3M 2004 Annual Report Download - page 87

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In September 2003, the Company filed a shelf registration statement with the Securities and Exchange Commission
relating to the potential offering of debt securities of up to $1.5 billion. This shelf registration became effective in
October 2003. In December 2003, the Company established under the shelf a medium-term notes program through
which up to $1.5 billion of medium-term notes may be offered. 3M plans to use the net proceeds from issuances of
debt securities under this registration for general corporate purposes, including the repayment of debt; investments in
or extensions of credit to 3M subsidiaries; or the financing of possible acquisitions or business expansion. At
December 31, 2004, $62 million of medium-term notes had been issued under the medium-term notes program. The
medium-term notes program and shelf registration have remaining capacity of approximately $1.438 billion.
On November 15, 2002, 3M sold $639 million in aggregate face amount of 30-year zero coupon senior notes (the
“Convertible Notes”) that are convertible into shares of 3M common stock. The gross proceeds from the offering,
to be used for general corporate purposes, were $550 million ($540 million net of issuance costs). The book value
of the Convertible Notes at December 31, 2004, was $556 million. On February 14, 2003, 3M registered these
Convertible Notes in a registration statement filed with the Securities and Exchange Commission. The terms of the
Convertible Notes include a yield to maturity of .50% and an initial conversion premium of 40% over the $65.00
(split-adjusted) closing price of 3M common stock on November 14, 2002. If certain conditions for conversion
(relating to the closing common stock prices of 3M exceeding the conversion trigger price for specified periods)
are met, holders may convert each of the 30-year zero-coupon senior notes into 9.4602 shares of 3M common
stock in any calendar quarter commencing after March 31, 2003. The conversion trigger price for the fourth
quarter of 2004 was $119.40 per share. If the conditions for conversion are met, and 3M elects not to settle in
cash, the 30-year zero-coupon senior notes will be convertible in the aggregate into approximately 6.0 million
shares of 3M common stock. 3M may redeem the 30-year zero-coupon senior notes at any time in whole or in
part, beginning November 21, 2007, at the greater of the accreted conversion price or the current market price.
Holders of the 30-year zero-coupon senior notes have the option to require 3M to purchase their notes at accreted
value on November 21 in the years 2005, 2007, 2012, 2017, 2022 and 2027. 3M may choose to pay the
redemption purchase price in cash and/or common stock; however, if redemption occurs, the Company has the
intent and ability to settle this debt security in cash. Debt issuance costs are amortized on a straight-line basis
over a three-year period beginning in November 2002. The conditions for conversion have never been met;
accordingly, there was no impact on 3M’s diluted earnings per share. For a discussion of accounting
pronouncements that will affect accounting treatment for the Convertible Note, refer to Note 1 to the Consolidated
Financial Statements for discussion of EITF Issue No. 04-08, “The Effect of Contingently Convertible Debt on
Diluted Earnings per Share” and proposed SFAS No. 128R, “Earnings per Share”.
In December 2000, the Company issued $350 million of dealer remarketable debt securities, which are classified
as current portion of long-term debt. The remarketable securities can be remarketed annually, at the option of the
dealer, for a year each time, with a final maturity date of December 2010. In December 2004, the Company’s
dealer remarketable securities were remarketed for one year. They were reissued with a fixed coupon rate
of 5.67%.
NOTE 10. 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 market volatility. The information that follows
explains the various types of derivatives and financial instruments, and includes a table that recaps net investment
hedging and cash flow hedging amounts.
Foreign Currency Forward and Option Contracts: 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.
At December 31, 2004, the Company had various open foreign exchange forward and option contracts, the majority
of which had maturities of one year or less. The amounts at risk are not material because the Company has the ability
to generate offsetting foreign currency cash flows. The settlement or extension of these derivatives will result in
reclassifications to earnings in the period during which the hedged transactions affect earnings (from other
comprehensive income). The maximum length of time over which 3M is hedging its exposure to the variability in future
cash flows for a majority of the forecasted transactions, excluding those forecasted transactions related to the
payment of variable interest on existing financial instruments, is 12 months. During the second quarter of 2002, the
Company converted a foreign-currency based pricing contract into a dollar-based pricing contract. This resulted in
the discontinuance of certain foreign currency cash flow hedges. The Company recognized a $10 million pre-tax
loss (recorded in cost of sales) related to the discontinuance of these contracts in 2002. Hedge ineffectiveness was
not material for the years 2004, 2003 and 2002.