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  • 10-K (Feb 14, 2013)
  • 10-K (Feb 16, 2012)
  • 10-K (Feb 16, 2011)
  • 10-K (Feb 16, 2010)
  • 10-K (Feb 17, 2009)

 
Quarterly Reports

 
8-K

 
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3M Company 10-K 2010

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

 

For the fiscal year ended December 31, 2009

 

Commission file number 1-3285

 

3M COMPANY

 

State of Incorporation: Delaware

 

I.R.S. Employer Identification No. 41-0417775

 

Principal executive offices: 3M Center, St. Paul, Minnesota 55144

 

Telephone number: (651) 733-1110

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class

 

Name of each exchange
on which registered

Common Stock, Par Value $.01 Per Share

 

New York Stock Exchange, Inc.
Chicago Stock Exchange, Inc.

 

Note: The common stock of the Registrant is also traded on the SWX Swiss Exchange.

Securities registered pursuant to section 12(g) of the Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x    No  o

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o    No  x

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o
(Do not check if a smaller
reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  o     No  x

 

The aggregate market value of voting stock held by nonaffiliates of the Registrant, computed by reference to the closing price and shares outstanding, was approximately $57.3 billion as of January 29, 2010 (approximately $42.0 billion as of June 30, 2009, the last business day of the Registrant’s most recently completed second quarter).

 

Shares of common stock outstanding at January 31, 2010: 711,733,377.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Parts of the Company’s definitive proxy statement (to be filed pursuant to Regulation 14A within 120 days after Registrant’s fiscal year-end of December 31, 2009) for its annual meeting to be held on May 11, 2010, are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.

 

This document (excluding exhibits) contains 124 pages.

The table of contents is set forth on page 2. The exhibit index begins on page 120.

 

 

 



Table of Contents

 

3M COMPANY

FORM 10-K

For the Year Ended December 31, 2009

 

TABLE OF CONTENTS

 

 

 

 

 

Beginning
Page

PART I

 

 

 

 

 

ITEM 1

 

Business

 

3

 

 

 

 

 

 

 

ITEM 1A

 

Risk Factors

 

8

 

 

 

 

 

 

 

ITEM 1B

 

Unresolved Staff Comments

 

9

 

 

 

 

 

 

 

ITEM 2

 

Properties

 

9

 

 

 

 

 

 

 

ITEM 3

 

Legal Proceedings

 

9

 

 

 

 

 

 

 

ITEM 4

 

Submission of Matters to a Vote of Security Holders

 

9

 

 

 

 

 

 

 

PART II

 

 

 

 

 

ITEM 5

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

10

 

 

 

 

 

 

 

ITEM 6

 

Selected Financial Data

 

12

 

 

 

 

 

 

 

ITEM 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

13

 

 

 

 

 

 

 

ITEM 7A

 

Quantitative and Qualitative Disclosures About Market Risk

 

43

 

 

 

 

 

 

 

ITEM 8

 

Financial Statements and Supplementary Data

 

44

 

 

 

 

 

 

 

 

 

Index to Financial Statements

 

44

 

 

 

 

 

 

 

ITEM 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

118

 

 

 

 

 

 

 

ITEM 9A

 

Controls and Procedures

 

118

 

 

 

 

 

 

 

ITEM 9B

 

Other Information

 

118

 

 

 

 

 

 

 

PART III

 

 

 

 

 

ITEM 10

 

Directors, Executive Officers and Corporate Governance

 

118

 

 

 

 

 

 

 

ITEM 11

 

Executive Compensation

 

119

 

 

 

 

 

 

 

ITEM 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

119

 

 

 

 

 

 

 

ITEM 13

 

Certain Relationships and Related Transactions, and Director Independence

 

119

 

 

 

 

 

 

 

ITEM 14

 

Principal Accounting Fees and Services

 

119

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

ITEM 15

 

Exhibits, Financial Statement Schedules

 

120

 

 

 

 

 

 

 

 

 

Index to Exhibits

 

120

 

 

2


 


Table of Contents

 

3M COMPANY

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2009

PART I

 

Item 1. Business.

 

3M Company was incorporated in 1929 under the laws of the State of Delaware to continue operations begun in 1902. The Company’s ticker symbol is MMM. As used herein, the term “3M” or “Company” includes 3M Company and its subsidiaries unless the context indicates otherwise. In this document, for any references to Note 1 through Note 19, refer to the Notes to Consolidated Financial Statements in Item 8.

 

Available Information

 

The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company files annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

3M also makes available free of charge through its website (http://investor.3M.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.

 

General

 

3M is a diversified technology company with a global presence in the following businesses: Industrial and Transportation; Health Care; Consumer and Office; Safety, Security and Protection Services; Display and Graphics; and Electro and Communications. 3M is among the leading manufacturers of products for many of the markets it serves. Most 3M products involve expertise in product development, manufacturing and marketing, and are subject to competition from products manufactured and sold by other technologically oriented companies.

 

At December 31, 2009, the Company employed 74,835 people (full-time equivalents), with 31,513 employed in the United States and 43,322 employed internationally.

 

Business Segments

 

As discussed in Note 17 to the Consolidated Financial Statements, effective in the first quarter of 2009, 3M made certain product moves between its business segments in its continuing effort to drive growth by aligning businesses around markets and customers. Segment information presented herein reflects the impact of these changes for all periods presented.

 

3M continues to manage its operations in six operating business segments: Industrial and Transportation; Health Care; Consumer and Office; Safety, Security and Protection Services; Display and Graphics; and Electro and Communications. 3M’s six business segments bring together common or related 3M technologies, enhancing the development of innovative products and services and providing for efficient sharing of business resources. These segments have worldwide responsibility for virtually all 3M product lines. Certain small businesses and lab-sponsored products, as well as various corporate assets and expenses, are not attributed to the business segments. Financial information and other disclosures relating to 3M’s business segments and operations in major geographic areas are provided in the Notes to Consolidated Financial Statements.

 

Industrial and Transportation Business: The Industrial and Transportation segment serves a broad range of markets, such as appliance, paper and packaging, food and beverage, electronics, automotive original equipment manufacturer (OEM) and automotive aftermarket (auto body shops and retail). Industrial and Transportation products include tapes, a wide variety of coated and non-woven abrasives, adhesives, specialty materials, filtration products, energy control products, closure systems for personal hygiene products, and components and products that are used in the manufacture, repair and maintenance of automotive, marine, aircraft and specialty vehicles.

 

Major industrial products include vinyl, polyester, foil and specialty industrial tapes and adhesives; Scotch® Masking Tape, Scotch® Filament Tape and Scotch® Packaging Tape; packaging equipment; 3M™ VHB™ Bonding Tapes; conductive, low surface energy, hot melt, spray and structural adhesives; reclosable fasteners; label materials for durable goods; and coated, nonwoven and microstructured surface finishing and grinding abrasives for the industrial

 

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market. 3M Purification Inc. (previously referred to as CUNO Incorporated), provides a comprehensive line of filtration products for the separation, clarification and purification of fluids and gases. Other industrial products include fluoroelastomers for seals, tubes and gaskets in engines; and engineering fluids. In addition, this segment provides 3M™ Scotchtint™ Window Film for buildings; 3M™ Ultra Safety and Security Window Film for property and personal protection during destructive weather conditions; and closures for disposable diapers.

 

Major transportation products include insulation components, including components for catalytic converters; functional and decorative graphics; abrasion-resistant films; masking tapes; fasteners and tapes for attaching nameplates, trim, moldings, interior panels and carpeting; coated, nonwoven and microstructured finishing and grinding abrasives; structural adhesives; and other specialty materials. In addition, 3M provides paint finishing and detailing products, including a complete system of cleaners, dressings, polishes, waxes and other products.

 

Health Care Business: The Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, dental and orthodontic practitioners, and health information systems. Products and services provided to these and other markets include medical and surgical supplies, skin health and infection prevention products, drug delivery systems, dental and orthodontic products, health information systems and anti-microbial solutions. As discussed in Note 2, 3M completed the sale of its global branded pharmaceuticals business in Europe in January 2007.

 

In the medical and surgical areas, 3M is a supplier of medical tapes, dressings, wound closure products, orthopedic casting materials, electrodes and stethoscopes. In infection prevention, 3M markets a variety of surgical drapes, masks and preps, as well as sterilization assurance equipment. Other products include drug delivery systems, such as metered-dose inhalers, transdermal skin patches and related components. Dental and orthodontic products include restoratives, adhesives, finishing and polishing products, crowns, impression materials, preventive sealants, professional tooth whiteners, prophylaxis and orthodontic appliances. In health information systems, 3M develops and markets computer software for hospital coding and data classification, and provides related consulting services. 3M provides microbiology products that make it faster and easier for food processors to test the microbiological quality of food.

 

Consumer and Office Business: The Consumer and Office segment serves markets that include consumer retail, office retail, home improvement, building maintenance and other markets. Products in this segment include office supply products, stationery products, construction and home improvement products, home care products, protective material products and consumer health care products.

 

Major consumer and office products include Scotch® brand products, such as Scotch® Magic™ Tape, Scotch® Glue Stick and Scotch® Cushioned Mailer; Post-it® Products, such as Post-it® Flags, Post-it® Note Pads, Post-it® Labeling & Cover-up Tape, and Post-it® Pop-up Notes and Dispensers; construction and home improvement products, including surface-preparation and wood-finishing materials, Command™ Adhesive Products and Filtrete™ Filters for furnaces and air conditioners; home care products, including Scotch-Brite® Scour Pads, Scotch-Brite® Scrub Sponges, Scotch-Brite™ Microfiber Cloth products, O-Cel-O™ Sponges and Scotchgard™ Fabric Protectors; protective material products; certain maintenance-free respirators; certain consumer retail personal safety products, including safety glasses and hearing protectors; and Nexcare™ Adhesive Bandages. In July 2009, 3M acquired ACE® branded (and related brands) elastic bandage, supports and thermometer product lines.

