3M 2007 Annual Report Download - page 23

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17
Research, Development and Related Expenses:
Research, development and related expenses (R&D) as a percent of net sales decreased 1.0 percentage point in 2007
when compared to 2006, as expenses incurred in 2006 in the Company’s now-divested R&D-intensive Pharmaceuticals
business did not repeat in 2007. Non-pharmaceutical ongoing R&D expenses, after adjusting for the following items, were
up approximately 11% in dollars, as the Company continued to aggressively invest in future technologies and growth
opportunities. 2006 spending included a $95 million in-process research and development charge (discussed in Note 2)
and $75 million in restructuring actions (Note 4), which increased 2006 R&D as a percent of sales by 0.7 percentage
points. In dollars, R&D spending decreased $154 million when comparing 2007 to 2006, with the change in restructuring
and other items year-on-year decreasing R&D by $174 million, 2006 pharmaceutical SG&A spending decreasing $120
million and other R&D spending increasing $140 million, or approximately 11% in dollars, reflecting 3M’s continuing
commitment to fund future growth for the Company.
R&D increased as a percent of sales by 0.6 of a percentage point, or $248 million, when comparing 2006 to 2005. The
2006 spending included a $95 million in-process research and development charge (discussed in Note 2) and $75 million
in restructuring actions (Note 4). Other spending increased approximately $78 million, representing an increase of
approximately 6% compared with 2005.
Gain on Sale of Businesses:
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.
In December 2006, 3M completed the sale of its global branded pharmaceuticals businesses in the United States,
Canada, and Latin America region and the Asia Pacific region, including Australia and South Africa. 3M received
proceeds of $1.209 billion for these transactions and recognized a pre-tax gain on sale of $1.074 billion in 2006
(recorded in the Health Care segment). For more detail, refer to Note 2.
Operating Income:
3M uses operating income as one of its primary business segment performance measurement tools. Operating income
margins over the past several years have been in excess of 22%, helped by solid sales growth and an ongoing strong
commitment to maintaining operational discipline throughout 3M’s global operations. Operating income margins of 25.3%
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. Operating income margins of 24.8% for 2006
were positively impacted by 2.2 percentage points ($523 million) from the gain on sale of portions of the pharmaceuticals
business, net of restructuring and other actions. Adjusting for the preceding items, operating income margins in 2007 were
similar to 2006.
Interest Expense and Income:
(Millions) 2007
2006
2005
Interest expense $ 210 $122 $ 82
Interest income (132) (51) (56)
Total $ 78 $ 71 $ 26
Interest Expense: Interest expense increased year-on-year in both 2007 and 2006, primarily due to higher average debt
balances and higher interest rates.
Interest Income: Interest income increased in 2007 due to higher average cash, cash equivalent and marketable securities
balances and higher interest rates. Interest income was lower in 2006, with lower average cash, cash equivalent and
marketable securities balances partially offset by higher interest rates.