3M 2011 Annual Report Download - page 60

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Company had the intent and ability to settle this debt security in cash. Accordingly, there was no impact on diluted
earnings per share attributable to 3M common shareholders. As discussed in Note 10, in September 2011, 3M
redeemed all remaining Convertible Notes, which were otherwise due in 2032. 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) 2011 2010 2009
Numerator:
Net income attributable to 3M ............................. $ 4,283 $ 4,085 $ 3,193
Denominator:
Denominator for weighted average 3M common shares
outstanding — basic ................................... 708.5 713.7 700.5
Dilution associated with the Company’s stock-based
compensation plans ................................... 10.5 11.8 6.2
Denominator for weighted average 3M common shares
outstanding — diluted .................................. 719.0 725.5 706.7
Earnings per share attributable to 3M common shareholders — basic $ 6.05 $ 5.72 $ 4.56
Earnings per share attributable to 3M common shareholders — diluted
$ 5.96
$ 5.63 $ 4.52
Stock-based compensation: The Company recognizes compensation expense for its stock-based compensation
programs, which include stock options, restricted stock, restricted stock units, performance shares, and the General
Employees’ Stock Purchase Plan (GESPP). Under applicable accounting standards, the fair value of share-based
compensation is determined at the grant date and the recognition of the related expense is recorded over the period
in which the share-based compensation vests. Refer to Note 16 for additional information.
Comprehensive income: Total comprehensive income and the components of accumulated other comprehensive
income (loss) are presented in the Consolidated Statement of Comprehensive Income and the Consolidated
Statement of Changes in Equity. Accumulated other comprehensive income (loss) is composed of foreign currency
translation effects (including hedges of net investments in international companies), defined benefit pension and
postretirement plan 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 within the scope of ASC 815, Derivatives and Hedging,
are recorded on the balance sheet at fair value. The Company uses interest rate swaps, currency and commodity
price swaps, and foreign currency 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 accounting
principles. If the underlying hedged transaction ceases to exist, all changes in fair value of the related derivatives that
have not been settled are recognized in current earnings. Instruments that do not qualify for hedge accounting are
marked to market with changes recognized in current earnings. Cash flows from derivative instruments are classified
in the statement of cash flows in the same category as the cash flows from the items subject to designated hedge or
undesignated (economic) hedge relationships. The Company does not hold or issue derivative financial instruments
for trading purposes and is not a party to leveraged derivatives.
Credit risk: The Company is exposed to credit loss in the event of nonperformance by counterparties in interest rate
swaps, currency swaps, commodity price swaps, and forward and option 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. 3M enters into master netting agreements with counterparties when possible to mitigate credit risk in
derivative transactions. A master netting arrangement may allow counterparties to net settle amounts owed to each
other as a result of multiple, separate derivative transactions. The Company does not anticipate nonperformance by
any of these counterparties. 3M has credit support agreements in place with two of its primary derivatives
counterparties. Under these agreements, either party is required to post eligible collateral when the market value of
transactions covered by these agreements exceeds specified thresholds, thus limiting credit exposure for both
parties. For presentation purposes on 3M’s consolidated balance sheet, the fair value of derivative assets or liabilities
are presented on a gross basis even when derivative transactions are subject to master netting arrangements and
may qualify for net presentation.
Fair value measurements: 3M follows ASC 820, Fair Value Measurements and Disclosures, with respect to assets
and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under the standard, fair