 

Safety, Security and Protection Services Business: The Safety, Security and Protection Services segment serves a broad range of markets that increase the safety, security and productivity of workers, facilities and systems. Major product offerings include personal protection products, safety and security products (including border and civil security solutions), cleaning and protection products for commercial establishments, track and trace solutions, and roofing granules for asphalt shingles. In April 2008, 3M acquired Aearo Holding Corp., the parent company of Aearo Technologies Inc. (hereafter referred to as Aearo). Aearo manufactures and sells personal protection and energy absorbing products, which expanded 3M’s platform by adding hearing protection as well as eyewear and fall protection product lines to 3M’s existing line of respiratory products. The consumer retail portion of Aearo’s business is included in 3M’s Consumer and Office business segment.

 

This segment’s products include certain maintenance-free and reusable respirators, personal protective equipment, electronic surveillance products, films that protect against counterfeiting, and reflective materials that are widely used on apparel, footwear and accessories, enhancing visibility in low-light situations. 3M’s Track and Trace Solutions business utilizes radio frequency identification (RFID) technology to provide a growing array of solutions — from library patron self-checkout systems to tracking packages. Other products include spill-control sorbents; Thinsulate™ Insulation and Thinsulate™ Lite Loft™ Insulation; nonwoven abrasive materials for floor maintenance and commercial cleaning; floor matting; and natural and color-coated mineral granules for asphalt shingles. In the second

 

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quarter of 2008, 3M completed the sale of its HighJump Software business which provided supply chain execution software solutions.

 

Display and Graphics Business: The Display and Graphics segment serves markets that include electronic display, traffic safety and commercial graphics. This segment includes optical film solutions for electronic displays; computer screen filters; reflective sheeting for transportation safety; commercial graphics systems; and projection systems, including mobile display technology and visual systems products.

 

The optical film business provides films that serve numerous market segments of the electronic display industry. 3M provides distinct products for five market segments, including products for: 1) LCD computer monitors, 2) LCD televisions, 3) hand-held devices such as cellular phones, 4) notebook PCs and 5) automotive displays. Other optical products include desktop and notebook computer screen filters that address needs for light control, privacy viewing and glare reduction. In traffic safety systems, 3M provides reflective sheetings used on highway signs, vehicle license plates, construction work-zone devices, trucks and other vehicles, and also provides pavement marking systems. Major commercial graphics products include films, inks, digital signage systems and related products used to produce graphics for vehicles and signs. The projection systems business focuses on bringing technology to the projection market, including mobile display technology in addition to its visual communication products that serve the world’s office and education markets with overhead projectors and transparency films, as well as equipment and materials for electronic and multimedia presentations.

 

Electro and Communications Business: The Electro and Communications segment serves the electrical, electronics and communications industries, including electrical utilities; electrical construction, maintenance and repair; original equipment manufacturer (OEM) electrical and electronics; computers and peripherals; consumer electronics; telecommunications central office, outside plant and enterprise; as well as aerospace, military, automotive and medical markets; with products that enable the efficient transmission of electrical power and speed the delivery of information. Products include electronic and interconnect solutions, microinterconnect systems, high-performance fluids, high-temperature and display tapes, telecommunications products, electrical products, and touch screens and touch monitors.

 

Major electronic and electrical products include packaging and interconnection devices; high-performance fluids used in the manufacture of computer chips, and for cooling electronics and lubricating computer hard disk drives; high-temperature and display tapes; insulating materials, including pressure-sensitive tapes and resins; and related items. 3M™ Flexible Circuits use electronic packaging and interconnection technology, providing more connections in less space, and are used in ink-jet print cartridges, cell phones and electronic devices. This segment serves the world’s telecommunications companies with a wide array of products for fiber-optic and copper-based telecommunications systems for rapid deployment in fixed and wireless networks. The 3M™ Aluminum Conductor Composite Reinforced (ACCR) electrical power cable, with an aluminum-based metal matrix at its core, increases transmission capacity for existing power lines. The touch systems business includes touch screens and touch monitors.

 

Distribution

 

3M products are sold through numerous distribution channels, including directly to users and through numerous wholesalers, retailers, jobbers, distributors and dealers in a wide variety of trades in many countries around the world. Management believes the confidence of wholesalers, retailers, jobbers, distributors and dealers in 3M and its products — a confidence developed through long association with skilled marketing and sales representatives — has contributed significantly to 3M’s position in the marketplace and to its growth.

 

Research and Patents

 

Research and product development constitutes an important part of 3M’s activities and has been a major driver of 3M’s sales growth. Research, development and related expenses totaled $1.293 billion in 2009, $1.404 billion in 2008 and $1.368 billion in 2007. Research and development, covering basic scientific research and the application of scientific advances in the development of new and improved products and their uses, totaled $838 million in 2009, $851 million in 2008 and $788 million in 2007. Related expenses primarily include technical support provided by 3M to customers who are using existing 3M products; internally developed patent costs, which include costs and fees incurred to prepare, file, secure and maintain patents; and amortization of acquired patents.

 

The Company’s products are sold around the world under various trademarks. The Company also owns, or holds licenses to use, numerous U.S. and foreign patents. The Company’s research and development activities generate a steady stream of inventions that are covered by new patents. Patents applicable to specific products extend for varying periods according to the date of patent application filing or patent grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary

 

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from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country.

 

The Company believes that its patents provide an important competitive advantage in many of its businesses. In general, no single patent or group of related patents is in itself essential to the Company as a whole or to any of the Company’s business segments. The importance of patents in the Display and Graphics segment is described in “Performance by Business Segment” — “Display and Graphics Business” in Part II, Item 7, of this Form 10-K.

 

Raw Materials

 

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.

 

Environmental Law Compliance

 

3M’s manufacturing operations are affected by national, state and local environmental laws around the world. 3M has made, and plans to continue making, necessary expenditures for compliance with applicable laws. 3M is also involved in remediation actions relating to environmental matters from past operations at certain sites (refer to “Environmental and Other Liabilities and Insurance Receivables” in Note 14, Commitments and Contingencies).

 

Environmental expenditures relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed. Reserves for liabilities for anticipated remediation costs are recorded on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of feasibility studies or the Company’s commitment to a plan of action. Environmental expenditures for capital projects that contribute to current or future operations generally are capitalized and depreciated over their estimated useful lives.

 

In 2009, 3M expended about $15 million for capital projects related to protecting the environment. This amount excludes expenditures for remediation actions relating to existing matters caused by past operations that do not contribute to current or future revenues, which are expensed. Capital expenditures for environmental purposes have included pollution control devices — such as wastewater treatment plant improvements, scrubbers, containment structures, solvent recovery units and thermal oxidizers — at new and existing facilities constructed or upgraded in the normal course of business. Consistent with the Company’s policies stressing environmental responsibility, capital expenditures (other than for remediation projects) for known projects are presently expected to be about $22 million over the next two years for new or expanded programs to build facilities or modify manufacturing processes to minimize waste and reduce emissions.

 

While the Company cannot predict with certainty the future costs of such cleanup activities, capital expenditures or operating costs for environmental compliance, the Company does not believe they will have a material effect on its capital expenditures, earnings or competitive position.

 

Executive Officers

 

Following is a list of the executive officers of 3M, and their age, present position, the year elected to their present position and other positions they have held during the past five years. No family relationships exist among any of the executive officers named, nor is there any undisclosed arrangement or understanding pursuant to which any person was selected as an officer. This information is presented as of the date of the 10-K filing (February 16, 2010).

 

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Name

 

Age

 

Present Position

 

Year Elected to Present Position

 

Other Positions Held During 2005-2009

George W. Buckley

 

62

 

Chairman of the Board, President and Chief Executive Officer

 

2005

 

Chairman and Chief Executive Officer, Brunswick Corporation, 2000-2005

 

 

 

 

 

 

 

 

 

Patrick D. Campbell

 

57

 

Senior Vice President and Chief Financial Officer

 

2002

 

 

 

 

 

 

 

 

 

 

 

Joaquin Delgado

 

50

 

Executive Vice President, Electro and Communications Business

 

2009

 

Vice President and General Manager, Electronics Markets Materials Division, 2007-2009

 

 

 

 

 

 

 

 

Vice President, Research and Development and New Business Ventures, Consumer and Office Business, 2005-2007

 

 

 

 

 

 

 

 

Managing Director, 3M Korea, 2003-2005

 

 

 

 

 

 

 

 

 

Joe E. Harlan

 

50

 

Executive Vice President, Consumer and Office Business

 

2009

 

Executive Vice President, Electro and Communications Business, 2004-2009

 

 

 

 

 

 

 

 

 

Michael A. Kelly

 

53

 

Executive Vice President, Display and Graphics Business

 

2006

 

Division Vice President, Occupational Health and Environmental Safety Division, 2003-2006

 

 

 

 

 

 

 

 

 

Angela S. Lalor

 

44

 

Senior Vice President, Human Resources

 

2006

 

Staff Vice President, Human Resources Operations, 2005

 

 

 

 

 

 

 

 

Executive Director, Human Resources Operations, 2004-2005

 

 

 

 

 

 

 

 

 

Jean Lobey

 

57

 

Executive Vice President, Safety, Security and Protection Services Business

 

2005

 

 

 

 

 

 

 

 

 

 

 

Robert D. MacDonald

 

59

 

Senior Vice President, Marketing and Sales

 

2004

 

 

 

 

 

 

 

 

 

 

 

Frederick J. Palensky

 

60

 

Executive Vice President, Research and Development and Chief Technology Officer

 

2006

 

Executive Vice President, Enterprise Services, 2005-2006

Executive Vice President, Safety, Security and Protection Services Business, 2002-2005

 

 

 

 

 

 

 

 

 

Brad T. Sauer

 

50

 

Executive Vice President, Health Care Business

 

