3M 2008 Annual Report Download - page 18

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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 2008, 3M made certain
product moves between its business segments. 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; Safety, Security and Protection Services; Consumer and Office; Display and
Graphics; and Electro and Communications.
3M had record sales in 2008 despite a dramatic fourth-quarter 2008 economic downturn. 3M is responding to this
lower demand with aggressive cost and cash management, along with tighter operational discipline. 3M expects to
manage through these worldwide market challenges and is positioning itself to benefit when growth returns. 3M
streamlined its operations through 2008 and will continue to optimize to protect against the downside throughout
2009. In the fourth quarter of 2008 alone, 3M announced reductions of over 2,400 full-time positions worldwide,
which brought total year reductions to approximately 3,500. These job eliminations spanned all sectors and all
geographies, but were particularly focused on those developed economies experiencing the most sales pressure. In
addition, 3M has furloughed factory workers until production volumes return to more normal levels and contract
workers are also being reduced to only those considered essential. These 2008 actions in total are expected to save
the Company $250 to $300 million in 2009. 3M also decided to defer merit pay increases in 2009 except in those
cases where local laws prohibit it, with estimated cost-avoidance of approximately $100 million in 2009. In addition,
3M has amended its practice on banked vacation — effectively phasing it out — which will reduce expenses by an
estimated $100 million in both 2009 and 2010.
While this market is difficult to predict, in 2009 for planning purposes, 3M is assuming year-on-year declines in
organic sales volume, negative foreign currency impacts on sales, operating margin declines, and earnings per share
declines. 3M will work to conserve cash by reducing capital expenditures by more than 30 percent in 2009 and by
focusing on reducing working capital. 3M has halted stock repurchases until the credit market offers more visibility.
The strength of 3M’s customer focused diversified business and technology platforms, unparalled geographic reach,
and relentless attention to operational excellence, along with 3M’s balance sheet strength, provide a strong
foundation for stability and consistency in an uncertain global economy.
For the three months ended December 31, 2008, sales decreased 11.2 percent compared to the same period last
year, due to an increasingly challenging global economy. Local currency sales (which include volume, selling price
and acquisition impacts, but exclude divestiture and translation impacts) increased in Safety, Security and Protection
Services and in Health Care. Sales in local currencies for the other four business segments dropped during the fourth
quarter. Fourth quarter 2008 net income was $536 million, or $0.77 per diluted share, compared to $851 million, or
$1.17 per diluted share in the fourth quarter of 2007. In response to difficult economic conditions, in the fourth-quarter
of 2008, 3M took actions which resulted in net pre-tax charges of $219 million for restructuring actions and exit
activities, which reduced net income by $140 million, or $0.20 per diluted share, as 3M aggressively balanced its cost
structure to a slower growth environment. The fourth quarter of 2007 included net pre-tax charges of $20 million
related to restructuring, exit activities and a loss on sale of businesses, which reduced net income by $12 million, or
$0.02 per diluted share. Refer to the “Special Items” summary at the end of this overview section for more detail on
these items that impacted results.
For total year 2008, sales increased 3.3 percent to $25.3 billion, with local-currency sales up 1.4 percent. Operating
income margins were 20.6 percent, including restructuring and other items that negatively impacted operating
income by $269 million, or 1.1 percentage points. In addition to the fourth quarter items noted in the preceding
paragraph, refer to the “Special Items” summary at the end of this overview section for discussion of other items
impacting results. In 2008, restructuring and other special items negatively impacted net income by $194 million, or
$0.28 per diluted share. In 2007, the largest special item was the gain on sale of businesses, primarily the global
branded pharmaceuticals business in Europe, which, combined with other items, benefited 2007 net income by $448
million, or $0.62 per diluted share. Including these special items, 3M reported net income of $3.460 billion, or $4.89
per diluted share for 2008, compared to net income of $4.096 billion, or $5.60 per diluted share, for 2007.
In December 2006 and January 2007, 3M completed the sale of its branded pharmaceuticals business, resulting in
gains in the fourth quarter of 2006 and 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 both
2007 and 2006, 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 of $4.096 billion, or $5.60 per diluted
share, compared with net sales of $22.923 billion and net income of $3.851 billion, or $5.06 per diluted share, in
2006. Excluding the special items in both years, the Company still achieved strong underlying operating performance,