3M 2005 Annual Report Download - page 70

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44
Company changed its vesting period from one to three years, which results in compensation expense under the
May 2005 annual grant being recognized over three years. The decrease in pro forma stock-based compensation
for 2005 compared with 2004 was primarily driven by this change in vesting period. Shares used in the pro forma
diluted earnings per share computation use the calculation methodology prescribed by SFAS No. 123, and are
thus different from the shares used for the reported diluted earnings per share computation. Pro forma amounts
for stock-based compensation are as follows:
Stock-Based Compensation
Pro Forma Net Income and Earnings Per Share
(Millions, except per share amounts) 2005 2004 2003
Net income, as reported $3,199 $2,990 $2,403
Add: Stock-based compensation expense
included in net income, net of
related tax effects 633
Deduct: Total stock-based compensation
expense determined under fair value,
net of related tax effects (94) (152) (120)
Pro forma net income $3,111 $2,841 $2,286
Earnings per share – basic
As reported $ 4.18 $ 3.83 $ 3.07
Pro forma 4.07 3.64 2.92
Earnings per share – diluted
As reported $ 4.12 $ 3.75 $ 3.02
Pro forma 3.98 3.56 2.88
The pro forma impact of stock-based compensation on net income and earnings per share provided above for the
years ended December 31, 2005, 2004 and 2003, were recognized over the nominal vesting period, whereby if an
employee retired before the end of the vesting period, the Company would recognize any remaining unrecognized
compensation cost at the date of retirement. SFAS No. 123R requires recognition under a non-substantive vesting
period approach, requiring compensation expense recognition when an employee is eligible to retire. 3M
employees in the U.S. are eligible to retire beginning at age 55 and after having completed five years of service.
Approximately 25 to 30% of the number of stock-based compensation awards are made to this population. The
Company will change to the non-substantive vesting period approach for new stock compensation grants made
after the Company’s adoption of SFAS No. 123R on January 1, 2006. Therefore, primarily beginning in May 2006
with the annual MSOP grant, immediate expensing of those stock-based compensation awards granted to
employees eligible to retire will result in a higher compensation expense than historically recognized in
comparable prior periods. The following table adjusts pro forma diluted earnings per share from the above table to
reflect the approximate impact of using the non-substantive vesting period approach.
Stock-Based Compensation
Pro Forma Earnings Per Share – Diluted 2005 2004 2003
Pro forma (from above table) $3.98 $3.56 $2.88
Impact of retirement-eligible (.02) – –
Pro forma (adjusted to reflect non-
substantive vesting period approach) $3.96 $3.56 $2.88
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 that
qualify for hedge accounting are designated and effective as hedges, in accordance with U.S. generally accepted