2004

 

 

 

 

 

 

 

 

 

 

 

Hak Cheol Shin

 

52

 

Executive Vice President, Industrial and Transportation Business

 

2006

 

Executive Vice President, Industrial Business, 2005

 

 

 

 

 

 

 

 

Division Vice President, Industrial Adhesives and Tapes Division, 2003-2005

 

 

 

 

 

 

 

 

 

Marschall I. Smith

 

65

 

Senior Vice President, Legal Affairs and General Counsel

 

2007

 

Vice President and General Counsel Brunswick Corporation, 2001-2007

 

 

 

 

 

 

 

 

 

Inge G. Thulin

 

56

 

Executive Vice President, International Operations

 

2004

 

 

 

 

 

 

 

 

 

 

 

John K. Woodworth

 

58

 

Senior Vice President, Corporate Supply Chain Operations

 

2006

 

Vice President, Asia Pacific, 2004-2006

 

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Item 1A. Risk Factors

 

Our disclosure and analysis in our Annual Report on Form 10-K contain forward-looking statements that relate to future events and typically address the Company’s expected future business and financial performance based on certain assumptions. These assumptions and expectations of future events and trends are subject to risks and uncertainties. Depending on a variety of factors, actual future results and trends may differ materially from historical results or those reflected in any such forward-looking statements. Provided below is a cautionary discussion of what we believe to be the most significant risk factors applicable to the Company. Discussion of these factors is incorporated by reference into and considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”

 

* Results are impacted by the effects of, and changes in, worldwide economic and capital markets conditions. The Company operates in more than 65 countries and derives approximately 63 percent of its revenues from outside the United States. The Company’s business may be adversely affected by factors in the United States and other countries that are beyond its control, such as disruptions in financial markets or downturns in economic activity in specific countries or regions, or in the various industries in which the Company operates; social, political or labor conditions in specific countries or regions; or adverse changes in the availability and cost of capital, interest rates, tax rates, or regulations in the jurisdictions in which the Company operates.

 

* The Company’s credit ratings are important to 3M’s cost of capital. The major rating agencies routinely evaluate the Company’s credit profile and have assigned debt ratings to 3M that are near the top of the ratings spectrum. This evaluation is based on a number of factors, which include financial strength, business and financial risk, as well as transparency with rating agencies and timeliness of financial reporting. The Company 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. The Company’s strong ratings serve to lower 3M’s borrowing costs and facilitate access to a variety of lenders. Failure to maintain the current ratings level could adversely affect the Company’s cost of funds, liquidity and access to capital markets.

 

* The Company’s results are affected by competitive conditions and customer preferences. Demand for the Company’s products, which impacts revenue and profit margins, is affected by (i) the development and timing of the introduction of competitive products; (ii) the Company’s response to downward pricing to stay competitive; (iii) changes in customer order patterns, such as changes in the levels of inventory maintained by customers and the timing of customer purchases which may be affected by announced price changes, changes in the Company’s incentive programs, or the customer’s ability to achieve incentive goals; and (iv) changes in customers’ preferences for our products, including the success of products offered by our competitors, and changes in customer designs for their products that can affect the demand for some of the Company’s products.

 

* Foreign currency exchange rates and fluctuations in those rates may affect the Company’s ability to realize projected growth rates in its sales and earnings. Because the Company’s financial statements are denominated in U.S. dollars and approximately 63 percent of the Company’s revenues are derived from outside the United States, the Company’s results of operations and its ability to realize projected growth rates in sales and earnings could be adversely affected if the U.S. dollar strengthens significantly against foreign currencies.

 

* The Company’s growth objectives are largely dependent on the timing and market acceptance of its new product offerings, including its ability to continually renew its pipeline of new products and to bring those products to market. This ability may be adversely affected by difficulties or delays in product development, such as the inability to identify viable new products, obtain adequate intellectual property protection, or gain market acceptance of new products. There are no guarantees that new products will prove to be commercially successful.

 

* The Company’s future results are subject to fluctuations in the costs and availability of purchased components, compounds, raw materials and energy, including oil and natural gas and their derivatives, due to shortages, increased demand, supply interruptions, currency exchange risks, natural disasters and other factors. The Company depends on various components, compounds, raw materials, and energy (including oil and natural gas and their derivatives) supplied by others for the manufacturing of its products. It is possible that any of its supplier relationships could be interrupted due to natural and other disasters and other events, or be terminated in the future. Any sustained interruption in the Company’s receipt of adequate supplies could have a material adverse effect on the Company. In addition, while the Company has a process to minimize volatility in component and material pricing, no assurance can be given that the Company will be able to successfully manage price fluctuations or that future price fluctuations or shortages will not have a material adverse effect on the Company.

 

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* Acquisitions, strategic alliances, divestitures, and other unusual events resulting from portfolio management actions and other evolving business strategies, and possible organizational restructuring could affect future results. The Company monitors its business portfolio and organizational structure and has made and may continue to make acquisitions, strategic alliances, divestitures and changes to its organizational structure. With respect to acquisitions, future results will be affected by the Company’s ability to integrate acquired businesses quickly and obtain the anticipated synergies.

 

* The Company’s future results may be affected if the Company generates fewer productivity improvements than estimated. The Company utilizes various tools, such as Lean Six Sigma, to improve operational efficiency and productivity. There can be no assurance that all of the projected productivity improvements will be realized.

 

* The Company’s future results may be affected by various legal and regulatory proceedings, including those involving product liability, antitrust, environmental or other matters. The outcome of these legal proceedings may differ from the Company’s expectations because the outcomes of litigation, including regulatory matters, are often difficult to reliably predict. Various factors or developments can lead the Company to change current estimates of liabilities and related insurance receivables where applicable, or make such estimates for matters previously not susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in future charges that could have a material adverse effect on the Company’s results of operations or cash flows in any particular period. For a more detailed discussion of the legal proceedings involving the Company and the associated accounting estimates, see the discussion in Note 14.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

3M’s general offices, corporate research laboratories, and certain division laboratories are located in St. Paul, Minnesota. The Company operates 72 manufacturing facilities in 28 states. The Company operates 105 manufacturing and converting facilities in 35 countries outside the United States.

 

3M owns substantially all of its physical properties. 3M’s physical facilities are highly suitable for the purposes for which they were designed. Because 3M is a global enterprise characterized by substantial intersegment cooperation, properties are often used by multiple business segments.

 

Item 3. Legal Proceedings.

 

Discussion of legal matters is incorporated by reference from Part II, Item 8, Note 14, “Commitments and Contingencies,” of this document, and should be considered an integral part of Part I, Item 3, “Legal Proceedings.”

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

None in the quarter ended December 31, 2009.

 

9



Table of Contents

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Equity compensation plans’ information is incorporated by reference from Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” of this document, and should be considered an integral part of Item 5. At January 29, 2010, there were 110,956 shareholders of record. 3M’s stock is listed on the New York Stock Exchange, Inc. (NYSE), the Chicago Stock Exchange, Inc., and the SWX Swiss Exchange. Cash dividends declared and paid totaled $.51 per share for each quarter of 2009, and $.50 per share for each quarter of 2008. Stock price comparisons follow:

 

Stock price comparisons (NYSE composite transactions)

 

(Per share amounts)

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Year

 

2009 High

 

$

59.81

 

$

61.46

 

$

76.00

 

$

84.32

 

$

84.32

 

2009 Low

 

40.87

 

48.72

 

57.81

 

71.62

 

40.87

 

2008 High

 

$

84.76

 

$

83.22

 

$

74.71

 

$

68.31

 

$

84.76

 

2008 Low

 

72.05

 

68.61

 

65.51

 

50.01

 

50.01

 

 

Issuer Purchases of Equity Securities

 

Repurchases of common stock are made to support the Company’s stock-based employee compensation plans and for other corporate purposes. In February 2007, 3M’s Board of Directors authorized a two-year share repurchase of up to $7.0 billion for the period from February 12, 2007 to February 28, 2009. In February 2009, 3M’s Board of Directors extended this share repurchase authorization until the remaining $2.6 billion (as of December 31, 2009) is fully utilized.

 

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Table of Contents

 

Issuer Purchases of Equity

Securities (registered pursuant to

Section 12 of the Exchange Act)

 

Period

 

Total
Number of
Shares
 Purchased(1)

 

Average Price
Paid per Share

 

Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs

 

Maximum Approximate
Dollar Value
of Shares
that May
Yet Be
Purchased
under the
Plans or
Programs

 

 

 

 

 

 

 

 

 

(Millions)

 

January 1-31, 2009

 

2,921

 

$

54.03

 

 

$

2,567

 

February 1-28, 2009

 

 

$

 

 

$

2,567

 

March 1-31, 2009

 

1,661

 

$

50.33

 

 

$

2,567

 

Total January 1-March 31, 2009

 

4,582

 

$

52.69

 

 

$

2,567

 

April 1-30, 2009

 

62,049

 

$

54.39

 

 

$

2,567

 

May 1-31, 2009

 

32,173

 

$

58.71

 

 

$

2,567

 

June 1-30, 2009

 

682

 

$

60.03

 

 

$

2,567

 

Total April 1-June 30, 2009

 

94,904

 

$

55.90

 

 

$

2,567

 

July 1-31, 2009

 

19,780

 

$

56.87

 

 

$

2,567

 

August 1-31, 2009

 

30,321

 

$

71.72

 

 

$

2,567

 

September 1-30, 2009

 

10,047

 

$

73.92

 

 

$

2,567

 

Total July 1-September 30, 2009

 

60,148

 

$

67.21

 

 

$

2,567

 

October 1-31, 2009

 

33,643

 

$

76.30

 

 

$

2,567

 

November 1-30, 2009

 

11,260

 

$

77.51

 

 

$

2,567

 

December 1-31, 2009

 

49,882

 

$

81.94

 

 

$

2,567

 

Total October 1 — December 31, 2009

 

94,785

 

$

79.41

 

 

$

2,567

 

Total January 1 — December 31, 2009

 

254,419

 

$

67.27

 

 

$

2,567

 


(1)          The total number of shares purchased includes: (i) shares purchased under the Board’s authorizations described above, and (ii) shares purchased in connection with the exercise of stock options (which combined totaled 2,921 shares in January 2009, 1,661 shares in March 2009, 62,049 shares in April 2009, 32,173 shares in May 2009, 682 shares in June 2009, 19,780 shares in July 2009, 30,321 shares in August 2009, 10,047 shares in September 2009, 33,643 shares in October 2009, 11,260 shares in November 2009, and 49,882 shares in December 2009).

