June 30, 2007 was $609 million, all of which have been a loss position for less than 12 months. Unrealized losses for these securities at June 30, 2007 were not material. 3M has both the intent and ability to hold the securities for the time necessary to recover the cost basis.

The balance at June 30, 2007 for marketable securities and short-term investments 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.

 

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