3M 2006 Annual Report Download - page 48

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sales by approximately 0.6%. In 2005, local currency sales increased slightly. Given the relatively flat sales, operating
income dollars and margins have remained at a healthy level, even after considering the impact of net gains related to
the sale of branded pharmaceuticals in 2006.
Display and Graphics Business (16.4% of consolidated sales):
2006 2005 2004
Sales (millions) $3,765 $3,511 $3,346
Sales change analysis:
Local currency (volume and price) 6.9% 4.7% 12.4%
Translation 0.3 0.2 4.7
Total sales change 7.2% 4.9% 17.1%
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Operating income (millions) $1,062 $1,162 $1,115
Percent change (8.6)% 4.2% 28.8%
Percent of sales 28.2% 33.1% 33.3%
The Display and Graphics segment serves markets that include electronic display, touch screen, traffic safety and
commercial graphics. This segment includes optical film and lens solutions for electronic displays; touch screens and
touch monitors; computer screen filters; reflective sheeting for transportation safety; and commercial graphics systems.
The optical film business provides films that serve numerous market segments of the display lighting 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. The optical
business includes a number of different products that are protected by various patents and groups of patents. The
remaining lifetimes of such patents, as well as patents protecting future products, range from less than a few years to
more than 15 years. These patents provide varying measures of exclusivity to 3MIRUDQXPEHURIVXFKSURGXFWV0¶V
proprietary manufacturing technology and know-how also provide a competitive advantage to 3M independent of such
patents.
In 2006, the Display and Graphics business posted local-currency sales growth of 6.9%. Optical film sales volumes
increased at double-digit rates in 2006. 3M saw an acceleration in the LCD industry due to strong consumer demand
IRU/&'79¶VZKLFKGURYHUHFRUGVDOHVRI0¶VSURSULHWDry optical films, despite ongoing downward pricing pressure
in these consumer electronic applications. Commercial Graphics, a supplier of large-format graphics solutions that cut
across a range of industries, delivered strong double-digit local-currency growth in 2006. Traffic Safety Systems also
posted solid local-currency growth. Operating income declined by 8.6%. Operating income included $39 million in
restructuring expenses, primarily comprised of asset impairments and severance and related benefits, which
negatively impacted operating income growth by 3.4%. These asset impairments relate to decisions the Company
made in the fourth quarter of 2006 to exit certain marginal product lines in the Touch Systems and Optical Systems
businesses. In optical film, selling price declines, the sales mix shift towards larger LCD displays, and operational
FKDOOHQJHVUHODWHGWRWKH&RPSDQ\¶VQHZRSWLFDOILOP manufacturing production line penalized operating income in
2006.
In 2005, Display and Graphics local-currency sales grew 4.7%, impacted by many factors. The first half of 2005 was
tempered by tough year-on-year optical ILOPFRPSDULVRQVZKLOH0¶VWUDIILFVDfety systems business awaited a new
highway funding bill in the United States and the sluggish economies in Western Europe and Japan held back growth in
the commercial graphics business. Growth rebounded in the second half of 2005 as a new U.S. highway funding bill was
passed in July, the economies in Western Europe and Japan started to show some moderate growth and, as expected,
3M saw acceleration in demand for consumer electronics, especially flat-panel LCD televisions and a more normal LCD
component inventory situation. This growth in the second half RIGURYHUHFRUGVDOHVRI0¶VSURSULHWDU\RSWLFDOILOPV
and components despite growing pricing pressure. The continued decline in lens systems for the CRT rear projection
television market negatively impacted Display and Graphics sales growth by approximately 3% in 2005 and negatively
impacted operating income by approximately 7.5% in 2005.