 

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Table of Contents

 

Item 6. Selected Financial Data.

 

(Dollars in millions, except per share amounts)

 

2009

 

2008

 

2007

 

2006

 

2005

 

Years ended December 31:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

23,123

 

$

25,269

 

$

24,462

 

$

22,923

 

$

21,167

 

Net income before cumulative effect of accounting change attributable to 3M

 

3,193

 

3,460

 

4,096

 

3,851

 

3,139

 

Per share of 3M common stock:

 

 

 

 

 

 

 

 

 

 

 

Net income before cumulative effect of accounting change attributable to 3M — basic

 

4.56

 

4.95

 

5.70

 

5.15

 

4.10

 

Net income before cumulative effect of accounting change attributable to 3M — diluted

 

4.52

 

4.89

 

5.60

 

5.06

 

4.02

 

Cash dividends declared and paid per 3M common share

 

2.04

 

2.00

 

1.92

 

1.84

 

1.68

 

At December 31:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

27,250

 

$

25,793

 

$

24,699

 

$

21,294

 

$

20,541

 

Long-term debt (excluding portion due within one year) and long-term capital lease obligations

 

5,204

 

5,224

 

4,088

 

1,112

 

1,368

 

 

The above income and earnings per share information exclude a cumulative effect of accounting change in 2005 ($35 million, or 5 cents per diluted share). New accounting guidance for asset retirement obligations was effective December 31, 2005, and its adoption resulted in the recognition of an asset retirement obligation liability of $59 million at December 31, 2005, and an after-tax charge of $35 million for 2005, which was reflected as a cumulative effect of change in accounting principle in the Consolidated Statement of Income.

 

Items included in the preceding table which had a significant impact on results are summarized as follows. 2009 results included net losses that decreased operating income by $194 million and net income attributable to 3M by $119 million. 2009 included restructuring actions ($209 million pre-tax, $128 million after tax and noncontrolling interest), which was partially offset by a gain on sale of real estate ($15 million pre-tax, $9 million after tax). 2008 results included net losses that decreased operating income by $269 million and net income attributable to 3M by $194 million. 2008 included restructuring actions ($229 million pre-tax, $147 million after-tax and noncontrolling interest), exit activities ($58 million pre-tax, $43 million after-tax) and losses related to the sale of businesses ($23 million pre-tax, $32 million after-tax), which were partially offset by a gain on sale of real estate ($41 million pre-tax, $28 million after-tax). 2007 results included net gains that increased operating income by $681 million and net income attributable to 3M by $448 million. 2007 included gains related to the sale of businesses ($849 million pre-tax, $550 million after-tax) and a gain on sale of real estate ($52 million pre-tax, $37 million after-tax), which were partially offset by increases in environmental liabilities ($134 million pre-tax, $83 million after-tax), restructuring actions ($41 million pre-tax, $27 million after-tax), and exit activities ($45 million pre-tax, $29 million after-tax). 2006 results included net gains that increased operating income by $523 million and net income attributable to 3M by $438 million. 2006 included net benefits from gains related to the sale of certain portions of 3M’s branded pharmaceuticals business ($1.074 billion pre-tax, $674 million after-tax) and favorable income tax adjustments ($149 million), which were partially offset by restructuring actions ($403 million pre-tax, $257 million after-tax), acquired in-process research and development expenses ($95 million pre-tax and after-tax), settlement costs of an antitrust class action ($40 million pre-tax, $25 million after-tax), and environmental obligations related to the pharmaceuticals business ($13 million pre-tax, $8 million after-tax). 2005 results included charges that reduced net income attributable to 3M before cumulative effect of accounting change by $75 million. This related to a tax liability resulting from 3M’s reinvestment of approximately $1.7 billion of foreign earnings in the United States pursuant to the repatriation provisions of the American Jobs Creation Act of 2004.

 

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Table of Contents

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of 3M’s financial statements with a narrative from the perspective of management. 3M’s MD&A is presented in nine sections:

 

 

 

Beginning
page

 

 

 

 

 

 

 

 

 

·  Overview

 

13

 

 

 

 

 

 

 

 

 

·  Results of Operations

 

16

 

 

 

 

 

 

 

 

 

·  Performance by Business Segment

 

20

 

 

 

 

 

 

 

 

 

·  Performance by Geographic Area

 

30

 

 

 

 

 

 

 

 

 

·  Critical Accounting Estimates

 

33

 

 

 

 

 

 

 

 

 

·  New Accounting Pronouncements

 

36

 

 

 

 

 

 

 

 

 

·  Financial Condition and Liquidity

 

36

 

 

 

 

 

 

 

 

 

·  Financial Instruments

 

42

 

 

 

 

 

 

 

 

 

·  Forward-Looking Statements

 

42

 

 

 

 

 

 

 

 

 

 

OVERVIEW

 

3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products. As discussed in Note 17 to the Consolidated Financial Statements, effective in the first quarter of 2009, 3M made certain business segment realignments, including both product moves between business segments and reporting changes related to revised U.S. performance measures. The financial information presented herein reflects the impact of these changes for all periods presented. 3M manages its operations in six operating business segments: Industrial and Transportation; Health Care; Consumer and Office; Safety, Security and Protection Services; Display and Graphics; and Electro and Communications.

 

3M’s quarterly year-on-year business results got stronger as 2009 progressed, with first nine-month 2009 year-on-year comparisons significantly negatively impacted by the economic downturn that began impacting 3M in the fourth quarter of 2008. For total year 2009, while sales declined 8.5 percent and organic volumes declined 9.5 percent, worldwide industrial production is expected to be down by a similar amount and 3M’s sales performance was in line with the overall economy. 3M restructured a number of businesses during the year, resulting in 2009 total year savings of almost $400 million, with estimated additional incremental savings of more than $150 million in 2010. In addition, 3M amended its policy regarding banked vacation, which added more than $100 million to operating income in 2009, with a slightly lower benefit expected in 2010. 3M also enacted temporary furloughs where appropriate, froze merit pay and reduced indirect spending. Finally, in the midst of this economic downturn, 3M invested $1.3 billion in research, development and related expenses during 2009.

 

3M has been aggressively restructuring the company since early 2008 and continued this effort through the third quarter of 2009, with these restructuring actions and exit activities in the aggregate resulting in a reduction of approximately 6,400 positions. 3M aggressively reduced structural costs across the company, including in the factories. The focus now is to accelerate growth in the various businesses and to add only those expenses that are absolutely necessary. 3M announced the reduction of approximately 200 positions in the third quarter of 2009, with the majority of those occurring in Western Europe and, to a lesser extent, the United States. In the second quarter of 2009, 3M permanently reduced approximately 900 positions spanning many businesses and geographies, and in the United States another 700 people accepted a voluntary retirement option. 3M expects that a small portion of those who accepted the voluntary separation will be replaced; thus, on a net basis, 3M estimates an employment level decline of approximately 1,400 to 1,500 due to these second quarter restructuring actions. In the first quarter of 2009, 3M announced the elimination of approximately 1,200 positions. In addition, 3M announced reductions of approximately 3,500 positions in 2008, with 2,400 of these reductions announced in the fourth quarter of 2008. The related net restructuring charges and other special items reduced net income attributable to 3M for year 2009 by $119 million, or $0.17 per diluted share. Special items reduced net income attributable to 3M for year 2008 by $194 million, or $0.28 per diluted share, with $140 million, or $0.20 per diluted share, in the fourth quarter of 2008. Refer to the special items discussion at the end of this overview section for more detail.

 

Fourth-quarter 2009 sales totaled $6.1 billion, an increase of 11.1 percent from the fourth quarter of 2008, with all business segments and major geographic areas showing improvement. Net income attributable to 3M was $935 million, or $1.30 per diluted share. This compares to $536 million, or $0.77 per diluted share, which includes the impact of restructuring and other special items, in the fourth quarter of 2008.

 

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Table of Contents

 

Sales in 2009 totaled $23.1 billion, a decrease of 8.5 percent from 2008. Including the preceding special items, net income attributable to 3M was $3.193 billion, or $4.52 per diluted share, in 2009, versus $3.460 billion, or $4.89 per diluted share, in 2008. In 2009, the global economic slowdown dramatically affected year-on-year comparisons for 3M’s businesses. Substantial end-market declines and inventory takedowns in major industries, including automotive, consumer electronics and general industrial manufacturing, resulted in significantly lower sales and income. Accordingly, 3M reduced its cost structure, lowered manufacturing output and intensified its attention to operational improvement. The combination of these actions drove operating income margins of 20.8 percent in 2009, compared to 20.6 percent in 2008. Restructuring charges and other special items reduced this operating income margin by approximately one percentage point in both 2009 and 2008.

 

In January 2007, 3M completed the sale of its branded pharmaceuticals business, resulting in a gain in the first quarter of 2007. In addition, 3M recorded a gain related to the sale of its Opticom Priority Control Systems and Canoga Traffic Detection businesses in the second quarter of 2007. In 2007, these gains on sale of businesses were partially offset by restructuring and the net impact of other special items. Refer to “Special Items” at the end of this overview section for additional details. Including these special items, in 2007, 3M reported net sales of $24.462 billion and net income attributable to 3M of $4.096 billion, or $5.60 per diluted share.

