3M 2009 Annual Report Download - page 24

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point. Other benefits to cost of sales as a percent of net sales included increases in selling prices and a slight
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