the increase in debt at year-end 2008 was the result of a strategy to build and maintain a cash buffer in the U.S. given the difficult market environment at that point in time. 3M has an AA- credit rating with a stable outlook from Standard & Poor’s and an Aa2 credit rating with a stable outlook from Moody’s Investors Service. In addition to cash on hand, the Company has sufficient access to capital markets to meet currently anticipated growth and acquisition investment funding needs.

 

In 2009, the Company experienced cost decreases in most raw materials and transportation fuel costs. This was driven by lower basic feedstock costs, particularly metals and oil derived materials. To date the Company is receiving sufficient quantities of all raw materials to meet its reasonably foreseeable production requirements. It is impossible to predict future shortages of raw materials or the impact any such shortages would have. 3M has avoided disruption to its manufacturing operations through careful management of existing raw material inventories and development and qualification of additional supply sources. 3M manages commodity price risks through negotiated supply contracts, price protection agreements and forward physical contracts.

 

In 2009, 3M changed its annual stock option and restricted stock unit grant date to more closely align the award with the timing of the Company’s performance review process. In 2009 and forward, under the annual grant, 3M will grant shares in February instead of May as in previous years. Accounting rules requires recognition of expense 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 at age 55 and after having completed five years of service. Approximately 25 percent of the stock-based compensation award expense dollars are for this retiree-eligible population. Therefore, in 2007 and 2008, the second quarter of each year (because of the May grant date) reflected higher stock-based compensation expense than the other quarters. In 2009, the retiree-eligible impact shifted to the first quarter of 2009. In addition, both the first and second quarter of 2009 reflected higher stock-based compensation expense related to the earlier February grant date. These and other factors resulted in higher stock-based compensation cost in 2009 when compared to 2008. Refer to Note 16 for additional discussion of the Company’s stock-based compensation programs.

 

3M’s pension plans were 90 percent funded at year-end 2009. The U.S. qualified plan, which is approximately 68 percent of the worldwide pension obligation, was 96 percent funded, and the international plans were 83 percent funded. Asset returns in 2009 for the U.S. qualified plan were 12.6 percent while the year-end 2009 discount rate was 5.77%, down 0.37 percentage points from the 2008 discount rate of 6.14%. 3M expects to contribute $500 million to $700 million of cash to its global pension plans in 2010. The Company does not have a required minimum pension contribution obligation for its U.S. plans in 2010. 3M expects pension and