 

The following table contains sales and operating income results by business segment for the years ended December 31, 2009 and 2008. Refer to the section entitled “Performance by Business Segment” later in MD&A for discussion by business segment of restructuring and other items that impacted reported operating income. Refer to Note 17 for discussion of Corporate and Unallocated and Elimination of Dual Credit.

 

 

 

2009

 

2008

 

2009 vs. 2008
% change

 

(Dollars in millions)

 

Net
Sales

 

% of
Total

 

Oper.
Income

 

Net
Sales

 

% of
Total

 

Oper.
Income

 

Net
Sales

 

Oper.
Income

 

Business Segments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial and Transportation

 

$

7,116

 

30.8

%

$

1,238

 

$

8,173

 

32.3

%

$

1,548

 

(12.9

)%

(20.0

)%

Health Care

 

4,294

 

18.6

%

1,350

 

4,303

 

17.0

%

1,175

 

(0.2

)%

14.9

%

Consumer and Office

 

3,471

 

15.0

%

748

 

3,578

 

14.2

%

683

 

(3.0

)%

9.5

%

Safety, Security and Protection Services

 

3,180

 

13.8

%

745

 

3,450

 

13.7

%

710

 

(7.8

)%

5.0

%

Display and Graphics

 

3,132

 

13.5

%

590

 

3,268

 

12.9

%

583

 

(4.2

)%

1.3

%

Electro and Communications

 

2,276

 

9.8

%

322

 

2,835

 

11.2

%

540

 

(19.7

)%

(40.4

)%

Corporate and Unallocated

 

12

 

0.1

%

(100

)

23

 

0.1

%

58

 

 

 

 

 

Elimination of Dual Credit

 

(358

)

(1.6

)%

(79

)

(361

)

(1.4

)%

(79

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Company

 

$

23,123

 

100.0

%

$

4,814

 

$

25,269

 

100.0

%

$

5,218

 

(8.5

)%

(7.7

)%

 

In 2009, while sales declined 8.5 percent for the total year, this was similar to the overall economy and close to the estimated decline in worldwide industrial production. Quarterly year-on-year comparisons improved throughout 2009. Sales declined 21.3 percent in the first quarter, 15.1 percent in the second quarter and 5.6 percent in the third quarter, but improved 11.1 percent in the fourth quarter. Refer to the sections entitled “Performance by Business Segment” and “Performance by Geographic Area” later in MD&A for additional discussion of sales change.

 

In 2008, worldwide sales growth was 3.3 percent. Local-currency sales growth was 1.4 percent for 2008, including a 3.3 percentage point benefit from acquisitions. Local-currency sales increased 17.1 percent in Safety, Security and Protection Services (including 13.0 percentage points from acquisitions), 6.7 percent in Health Care (including 1.7 percentage points from acquisitions), 4.1 percent in Industrial and Transportation (including 3.7 percentage points from acquisitions), and 1.0 percent in Consumer and Office (including 1.8 percentage points from acquisitions). Local-currency sales declined 1.6 percent in Electro and Communications and 17.9 percent in Display and Graphics.

 

3M generated $4.9 billion of operating cash flows in 2009, an increase of $408 million when compared to 2008. This followed an increase of $287 million when comparing 2008 to 2007. In 2009, 2008 and 2007, the Company utilized approximately $1.4 billion of cash each year to pay dividends. In February 2007, 3M’s Board of Directors authorized a two-year share repurchase of up to $7.0 billion for the period from February 12, 2007 to February 28, 2009. In February 2009, 3M’s Board of Directors extended this share repurchase authorization until the remaining amount is fully utilized. As of December 31, 2009, approximately $2.6 billion remained available for repurchase. With the Company’s emphasis on maintaining ample liquidity and enhancing balance sheet strength, share repurchase activity was suspended beginning in the fourth quarter of 2008. The extension of this program provides flexibility to resume repurchase activity when business conditions permit. In 2009 no broker repurchases of stock were made,

 

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Table of Contents

 

compared to repurchases of 3M common stock of $1.6 billion in 2008 (primarily in the first nine months of 2008) and repurchases of 3M common stock of $3.2 billion in 2007. In February 2010, 3M’s Board of Directors authorized a dividend increase of 2.9 percent for 2010, marking the 52nd consecutive year of dividend increases for 3M. 3M’s debt to total capital ratio (total capital defined as debt plus equity) at December 31, 2009 was 30 percent, compared to 39 percent at December 31, 2008. A portion of 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 postretirement benefit expense in 2010 to increase by approximately $130 million pre-tax, or 12 cents per diluted share, when compared to 2009. Refer to critical accounting estimates within MD&A and Note 11 (Pension and Postretirement Benefit Plans) for additional information concerning 3M’s pension and post-retirement plans.

 

The preceding forward-looking statements involve risks and uncertainties that could cause results to differ materially from those projected (refer to the forward-looking statements section in Item 7 and the risk factors provided in Item 1A for discussion of these risks and uncertainties).

 

Special Items:

 

Special items represent significant charges or credits that are important to understanding changes in the Company’s underlying operations.

 

In 2009, net losses for restructuring and other actions decreased operating income by $194 million and net income attributable to 3M by $119 million, or $0.17 per diluted share. 2009 included restructuring actions ($209 million pre-tax, $128 million after tax and noncontrolling interest), which were partially offset by a gain on sale of real estate ($15 million pre-tax, $9 million after tax). The gain on sale of real estate relates to the June 2009 sale of a New Jersey roofing granule facility, which is recorded in cost of sales within the Safety, Security and Protection Services business segment. Restructuring is discussed in more detail in Note 4 (Restructuring Actions and Exit Activities).

 

In 2008, net losses for restructuring and other actions decreased operating income by $269 million and net income attributable to 3M by $194 million, or $0.28 per diluted share. 2008 included restructuring actions ($229 million pre-tax, $147 million after-tax and noncontrolling interest), exit activities ($58 million pre-tax, $43 million after-tax) and losses related to the sale of businesses ($23 million pre-tax, $32 million after-tax), which were partially offset by a gain on sale of real estate ($41 million pre-tax, $28 million after-tax). Divestiture impacts, restructuring actions and

 

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Table of Contents

 

exit activities are discussed in more detail in Note 2 (Acquisitions and Divestitures) and Note 4 (Restructuring Actions and Exit Activities). Concerning the real estate gain, 3M received proceeds and recorded a gain in 2008 for a sale-leaseback transaction relative to an administrative location in Italy.

 

In 2007, gains on sale of businesses and real estate, net of restructuring and other items, increased operating income by $681 million and net income attributable to 3M by $448 million, or $0.62 per diluted share. 2007 included net benefits from gains related to the sale of businesses ($849 million pre-tax, $550 million after-tax) and a gain on sale of real estate ($52 million pre-tax, $37 million after-tax), which were partially offset by increases in other environmental liabilities ($134 million pre-tax, $83 million after-tax), restructuring actions ($41 million pre-tax, $27 million after-tax), and other exit activities ($45 million pre-tax, $29 million after-tax). These items, except the gain on sale of real estate, are discussed in more detail in Note 2 (Acquisitions and Divestitures), Note 4 (Restructuring Actions and Exit Activities) and Note 14 (Commitments and Contingencies). Gains on sale of businesses include the second-quarter 2007 sale of 3M’s Opticom Priority Control Systems and Canoga Traffic Detection businesses, and the first-quarter 2007 sale of the global branded pharmaceuticals business in Europe. Concerning the real estate sale, 3M sold a laboratory facility located in Suwon, Korea.

 

RESULTS OF OPERATIONS

 

Net Sales:

 

 

 

2009

 

2008

 

 

 

U.S.

 

Intl.

 

Worldwide

 

U.S.

 

Intl.

 

Worldwide

 

Net sales (millions)

 

$

8,509

 

$

14,614

 

$

23,123

 

$

9,179

 

$

16,090

 

$

25,269

 

% of worldwide sales

 

36.8

%

63.2

%

 

 

36.3

%

63.7

%

 

 

Components of net sales change:

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume — organic

 

(11.9

)%

(8.1

)%

(9.5

)%

(5.0

)%

(1.0

)%

(2.4

)%

Volume — acquisitions

 

2.4

 

1.9

 

2.1

 

5.3

 

2.2

 

3.3

 

Price

 

2.5

 

1.5

 

1.8

 

2.4

 

(0.5

)

0.5

 

Local-currency sales (including acquisitions)

 

(7.0

)

(4.7

)

(5.6

)

2.7

 

0.7

 

1.4

 

Divestitures

 

(0.3

)

(0.1

)

(0.1

)

(0.6

)

(0.1

)

(0.3

)

Translation

 

 

(4.4

)

(2.8

)

 

3.4

 

2.2

 

Total sales change

 

(7.3

)%

(9.2

)%

(8.5

)%

2.1

%

4.0

%

3.3

%

 

In 2009, local-currency sales declined 5.6 percent. All major geographic areas showed local-currency declines, with the exception of the combined Latin America and Canada area, which was flat. Health Care had local-currency sales growth of 3.6 percent, while all other business segments experienced declines. Fourth-quarter 2009 local-currency sales increased 6.4 percent, with all business segments and major geographic areas showing improvement. In 2008, local-currency sales growth of 1.4 percent was led by the Safety, Security and Protection Services; Health Care; and Industrial and Transportation segments. Acquisitions increased 2008 sales by 3.3 percent, led by the April 2008 acquisition of Aearo. Refer to the sections entitled “Performance by Business Segment” and “Performance by Geographic Area” later in MD&A for additional discussion of sales change.

