3M 2004 Annual Report Download - page 94

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NOTE 12. Commitments and Contingencies
Capital and Operating Leases:
Rental expense under operating leases was $181 million in 2004, $162 million in 2003 and $137 million in 2002. It
is 3M’s practice to secure renewal rights for leases, thereby giving 3M the right, but not the obligation, to maintain
a presence in a leased facility. 3M’s primary capital lease, effective in April 2003, involves a building in the United
Kingdom (with a lease term of 22 years). During the second quarter of 2003, 3M recorded a capital lease asset
and obligation of approximately 33.5 million United Kingdom pounds (approximately $64 million at December 31,
2004 exchange rates). Minimum lease payments under capital and operating leases with non-cancelable terms in
excess of one year as of December 31, 2004, were as follows:
Capital Operating
(Millions) Leases Leases
2005 $ 5 $ 93
2006 5 56
2007 4 39
2008 5 19
2009 5 15
After 2009 82 118
Total 106 $ 340
Less: Amounts representing interest 31
Present value of future minimum lease payments 75
Less: Current obligations under capital leases 4
Long-term obligations under capital leases $ 71
Warranties/Guarantees:
3M’s accrued product warranty liabilities, recorded on the Consolidated Balance Sheet as part of current and long-
term liabilities, are estimated at approximately $22 million. 3M does not consider this amount to be material. The
fair value of 3M guarantees of loans with third parties and other guarantee arrangements are not material.
Related Party Activity:
Purchases from related parties (largely related to companies in which 3M has an equity interest) totaled
approximately $124 million in 2004 ($113 million in 2003 and $87 million in 2002). Receivables due from related
parties (largely related to receivables from employees for relocation and other ordinary business expense advances)
totaled approximately $34 million in 2004 ($44 million in 2003 and $25 million in 2002). 3M sales to related parties
totaled approximately $91 million in 2004 ($96 million in 2003; not material in 2002). Indebtedness to 3M from related
parties was not material in 2004, 2003 and 2002.
Legal Proceedings:
Discussion of legal matters is incorporated by reference from Part I, Item 3, Legal Proceedings, of this document, and
should be considered an integral part of the Consolidated Financial Statements and Notes.
NOTE 13. Employee Savings and Stock Ownership Plans
The Company sponsors employee savings plans under Section 401(k) of the Internal Revenue Code. These plans
are offered to substantially all regular U.S. employees. Employee contributions of up to 6% of compensation are
matched at rates ranging from 35% to 50%, with additional Company contributions depending upon Company
performance. All Company contributions initially are invested in 3M common stock, with employee contributions
invested in a number of investment funds pursuant to their elections. Vested employees may sell up to 50% of their
3M shares and diversify into other investment options.
The Company maintains an Employee Stock Ownership Plan (ESOP). This plan was established in 1989 as a cost-
effective way of funding the majority of the Company’s contributions under 401(k) employee savings plans. Total
ESOP shares are considered to be shares outstanding for earnings per share calculations.
Dividends on shares held by the ESOP are paid to the ESOP trust and, together with Company contributions, are
used by the ESOP to repay principal and interest on the outstanding notes. The tax benefit related to dividends paid
on unallocated shares was charged directly to equity and totaled approximately $4 million in 2004, $5 million in 2003
and $6 million in 2002. Over the life of the notes, shares are released for allocation to participants based on the ratio
of the current year’s debt service to the remaining debt service prior to the current payment.