3M 2006 Annual Report Download - page 71

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
The impact of stock-based compensation on net income and earnings per share provided below for the years ended
December 31, 2005 and 2004, was 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 United
States are eligible to retire beginning at age 55 and after having completed five years of service. Approximately 25%
of the number of stock-based compensation awards are made to this population. The Company changed to the non-
substantive vesting period approach for new stock compensation grants made DIWHUWKH&RPSDQ\¶VDGRSWLRQRI6)$6
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 resulted in higher
compensation expense than historically recognized in comparable prior periods. Effective with the May 2005 annual
MSOP grant, the 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 stock-based
compensation for 2005 compared with 2004 was primarily driven by this change in vesting period. Capitalized stock-
based compensation amounts were not material for 2006, 2005 and 2004. The diluted earnings per share impact
presented below for 2005 and 2004 is computed as the difference between restated historical per share amounts
(which reflect the impact of SFAS No. 123R on both net income and diluted shares) compared to the historically
reported diluted earnings per share. Amounts recognized in the consolidated financial statements with respect to
stock-based compensation plans (MSOP and GESPP) are as follows:
STOCK-BASED
COMPENSATION EXPENSE Years ended
(Millions, except per share amounts) 2005 2004
Cost of sales $ 42 $ 27 $ 44
Selling, general and administrative expenses 96 156
Research, development and related expenses 39 32 52
Operating Income (Loss) $ (200) $ (155) $ (252)
Income tax benefits $ 72 $ 67 $ 103
Net Income (Loss) $ (128) $ (88) $ (149)
$(0.17) $(0.14) $(0.19)
 (DUQLQJVSHUVKDUH±GLOXWHG $ 5.06 $ 3.98 $ 3.56
The following table adjusts the revised diluted earnings per share for 2005 and 2004 from the preceding table to
reflect the approximate impact of using the non-substantive vesting period approach for these periods.
Stock-Based Compensation
Pro Forma Earnings Per Share ± Diluted 2005 2004
 (DUQLQJVSHUVKDUH±GLOXWHG $ 3.98 $3.56
Impact of retirement-eligible employees  ±
Pro forma (adjusted to reflect non-substantive
vesting period approach) $ 3.96 $3.56
The actual tax benefits realized by the Company related to the exercise of employee stock options for 2006, 2005 and
2004, respectively, was $93 million, $95 million and $109 million. The Company does not have a specific policy to
repurchase common shares to mitigate the dilutive impact of options; however, the Company has historically made
adequate discretionary purchases, based on cash availability, market trends and other factors, to satisfy stock option
exercise activity.
Comprehensive income: Total comprehensive income and the components of accumulated other comprehensive income
(loss) are presented in the Consolidated Statement of Changes in StockholGHUV¶(TXLW\DQG&RPSUHKHQVLYH,QFRPH
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.
December 31
 (DUQLQJVSHUVKDUHLPSDFW±GLOXWHG
2006
119