Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Measurements

Fair Value Measurements

NOTE 9.  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 value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:

For 3M, assets and liabilities that are measured at fair value on a recurring basis primarily relate to available-for-sale marketable securities, available-for-sale investments (included as part of investments in the Consolidated Balance Sheet) and certain derivative instruments. Derivatives include cash flow hedges, interest rate swaps and most net investment hedges. The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and liabilities. Separately, there were no material fair value measurements with respect to nonfinancial assets or liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis for the three month periods ended March 31, 2012 and 2011.

3M uses various valuation techniques, which are primarily based upon the market and income approaches, with respect to financial assets and liabilities. Following is a description of the valuation methodologies used for the respective financial assets and liabilities measured at fair value.

Available-for-sale marketable securities — except auction rate securities:

Marketable securities, except auction rate securities, are valued utilizing multiple sources. A weighted average price is used for these securities. Market prices are obtained for these securities from a variety of industry standard data providers, security master files from large financial institutions, and other third-party sources. These multiple prices are used as inputs into a distribution-curve-based algorithm to determine the daily fair value to be used. 3M classifies U.S. treasury securities as level 1, while all other marketable securities (excluding auction rate securities) are classified as level 2. Marketable securities are discussed further in Note 6.

Available-for-sale marketable securities — auction rate securities only:

As discussed in Note 6, auction rate securities held by 3M failed to auction since the second half of 2007. As a result, investments in auction rate securities are valued utilizing third-party indicative bid levels in markets that are not active and broker-dealer valuation models that utilize inputs such as current/forward interest rates, current market conditions and credit default swap spreads. 3M classifies these securities as level 3.

Available-for-sale investments:

Investments include equity securities that are traded in an active market. Closing stock prices are readily available from active markets and are used as being representative of fair value. 3M classifies these securities as level 1.

Derivative instruments:

The Company’s derivative assets and liabilities within the scope of ASC 815, Derivatives and Hedging, are required to be recorded at fair value. The Company’s derivatives that are recorded at fair value include foreign currency forward and option contracts, commodity price swaps, interest rate swaps, and net investment hedges where the hedging instrument is recorded at fair value. Net investment hedges that use foreign currency denominated debt to hedge 3M’s net investment are not impacted by the fair value measurement standard under ASC 820, as the debt used as the hedging instrument is marked to a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may impact fair value.

3M has determined that foreign currency forwards and commodity price swaps will be considered level 1 measurements as these are traded in active markets which have identical asset or liabilities, while currency swaps, foreign currency options, interest rate swaps and cross-currency swaps will be considered level 2. For level 2 derivatives, 3M uses inputs other than quoted prices that are observable for the asset. These inputs include foreign currency exchange rates, volatilities, and interest rates. The level 2 derivative positions are primarily valued using standard calculations/models that use as their basis readily observable market parameters. Industry standard data providers are 3M’s primary source for forward and spot rate information for both interest rates and currency rates, with resulting valuations periodically validated through third-party or counterparty quotes and a net present value stream of cash flows model.

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis.

			Fair Value Measurements
(Millions)	Fair Value at		Using Inputs Considered as
Description	Mar. 31, 2012		Level 1		Level 2		Level 3
Assets:
Available-for-sale:
Marketable securities:
U.S. government agency securities	$	362	$	—	$	362	$	—
Foreign government agency securities	3		—		3		—
Corporate debt securities	635		—		635		—
Certificates of deposit/time deposits	58		—		58		—
Commercial paper	70		—		70		—
Asset-backed securities:
Automobile loan related	583		—		583		—
Credit card related	259		—		259		—
Equipment lease related	103		—		103		—
Other	6		—		6		—
U.S. treasury securities	59		59		—		—
U.S. municipal securities	19		—		19		—
Auction rate securities	5		—		—		5
Investments	3		3		—		—
Derivative instruments — assets:
Foreign currency forward/option contracts	52		47		5		—
Interest rate swap contracts	27		—		27		—
Liabilities:
Derivative instruments — liabilities:
Foreign currency forward/option contracts	47		47		—		—
Commodity price swap contracts	7		7		—		—

			Fair Value Measurements
(Millions)	Fair Value at		Using Inputs Considered as
Description	Dec. 31, 2011		Level 1		Level 2		Level 3
Assets:
Available-for-sale:
Marketable securities:
U.S. government agency securities	$	480	$	—	$	480	$	—
Foreign government agency securities	23		—		23		—
Corporate debt securities	668		—		668		—
Certificates of deposit/time deposits	49		—		49		—
Commercial paper	30		—		30		—
Asset-backed securities:
Automobile loan related	718		—		718		—
Credit card related	268		—		268		—
Equipment lease related	64		—		64		—
Other	5		—		5		—
U.S. treasury securities	34		34		—		—
U.S. municipal securities	14		—		14		—
Auction rate securities	4		—		—		4
Investments	4		4		—		—
Derivative instruments — assets:
Foreign currency forward/option contracts	107		98		9		—
Interest rate swap contracts	28		—		28		—
Liabilities:
Derivative instruments — liabilities:
Foreign currency forward/option contracts	42		42		—		—
Commodity price swap contracts	7		7		—		—

The following table provides a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3).

	Three months ended
(Millions)	March 31,
Marketable securities — auction rate securities only	2012		2011
Beginning balance	$	4	$	7
Total gains or losses:
Included in earnings	—		—
Included in other comprehensive income	1		—
Purchases, issuances, and settlements	—		—
Transfers in and/or out of Level 3	—		—
Ending balance (March 31)	5		7
Additional losses included in earnings due to reclassifications from other comprehensive income for:
Securities sold during the period ended March 31	—		—
Securities still held at March 31	—		—

In addition, the plan assets of 3M’s pension and postretirement benefit plans are measured at fair value on a recurring basis (at least annually). Refer to Note 11 in 3M’s 2011 Annual Report on Form 10-K.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:

Disclosures are required for certain assets and liabilities that are measured at fair value, but are recognized and disclosed at fair value on a nonrecurring basis in periods subsequent to initial recognition. For 3M, such measurements of fair value relate primarily to long-lived asset impairments. There were no material long-lived asset impairments for the three months ended March 31, 2012 and 2011.

Fair Value of Financial Instruments:

The Company’s financial instruments include cash and cash equivalents, marketable securities, accounts receivable, certain investments, accounts payable, borrowings, and derivative contracts. The carrying values approximated fair values for cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings and current portion of long-term debt because of the short-term nature of these instruments. Available-for-sale marketable securities and investments, in addition to certain derivative instruments, are recorded at fair values as indicated in the preceding disclosures. For its long-term debt the Company utilized third-party quotes to estimate fair values (classified as level 2). Information with respect to the carrying amounts and estimated fair values of these financial instruments follow:

	March 31, 2012				December 31, 2011
	Carrying		Fair		Carrying		Fair
(Millions)	Value		Value		Value		Value
Long-term debt, excluding current portion	$	4,510	$	4,942	$	4,484	$	5,002

The fair values reflected above consider the terms of the related debt absent the impacts of derivative/hedging activity. The carrying amount of long-term debt referenced above is impacted by certain fixed-to-floating interest rate swaps that are designated as fair value hedges and by the designation of fixed rate Eurobond securities issued by the Company as hedging instruments of the Company’s net investment in its European subsidiaries. 3M’s fixed-rate bonds were trading at a premium at March 31, 2012 and December 31, 2011 due to the low interest rates and tightening of 3M’s credit spreads.