UPDATE 1-3M plans up to $1 bln payment to pension funds

Thu Feb 16, 2012 5:37pm EST

* Global pension plan 82 pct funded

* 3M's long-term liabilities increased by $2.4 billion

* Company expects higher pension expense in 2012

Feb 16 (Reuters) - 3M Co plans to contribute about $800 million to $1 billion of cash to global pension and post-retirement plans in 2012 after a reduced discount rate severely inflated the size of long-term liabilities on the company's balance sheet.

The company, in its annual report filed Thursday with the U.S. Securities and Exchange Commission, said falling discount rates led to a reduction in the funded status of its pension plans.

As of the end of 2011, the company's worldwide pension plans were 82 percent funded. U.S. qualified pension plans were approximately 86 percent funded, international plans were 87 percent funded, and the U.S. nonqualified pension plan is not funded.

U.S. qualified plans make up 71 percent of the entire worldwide pension obligation.

The St. Paul, Minnesota-based company said long-term liabilities increased by approximately $2.4 billion as of the end of last year, in large part because lower discount rates inflated the size of 3M's $18.7 billion pension obligation by about 15 percent.

The size of a pension obligation is typically based on two key assumptions: discount rates and the expected return on plan assets. Discount rates reflect the ability of the debtor to pay off the liability based on the performance of assets in the plan.

3M expects a lower long-term rate of return on those assets than it had previously.

3M plans to pay $300 million in cash to pension funds in each of the first two quarters of the year. The company had $4.6 billion of liquidity and $5.2 billion of debt as of Dec. 31.

3M has said currency-related headwinds and a higher tax rate will also hurt 2012 earnings. But the company's expectation for sales growth, productivity improvements, and higher prices for its products will help offset those negative factors.

In its filing, 3M said that worldwide employment increased by 4,141 people in 2011, largely driven by acquisitions and hiring needs in developing economies.

Very few of those jobs were added in the United States, where the company is actually looking to slim down. In December, 3M Co started offering early retirement incentives to 4,900 employees, expecting about 15 percent to participate in the program.

The company also said that it spent more money on capital investments outside of the United States than it did on home soil. Of the $1.38 billion spent in 2011, 49.9 percent stayed in the United States, compared with about 52 percent in the two years prior. The company has nearly doubled its spending in Asia Pacific operations, and in the Latin America-Canada unit.

"3M is striving to increase its manufacturing and sourcing capacity outside the United States in order to more closely align its production capability with its sales in major geographic regions," the annual financial report said. "The initiative is expected to help improve customer service, lower transportation costs, and reduce working capital requirements."

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