 

16



Table of Contents

 

Operating Expenses:

 

(Percent of net sales)

 

2009

 

2008

 

2007

 

2009
Versus
2008

 

2008
Versus
2007

 

Cost of sales

 

52.4

%

52.9

%

52.1

%

(0.5

)%

0.8

%

Selling, general and administrative expenses

 

21.2

 

20.8

 

20.5

 

0.4

 

0.3

 

Research, development and related expenses

 

5.6

 

5.6

 

5.6

 

 

 

(Gain)/loss from sale of businesses

 

 

0.1

 

(3.5

)

(0.1

)

3.6

 

Operating income

 

20.8

%

20.6

%

25.3

%

0.2

%

(4.7

)%

 

As discussed in the preceding overview section, 2009 included restructuring charges, partially offset by a gain on sale of real estate, which combined decreased operating income by $194 million, or 0.9 percent of net sales. In 2008, the combination of restructuring actions, exit activities and a loss on sale of businesses, partially offset by a gain on sale of real estate, decreased operating income by $269 million, or 1.1 percent of net sales. In 2007, the gain on sale of businesses and real estate, net of environmental liability charges, restructuring and exit activities, benefited 2007 operating income by $681 million, or 2.8 percent of net sales. The following tables summarize these special items by income statement caption.

 

 

 

2009 Restructuring and Other Summary

 

 

 

 

 

(Millions)

 

Restructuring actions

 

Gain on sale of real estate

 

Total

 

 

 

 

 

Cost of sales

 

$

110

 

$

(15

)

$

95

 

 

 

 

 

Selling, general and administrative expenses

 

91

 

 

91

 

 

 

 

 

Research, development and related expenses

 

8

 

 

8

 

 

 

 

 

Total operating income penalty (benefit)

 

$

209

 

$

(15

)

$

194

 

 

 

 

 

 

 

 

2008 Restructuring and Other Summary

 

(Millions)

 

Restructuring
actions

 

Exit
activities

 

Loss on sale
of
businesses

 

Gain on sale
of real
estate

 

Total

 

Cost of sales

 

$

84

 

$

38

 

$

 

$

 

$

122

 

Selling, general and administrative expenses

 

135

 

17

 

 

(41

)

111

 

Research, development and related expenses

 

10

 

3

 

 

 

13

 

Loss from sale of businesses

 

 

 

23

 

 

23

 

Total operating income penalty (benefit)

 

$

229

 

$

58

 

$

23

 

$

(41

)

$

269

 

 

 

 

2007 Gain on Sale, Restructuring and Other Summary

 

(Millions)

 

Gain on sale
of
businesses

 

Environmental
liabilities

 

Restructuring
and exit
activities

 

Gain on sale
of real estate

 

Total

 

Cost of sales

 

$

 

$

 

$

64

 

$

 

$

64

 

Selling, general and administrative expenses

 

 

134

 

26

 

(52

)

108

 

Research, development and related expenses

 

 

 

(4

)

 

(4

)

Gain from sale of businesses

 

(849

)

 

 

 

(849

)

Total operating income penalty (benefit)

 

$

(849

)

$

134

 

$

86

 

$

(52

)

$

(681

)

 

Cost of Sales:

 

Cost of sales includes manufacturing, engineering and freight costs. Cost of sales as a percent of net sales decreased 0.5 percentage points in 2009 compared to 2008. As discussed in Note 4 (Restructuring Actions and Exit Activities), in 2009, 3M recorded $209 million in restructuring charges, of which $110 million was recorded in cost of sales. This was partially offset by a $15 million gain on sale of a New Jersey roofing granule facility, which was also recorded in cost of sales. In 2008, $122 million in restructuring and exit activities were recorded in cost of sales. Thus, restructuring and other items were $27 million lower year-on-year, benefiting cost of sales by 0.1 percentage point. Other benefits to cost of sales as a percent of net sales included increases in selling prices and a slight

 

17



Table of Contents

 

decrease in material costs. The Company was also able to mitigate organic volume declines through reductions in 3M’s manufacturing cost structure. Finally, in response to deteriorating conditions in Venezuela, 3M Venezuela swapped bolivars into U.S. dollars in 2009. While increasing cost of sales, these actions mitigated 3M’s exposure to future exchange rate risks.

 

Cost of sales as a percent of net sales increased 0.8 percentage points in 2008 compared to 2007, with this increase primarily due to the decline in Optical Systems sales and the rapid volume declines of certain other businesses in the fourth quarter. For the majority of the year 3M’s broad-based portfolio performed as expected, with benefits from selling price increases, foreign currency translation, and a continuous focus on driving operational excellence, helping to offset raw material inflation of approximately 4 percent for 2008, compared with 2007. In 2008, restructuring and exit costs increased cost of sales by $122 million, or 0.4 percentage points as a percent of net sales, similar to the 0.3 percentage point impact in 2007.

 

Selling, General and Administrative Expenses:

 

Selling, general and administrative (SG&A) expenses as a percent of net sales increased 0.4 percentage points in 2009 when compared to 2008, but in dollars decreased $338 million, helped by restructuring and other actions. In the sales and marketing area, advertising and merchandising costs were down year-on-year, but were up in the fourth quarter. As indicated in Note 4, in 2009, $91 million in restructuring expenses was recorded in SG&A, which increased SG&A as a percent of sales by 0.4 percentage points. In 2008, restructuring actions and exit activities, net of a gain on sale of real estate, increased SG&A by $111 million, which increased SG&A as a percent of sales by 0.5 percentage points.

 

Selling, general and administrative (SG&A) expenses as a percent of net sales increased 0.3 percentage points in 2008 when compared to 2007, or 4.6 percent in dollars. In 2008, SG&A expenses related to restructuring actions and exit activities were partially offset by a gain on sale of real estate, which combined increased SG&A by $111 million, or 0.5 percentage points, similar to the 0.4 percentage point impact in 2007. In the fourth quarter of 2008, as part of its restructuring program, 3M took aggressive actions to reduce general and administrative expenses and also pared back selling and marketing costs in certain businesses.

 

Research, Development and Related Expenses:

 

Research, development and related expenses (R&D) were 5.6 percent of net sales in 2009, 2008 and 2007. R&D expenses in dollars declined approximately 8 percent in 2009 compared to 2008, following an increase of 2.6 percent when comparing 2008 to 2007. 3M has continued to support its key larger programs, but overall dollar spending has been impacted by company-wide cost-cutting initiatives such as reductions in indirect spending and the banked vacation policy change.

 

Gain/Loss from Sale of Businesses:

 

In June 2008, 3M completed the sale of HighJump Software to Battery Ventures, a technology venture capital and private equity firm. 3M received proceeds of $85 million for this transaction and recognized, net of assets sold, transaction and other costs, a pre-tax loss of $23 million (recorded in the Safety, Security and Protection Services segment) in the second quarter of 2008.

 

In January 2007, 3M completed the sale of its global branded pharmaceuticals business in Europe to Meda AB. 3M received proceeds of $817 million for this transaction and recognized, net of assets sold, a pre-tax gain of $781 million in 2007 (recorded in the Health Care segment). In June 2007, 3M completed the sale of its Opticom Priority Control Systems and Canoga Traffic Detection businesses to TorQuest Partners Inc., a Toronto-based investment firm. 3M received proceeds of $80 million for this transaction and recognized, net of assets sold, transaction and other costs, a pre-tax gain of $68 million (recorded in the Display and Graphics segment) in 2007.

 

Operating Income:

 

3M uses operating income as one of its primary business segment performance measurement tools. Operating income was 20.8 percent of sales in 2009 compared to 20.6 percent of sales in 2008. 2009 was negatively impacted by restructuring expenses, net of a gain on sale of real estate, which combined decreased operating income by 0.9 percentage points ($194 million). 2008 was negatively impacted by restructuring actions, exit activities and a loss on sale of businesses that were partially offset by a gain on sale of real estate, which combined decreased operating income by 1.1 percentage points ($269 million). Operating income margins of 25.3 percent in 2007 were positively impacted by 2.8 percentage points ($681 million) from the gain on sale of businesses and real estate, net of environmental liabilities, restructuring and other exit activities.

 

18



Table of Contents

 

Interest Expense and Income:

 

(Millions)

 

2009

 

2008

 

2007

 

Interest expense

 

$

219

 

$

215

 

$

210

 

Interest income

 

(37

)

(105

)

(132

)

Total

 

$

182

 

$

110

 

$

78

 

 

Interest Expense: Interest expense increased slightly in 2009, primarily due to higher average U.S. long-term debt balances largely offset by benefits from reduced short-term balances and lower interest rates. Interest expense increased slightly in 2008 compared to 2007, primarily related to higher average U.S. and international long-term debt balances, which were partially offset by lower short-term debt balances and interest rates.

 

Interest Income: Interest income declined in 2009 when compared to 2008, primarily due to lower yields on investments. Interest income was lower in 2008 compared to 2007, primarily due to lower interest rates, which were partially offset by higher average cash and cash equivalent balances.

 

Provision for Income Taxes:

 

(Percent of pre-tax income)

 

2009

 

2008

 

2007

 

Effective tax rate

 

30.0

%

31.1

%

32.1

%

 

The effective tax rate for 2009 was 30.0 percent, compared with 31.1 percent in 2008, and 32.1 percent in 2007. In both 2009 and 2008, the Company’s tax rate primarily benefited from reduced international tax rates. Refer to Note 8 for additional information.

 

Noncontrolling Interest:

 

(Millions)

 

2009

 

2008

 

2007

 

Noncontrolling interest

 

$

51

 

$

60

 

$

55

 

 

Net income attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M ownership interests in 3M consolidated entities. The changes in noncontrolling interest amounts are primarily related to Sumitomo 3M Limited (Japan), which is 3M’s most significant consolidated entity with non-3M ownership interests. As discussed in Note 6, in the third quarter of 2009, 3M’s effective ownership in Sumitomo 3M Limited was reduced from 75 percent to 71.5 percent.

