3M 2004 Annual Report Download - page 89

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Currency Effects: 3M estimates that year-on-year currency effects, including hedging impacts, increased net
income by $181 million in 2004 and $73 million in 2003, and reduced net income by $35 million in 2002. This
estimate includes the effect of translating profits from local currencies into U.S. dollars; the impact of currency
fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction
gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks. 3M
estimates that year-on-year derivative and other transaction gains and losses increased net income by $48 million
in 2004, benefiting from lower year-on-year hedging losses. 3M estimates that year-on-year derivative and other
transaction gains and losses decreased net income by $73 million in 2003 and $25 million in 2002.
Credit risk: The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate
swaps, currency swaps, and option and foreign exchange contracts. However, the Company’s risk is limited to the fair
value of the instruments. The Company actively monitors its exposure to credit risk through the use of credit approvals
and credit limits, and by selecting major international banks and financial institutions as counterparties. The Company
does not anticipate nonperformance by any of these counterparties.
Fair value of financial instruments: At December 31, 2004 and 2003, the Company’s financial instruments included
cash and cash equivalents, accounts receivable, investments, accounts payable, borrowings, and derivative
contracts. The fair values of cash and cash equivalents, accounts receivable, accounts payable, and short-term
borrowings and current portion of long-term debt (except the $350 million dealer remarketable security and
Convertible Note) approximated carrying values because of the short-term nature of these instruments. Available-for-
sale investments and derivative contracts are reported at fair values. Fair values for investments held at cost are not
readily available, but are estimated to approximate fair value. The carrying amounts and estimated fair values of other
financial instruments based on third-party quotes as of December 31 follow:
Financial Instruments’ Carrying Amounts and Estimated Fair Values
2004 2003
Carrying Fair Carrying Fair
(Millions) Amount Value Amount Value
Dealer remarketable securities $ 350 $ 374 $ 350 $ 380
Convertible note 556 577 553 587
Long-term debt (excluding Convertible Note in 2003) 727 768 1,182 1,219
NOTE 11. Pension and Postretirement Benefit Plans
3M has various company-sponsored retirement plans covering substantially all U.S. employees and many
employees outside the United States. Pension benefits associated with these plans are generally based on each
participant’s years of service, compensation, and age at retirement or termination. In addition to providing pension
benefits, the Company provides certain postretirement health care and life insurance benefits for substantially all
of its U.S. employees who reach retirement age while employed by the Company. Most international employees
and retirees are covered by government health care programs. The cost of company-provided postretirement
health care plans for international employees is not material and is combined with U.S. amounts.
On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Medicare
Act) was signed into law. The Act expands Medicare to include coverage for prescription drugs. 3M sponsors
medical programs, including prescription drug coverage for U.S. retirees. On May 19, 2004, the FASB issued FSP
No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003”, which requires current recognition of the federal subsidy that employers may
receive for providing drug coverage to retirees. FSP No. 106-2 was effective for the Company July 1, 2004. The
Company remeasured its plans’ assets and accumulated postretirement benefit obligation (APBO) as of June 30,
2004 to include the effects of the Medicare Act. The Medicare Act reduced the APBO by $240 million, which was
partially offset by an increase to the APBO of $170 million as a result of the plan remeasurement. The net impact
to the APBO was a reduction of $70 million. The remeasurement, including the impact of the Medicare Act,
reduced expense by $8 million for the second half of 2004.
The Company’s pension funding policy is to deposit with independent trustees amounts allowable by law. Trust
funds and deposits with insurance companies are maintained to provide pension benefits to plan participants and
their beneficiaries. There are no plan assets in the non-qualified plan due to its nature. For its U.S. postretirement
plan, the Company has set aside amounts at least equal to annual benefit payments with an independent trustee.