3M 2012 Annual Report Download - page 62

56
Earnings Per Share Computations
(Amounts in millions, except per share amounts)
2012
2011
2010
Numerator:
Net income attributable to 3M
$
4,444
$ 4,283
$
4,085
Denominator:
Denominator for weighted average 3M common shares
outstanding – basic
693.9
708.5
713.7
Dilution associated with the Company’s stock-based
compensation plans
9.4
10.5
11.8
Denominator for weighted average 3M common shares
outstanding – diluted
703.3
719.0
725.5
Earnings per share attributable to 3M common shareholders – basic
$
6.40
$
6.05
$
5.72
Earnings per share attributable to 3M common shareholders – diluted
$
6.32
$
5.96
$
5.63
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 14 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. In addition to the one master agreement supported by a primary counterparty's parent guarantee, 3M has
credit support agreements in place with six of its primary derivative 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.