3M 2004 Annual Report Download - page 73

47
Stock-Based Compensation
Pro Forma Net Income and Earnings Per Share
(Millions, except per share amounts) 2004 2003 2002
Net income, as reported $2,990 $2,403 $1,974
Add: Stock-based compensation expense
included in net income, net of
related tax effects 3 3 2
Deduct: Total stock-based compensation
expense determined under fair value,
net of related tax effects (152) (120) (144)
Pro forma net income 2,841 2,286 1,832
Earnings per share – basic
As reported $ 3.83 $ 3.07 $ 2.53
Pro forma 3.64 2.92 2.35
Earnings per share – diluted
As reported $ 3.75 $ 3.02 $ 2.50
Pro forma 3.56 2.88 2.32
Comprehensive income: Total comprehensive income and the components of accumulated other comprehensive
income (loss) are presented in the Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive
Income. Accumulated other comprehensive income (loss) is composed of foreign currency translation effects
(including hedges of net investments in international companies), minimum pension liability adjustments, unrealized
gains and losses on available-for-sale debt and equity securities, and unrealized gains and losses on cash flow
hedging instruments.
Derivatives and hedging activities: All derivative instruments are recorded on the balance sheet at fair value. 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 market volatility. All hedging instruments are
designated and effective as hedges, in accordance with U.S. generally accepted accounting principles. If the
underlying hedged transaction ceases to exist, all changes in fair value of the related derivatives that have not been
settled are recognized in current earnings. Instruments that do not qualify for hedge accounting are marked to market
with changes recognized in current earnings. The Company does not hold or issue derivative financial instruments for
trading purposes and is not a party to leveraged derivatives.
New Accounting Pronouncements
In January 2003, the FASB issued and subsequently revised FASB Interpretation No. 46 (FIN 46), “Consolidation
of Variable Interest Entities.” This interpretation addresses the requirements for business enterprises to
consolidate related entities in which they are determined to be the primary economic beneficiary as a result of their
variable economic interests. The interpretation provides guidance in evaluating multiple economic interests in an
entity and in determining the primary beneficiary. Effective January 1, 2004, the Company adopted FIN 46. The
Company reviewed its major commercial relationships and its overall economic interests with other companies,
consisting of related parties, contracted manufacturing vendors, companies in which it has an equity position, and
other suppliers to determine the extent of its variable economic interests in these parties. As a result of this review,
3M identified several immaterial manufacturing-supplier arrangements that had certain variable interest entity
characteristics. 3M has concluded that it is not the primary beneficiary in any of these relationships and, therefore,
has not consolidated any of these entities. 3M does not have any material exposure to these entities that would
require disclosure. The adoption of this standard did not impact 3M’s consolidated results of operations or
financial condition.
On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Medicare
Act) was signed into law. Refer to Note 11 to the Consolidated Financial Statements for discussion of the
Medicare Act.