3M 2005 Annual Report Download - page 69

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43
Internal-use software: The Company capitalizes direct costs of materials and services used in the development of
internal-use software. Amounts capitalized are amortized on a straight-line basis over a period of three to five years
and are reported as a component of machinery and equipment within property, plant and equipment.
Environmental: Environmental expenditures relating to existing conditions caused by past operations that do not
contribute to current or future revenues are expensed. Liabilities for remediation costs are recorded on an
undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of
feasibility studies or the Company’s commitment to a plan of action. Environmental expenditures for capital projects
that contribute to current or future operations generally are capitalized and depreciated over their estimated useful
lives.
Income taxes: The provision for income taxes is determined using the asset and liability approach. Under this
approach, deferred income taxes represent the expected future tax consequences of temporary differences between
the carrying amounts and tax basis of assets and liabilities. The Company records a valuation allowance to reduce its
deferred tax assets when uncertainty regarding their reliability exists. As of December 31, 2005, no valuation
allowances were recorded.
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 average options outstanding during the years 2005, 2004 and 2003
were not included in the computation of diluted earnings per share because they would not have had a dilutive effect
(15.4 million average options for 2005, 6.6 million average options for 2004 and 6.4 million average options for 2003).
As discussed in Note 8 to the Consolidated Financial Statements, the conditions for conversion related to the
Company’s Convertible Notes have never been met; 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 for the years ended December 31 follow:
Earnings Per Share Computations
(Amounts in millions, except per share amounts) 2005 2004 2003
Numerator:
Net income $3,199 $2,990 $2,403
Denominator:
Denominator for weighted average common
shares outstanding – basic 764.9 780.5 782.8
Dilution associated with the Company’s
stock-based compensation plans 12.0 16.0 12.5
Denominator for weighted average common
shares outstanding – diluted 776.9 796.5 795.3
Earnings per share – basic $ 4.18 $ 3.83 $ 3.07
Earnings per share – diluted $ 4.12 $ 3.75 $ 3.02
Stock-based compensation: The Company utilizes the intrinsic value method as prescribed by Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and generally no compensation
cost is recognized for either the General Employees’ Stock Purchase Plan (GESPP) or the Management Stock
Ownership Program (MSOP). The GESPP is considered non-compensatory. In December 2002, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148,
“Accounting for Stock-Based Compensation –Transition and Disclosure – an amendment of SFAS No. 123.” The
Company has adopted the disclosure requirements of SFAS No. 148. Refer to Notes 13 and 14 for additional
information concerning the GESPP and MSOP and also refer to additional discussion later in Note 1 concerning
the impact of SFAS No. 123R “Share Based Payment”. Pro forma amounts for stock option awards are based on
the options’ estimated Black-Scholes fair value at the date of grant, net of tax, with expense recognition over the
vesting period of the stock-based compensation award. Effective with the May 2005 annual MSOP grant, the