 

Currency Effects:

 

Currency Effects: 3M estimates that year-on-year currency effects, including hedging impacts, decreased net income attributable to 3M by approximately $220 million in 2009 and increased net income attributable to 3M by approximately $160 million in 2008 and $150 million in 2007. This estimate includes the effect of translating profits from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks and the negative impact of swapping Venezuelan bolivars into U.S. dollars. 3M estimates that year-on-year derivative and other transaction gains and losses had an immaterial impact in 2009, and increased net income attributable to 3M by approximately $40 million in 2008 and by approximately $10 million in 2007.

 

19



Table of Contents

 

PERFORMANCE BY BUSINESS SEGMENT

 

Disclosures relating to 3M’s business segments are provided in Item 1, Business Segments. Financial information and other disclosures are provided in the Notes to the Consolidated Financial Statements. As discussed in Note 17 to the Consolidated Financial Statements, effective in the first quarter of 2009, 3M made certain business segment realignments, including both product moves between business segments and reporting changes related to revised U.S. performance measures. Segment information presented herein reflects the impact of these changes for all periods presented. The reportable segments are Industrial and Transportation; Health Care; Consumer and Office; Safety, Security and Protection Services; Display and Graphics; and Electro and Communications. Information related to 3M’s business segments is presented in the tables that follow. Local-currency sales change amounts are separated into organic local-currency sales (which include both organic volume impacts plus selling price impacts) and acquisition impacts. The divestiture impact, translation impact and total sales change are also provided for each segment.

 

As discussed in the preceding overview and results of operations section, the combination of restructuring actions, gains and losses on the sale of businesses, and other special items significantly impacted 2009, 2008 and 2007 results. The following tables summarize these special items by business segment.

 

 

 

2009 Restructuring and Other Summary

 

 

 

 

 

(Millions)

 

Restructuring
actions

 

Gain on
sale of
real estate

 

Total

 

 

 

 

 

Industrial and Transportation

 

$

88

 

$

 

$

88

 

 

 

 

 

Health Care

 

20

 

 

20

 

 

 

 

 

Consumer and Office

 

13

 

 

13

 

 

 

 

 

Safety, Security and Protection Services

 

17

 

(15

)

2

 

 

 

 

 

Display and Graphics

 

22

 

 

22

 

 

 

 

 

Electro and Communications

 

11

 

 

11

 

 

 

 

 

Corporate and Unallocated

 

38

 

 

38

 

 

 

 

 

Total operating income penalty (benefit)

 

$

209

 

$

(15

)

$

194

 

 

 

 

 

 

 

 

2008 Restructuring and Other Summary

 

(Millions)

 

Restructuring
actions

 

Exit
activities

 

Loss
on sale of
businesses

 

Gain on
sale of
real estate

 

Total

 

Industrial and Transportation

 

$

40

 

$

26

 

$

 

$

 

$

66

 

Health Care

 

51

 

9

 

 

 

60

 

Consumer and Office

 

18

 

 

 

 

18

 

Safety, Security and Protection Services

 

12

 

3

 

23

 

 

38

 

Display and Graphics

 

24

 

18

 

 

 

42

 

Electro and Communications

 

7

 

 

 

 

7

 

Corporate and Unallocated

 

77

 

2

 

 

(41

)

38

 

Total operating income penalty (benefit)

 

$

229

 

$

58

 

$

23

 

$

(41

)

$

269

 

 

 

 

2007 Gain on Sale, Restructuring and Other Summary

 

(Millions)

 

Gain on
sale of
businesses

 

Environmental
liabilities

 

Restructuring
and exit
activities

 

Gain on
sale of
real estate

 

Total

 

Industrial and Transportation

 

$

 

$

 

$

9

 

$

 

$

9

 

Health Care:

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of pharmaceuticals business

 

(781

)

 

 

 

(781

)

Restructuring actions and other

 

 

 

(10

)

 

(10

)

Consumer and Office

 

 

 

 

 

 

Safety, Security and Protection Services

 

 

 

29

 

 

29

 

Display and Graphics

 

(68

)

 

17

 

 

(51

)

Electro and Communications

 

 

 

41

 

 

41

 

Corporate and Unallocated

 

 

134

 

 

(52

)

82

 

Total operating income penalty (benefit)

 

$

(849

)

$

134

 

$

86

 

$

(52

)

$

(681

)

 

20



Table of Contents

 

Due to the significant changes in quarterly activity in both 2009 and 2008, including the impact of the economic downturn in the fourth-quarter of 2008, the following discusses both fourth-quarter and total year results in both 2009 and 2008 for each business segment.

 

Industrial and Transportation Business (30.8% of consolidated sales):

 

 

 

2009

 

2008

 

2007

 

Sales (millions)

 

$

7,116

 

$

8,173

 

$

7,639

 

Sales change analysis:

 

 

 

 

 

 

 

Organic local-currency sales (volume and price)

 

(12.6

)%

0.4

%

3.9

%

Acquisitions

 

2.4

 

3.7

 

1.6

 

Local-currency sales

 

(10.2

)%

4.1

%

5.5

%

Translation

 

(2.7

)

2.9

 

3.7

 

Total sales change

 

(12.9

)%

7.0

%

9.2

%

 

 

 

 

 

 

 

 

Operating income (millions)

 

$

1,238

 

$

1,548

 

$

1,580

 

Percent change

 

(20.0

)%

(2.0

)%

12.3

%

Percent of sales

 

17.4

%

18.9

%

20.7

%

 

The Industrial and Transportation segment serves a broad range of markets, such as appliance, paper and packaging, food and beverage, electronics, automotive original equipment manufacturer (OEM) and automotive aftermarket (auto body shops and retail). Industrial and Transportation products include tapes, a wide variety of coated and non-woven abrasives, adhesives, specialty materials, filtration products, energy control products, closure systems for personal hygiene products, and components and products that are used in the manufacture, repair and maintenance of automotive, marine, aircraft and specialty vehicles.

 

Fourth quarter and year 2009 results:

 

Industrial and Transportation is a large and highly diversified set of businesses that, when taken together, correlate well with the overall economy. Early in 2009, the business saw significant sales declines that required swift and aggressive restructuring and cost reduction plans to offset the impact of lower volumes, including the impact of large inventory declines in the wholesale distribution channel. Inventories began to stabilize around mid-year 2009, and it now appears that inventory and point-of-sale levels in this channel are in reasonably good balance.

 

Sales in Industrial and Transportation rose 10 percent to $1.9 billion in the fourth quarter. Fourth quarter local-currency growth was 4.6 percent, which included organic volume growth of 3 percent. Fourth-quarter growth was led by the renewable energy business and the automotive OEM business. 3M also drove positive local-currency sales growth in industrial adhesives and tapes, automotive aftermarket and in Dyneon LLC, which supplies flouropolymers and elastomers into the oil, gas and transportation industries. Other businesses in this segment posted local-currency sales declines ranging from one to five percent in the fourth quarter. On a regional basis, growth was strongest in Latin America and in Asia Pacific.

 

The combination of positive sales volumes in the quarter, higher year-on-year factory production levels and improvements in cost structure resulted in operating income growth in the fourth quarter. This segment recorded net charges of $36 million related to restructuring actions and exit activities in the fourth quarter of 2008. Including these net charges, operating income in the fourth quarter of 2009 increased 86 percent to $397 million and operating income margins improved by 8.5 percentage points to 20.8 percent.

 

Full-year 2009 sales were $7.1 billion, down 12.9 percent in dollars and down 10.2 percent in local currency. Foreign currency impacts penalized sales for the year by 2.7 percent. Sales increased in the renewable energy and automotive aftermarket businesses, but sales decreased in the other businesses, impacted by end-market declines. This segment announced restructuring actions in 2009, along with plant shut-downs, furloughs and mandatory vacation across the operation. In 2009, this business segment recorded charges of $88 million related to restructuring actions, with this charge comprised of employee-related liabilities for severance and benefits of $83 million and fixed asset impairments of $5 million. Including these special items, 2009 operating income was $1.2 billion and operating income margins were 17.4 percent. This segment recorded $66 million related to restructuring and exit activities in 2008.

 

Industrial and Transportation continued to invest aggressively to accelerate its growth capability. For example, the renewable energy business recently opened a new large-scale high-tech manufacturing site in Singapore, and the industrial abrasives business opened a new state-of-the-art manufacturing site in North America. Recently, 3M Purification Inc. launched a high-quality disposable filtration system for the biopharmaceuticals industry. And finally,

 

21



Table of Contents

 

the automotive aftermarket business introduced the 3M Dirt Trap Protection System, which increases paint booth productivity and reduces daily maintenance costs in auto body repair shops.

 

Fourth quarter and year 2008 results:

 

2008 can be characterized as a tale of two distinct chapters for Industrial and Transportation. The first was January through October, characterized by outstanding top-and bottom-line growth across most of the portfolio; the second chapter was the combined months of November and December, when many large customers slowed their operations.

 

Among 3M’s business segments, Industrial and Transportation has been among those most affected by recent economic contractions, particularly in big industries such as automotive and electronics. With worldwide industrial production in decline, 3M’s Industrial and Transportation business had fourth quarter 2008 sales of $1.7 billion, an 11.2 percent decline compared to 2007. Local-currency sales were down 6.4 percent, including a positive 3.1 percent impact from acquisitions. Not all divisions within Industrial were impacted equally in the fourth quarter. Those that are heavily linked to automotive manufacturing, namely automotive OEM and Dyneon LLC, saw declines of more than 20 percent, as did businesses selling to the electronics industry, such as high-tech tapes and adhesives. Most other divisions experienced local-currency sales contractions of less than 10 percent in the fourth quarter, with the exception of the automotive aftermarket business, which posted positive local-currency sales growth. Geographically, fourth quarter 2008 local-currency sales were down in all regions, with the largest declines in the U.S. and Asia Pacific, followed by Europe. Local-currency sales were flat in Latin America. Operating income in the fourth quarter declined 42 percent to $214 million, which included net charges of $36 million for restructuring actions and exit activities.

 

Full-year 2008 sales were up 7 percent to $8.2 billion. Local-currency growth rates were strongest in the automotive aftermarket business. 3M also drove strong sales growth in two of its largest divisions, namely abrasives and industrial tapes and adhesives. Closure systems for personal hygiene products also showed good growth. Geographically, all major regions drove positive local-currency sales growth. Strong market penetration continued in emerging economies, especially the high growth countries of Brazil, Russia, India, China and Poland, where the business drove strong organic local-currency growth. Operating income declined, but increased after adjusting for $66 million in restructuring actions and exit activities (discussed further below). Strong operational discipline was the key to protecting the bottom line as full-year operating margins totaled 18.9 percent, with operating income margins at 19.7 percent after adjusting for restructuring and exit activities.

 

Industrial and Transportation restructuring and exit activities totaled $66 million for total year 2008. During the fourth quarter of 2008, restructuring actions totaling $40 million (partially offset by a $4 million reduction in previously accrued exit activity charges) were comprised of severance and related benefits totaling $33 million and asset impairments of $7 million. Net exit activity charges of $26 million in 2008 largely related to employee reductions at an Industrial and Transportation manufacturing facility located in the United Kingdom, which totaled $19 million. This compared to restructuring actions and exit activities of $9 million in 2007.

 

Industrial and Transportation continued to invest in innovative new products along with complementary gap-fill acquisitions, evidenced by the closing of eight acquisitions in 2008, with some of the larger acquisitions summarized as follows. In July 2008, 3M acquired K&H Surface Technologies Pty. Ltd., an Australian-based manufacturing company specializing in a range of repair products for the professional do-it-yourself automotive refinish markets. In August 2008, 3M acquired Polyfoam Products Inc., a structural adhesives company specializing in foam adhesives for tile roofing and other adhesive products for the building industry. In October 2008, 3M completed its acquisition of EMFI S.A. and SAPO S.A.S., manufacturers of polyurethane-based structural adhesives and sealants headquartered in Haguenau, France. In October 2008, 3M also completed its acquisition of Meguiar’s Inc., a 100-year-old business that manufactures the leading Meguiar’s brand of car care products for cleaning and protecting automotive surfaces, which is headquartered in Irvine, California.

 

Investment:

 

In March 2005, 3M’s automotive business completed the purchase of 19 percent of TI&M Beteiligungsgesellschaft mbH (TI&M) for approximately $55 million. TI&M is the parent company of I&T Innovation Technology Entwicklungsund Holding Aktiengesellschaft (I&T), an Austrian maker of flat flexible cable and circuitry. Pursuant to a Shareholders Agreement, 3M marketed the firm’s flat flexible wiring systems for automotive interior applications to the global automotive market. I&T filed a petition for bankruptcy protection in August 2006. As part of its agreement to purchase the shares of TI&M, the Company was granted a put option, which gave the Company the right to sell back its entire ownership interest in TI&M to the other investors from whom 3M acquired its 19 percent interest. The put option became exercisable January 1, 2007. The Company exercised the put option and recovered approximately $25 million of its investment from one of the investors based in Belgium in February 2007. The other two TI&M investors have filed a bankruptcy petition in Austria. The Company is pursuing recovery of the balance of

 

22



Table of Contents

 

its investment both through the Austrian bankruptcy proceedings and pursuant to the terms of the Share Purchase Agreement. The Company received approximately $6 million of its investment back in the fourth quarter of 2008. The Company believes collection of its remaining investment is probable and, as a result, no impairment reserve has been recorded.

 

Health Care Business (18.6% of consolidated sales):

 

 

 

2009

 

2008

 

2007

 

Sales (millions)

 

$

4,294

 

$

4,303

 

$

3,980

 

Sales change analysis:

 

 

 

 

 

 

 

Organic local-currency sales (volume and price)

 

2.7

%

5.0

%

13.6

%

Acquisitions

 

0.9

 

1.7

 

4.6

 

Local-currency sales

 

3.6

%

6.7

%

18.2

%

Divestitures

 

 

(0.1

)

(23.5

)

Translation

 

(3.8

)

1.5

 

4.2

 

Total sales change

 

(0.2

)%

8.1

%

(1.1

)%

 

 

 

 

 

 

 

 

Operating income (millions)

 

$

1,350

 

$

1,175

 

$

1,884

 

Percent change

 

14.9

%

(37.6

)%

2.0

%

Percent of sales

 

31.4

%

27.3

%

47.4

%

 

The Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, dental and orthodontic practitioners, and health information systems. Products and services provided to these and other markets include medical and surgical supplies, skin health and infection prevention products, drug delivery systems, dental and orthodontic products, health information systems and anti-microbial solutions. As discussed in Note 2, 3M completed the sale of its global branded pharmaceuticals business in Europe in January 2007.

 

Fourth quarter and year 2009 results:

 

Fourth-quarter sales in Health Care were $1.1 billion, up nearly 11 percent in dollars and up 6 percent in local currency. Foreign exchange impacts added nearly 5 percent to fourth quarter sales. Sales increased in every business within health care, most notably infection prevention, skin and wound care and health information systems. The orthodontics business also showed a nice rebound in the fourth quarter. Geographically, sales grew in all major areas led by Canada, Latin America and Asia Pacific.

 

Fourth-quarter 2009 operating income increased to $375 million, or 32.7 percent of sales, with operating income growth driven by favorable product mix, good cost control and continued productivity efforts across the portfolio. Fourth quarter 2008 includes charges of $50 million for restructuring and exit activities.

 

For the full year, sales were $4.3 billion, up 3.6 percent in local currencies. This growth was broad-based, with positive contributions from nearly all businesses. Sales growth was led by the infection prevention and skin and wound care businesses, which provide a multitude of products that improve patient treatment outcomes and increase efficiency for health care providers. 3M also drove positive local-currency sales growth in the oral care business. On a geographic basis, sales growth rates were highest in Asia Pacific, Latin America and Canada.

 

Health Care recorded charges of $20 million related to restructuring actions in 2009, with this charge comprised of employee-related liabilities for severance and benefits. In 2008, this business segment recorded charges of $60 million related to restructuring and exit activities. Including these charges, full-year operating income in Health Care grew 15 percent to $1.35 billion, with operating income margins of 31.4 percent in 2009. 3M’s longer-term plan is to keep reinvesting in this business to drive higher growth, even if operating income margins at some point compress to the high-20’s.

 

In addition, the Health Care business invested in a number of areas to drive new products, accelerate growth and improve competitiveness. For example, 3M’s drug delivery systems business entered the large and growing dry-powder inhaler segment. In wound care, 3M strengthened its market leadership in clear wound dressings with new 3MTegaderm dressings for IV sites and chronic wound care. The dental business launched a number of new products, including new decay-preventative sealants, curing lights and impression material systems. In health information systems, 3M continued to launch solutions for the new International Classification of Diseases (ICD-10) coding, inpatient/outpatient medical record coding, reimbursement and data connectivity. And finally, 3M opened or expanded major new R&D and manufacturing facilities around the world, including China, Singapore, India, Brazil and Dubai. These investments are critical to 3M’s growth acceleration plans around the globe.

 

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Table of Contents

 

Fourth quarter and year 2008 results:

 

In the fourth quarter of 2008, Health Care sales topped $1 billion, despite a nearly 7 percentage point penalty from currency translation. In local-currency terms, sales rose 4.3 percent, including 2.2 percent from acquisitions. 3M saw solid local-currency growth in the medical products area, specifically in core infection prevention and skin and wound care products. Geographically, the U.S. and Asia Pacific led sales growth. Operating income margins of 24.0 percent in the fourth quarter of 2008 were the highest in the Company, which includes the impact of $50 million in restructuring and exit activity charges that reduced operating income margins by 4.9 percentage points.

 

For full-year 2008, Health Care’s results were strong, with sales increasing 8.1 percent to $4.3 billion and operating income margins of 27.3 percent. 2008 includes the impact of $60 million in restructuring and exit activities that reduced operating income margins by 1.4 percentage points. As discussed further below, 2007 operating income results include significant gains from the sale of 3M’s pharmaceuticals business in January 2007, negatively impacting the 2008 versus 2007 year-on-year operating income comparison. Local-currency sales were up 6.7 percent, largely organic, but also included 1.7 percent from acquisitions. In 2008, 3M completed a number of important bolt-on acquisitions in Health Care, including TOP-Service, a German orthodontic technology and services company offering a digital lingual solution; Imtec, an Oklahoma-based manufacturer of dental implants and cone beam computed tomography; and Solumed, a Quebec-based developer and marketer of leading-edge medical products designed to prevent infections in operating rooms and hospitals. Full-year 2008 sales were led by strong increases in 3M’s medical, dental and orthodontics businesses. Sales grew in all geographies, led by strong gains in Asia Pacific and Latin America.

 

The combination of the following items positively impacted total year 2007 Health Care operating income by $791 million. As discussed in Note 2, in January 2007 the Company sold its branded pharmaceuticals business in the Europe region. The operating income gain related to this sale, which is included in Health Care, totaled $781 million. In addition, as discussed in Note 4, a net operating income gain of $10 million was recorded in 2007, which primarily related to adjustments to restructuring costs incurred in the fourth quarter of 2006.

 

3M believes the following disaggregated information for 3M Health Care’s remaining businesses (without pharmaceuticals) and for pharmaceuticals on a stand-alone basis provides useful information.

 

Health Care Business without Pharmaceuticals:

 

 

 

2009

 

2008

 

2007

 

Sales (millions)

 

$

4,294

 

$

4,303

 

$

3,980

 

Sales change analysis:

 

 

 

 

 

 

 

Organic local-currency sales (volume and price)

 

2.7

%

5.0

%

13.6

%

Acquisitions

 

0.9

 

1.7

 

4.6

 

Local-currency sales