3M 2011 Annual Report Download - page 20

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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 eight sections:
x Overview
x Results of Operations
x Performance by Business Segment
x Performance by Geographic Area
x Critical Accounting Estimates
x New Accounting Pronouncements
x Financial Condition and Liquidity
x Financial Instruments
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 2011, 3M made certain
product moves between its business segments in its continuing effort to drive growth by aligning businesses around
markets and customers. 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.
Fourth-quarter 2011 sales totaled $7.1 billion, an increase of 5.7 percent from the fourth quarter of 2010. Net income
attributable to 3M was $954 million, or $1.35 per diluted share in the fourth quarter of 2011, compared to $928
million, or $1.28 per diluted share, in the fourth quarter of 2010. 3M’s sales growth was led by its industrial-oriented
businesses, along with steady growth in consumer and health care. The business environment remained challenging,
impacted by deteriorating demand in Western Europe and slower consumer electronics activity. While sales grew
across much of the portfolio, sales of optical films for LCD TVs remained weak and momentum also slowed in other
parts of electronics. Four of the Company’s six business segments showed growth in sales, led by Industrial and
Transportation at 14.3 percent, Safety, Security and Protection Services at 9.4 percent, Consumer and Office at 6.1
percent, and Health Care at 5.4 percent. A slowdown in electronics-related businesses negatively impacted both the
Electro and Communications and Display and Graphics business segments. Electro and Communications sales
decreased 2.7 percent and Display and Graphics sales declined 8.8 percent. Sales declined 17 percent in optical
systems, which is part of Display and Graphics, impacted by end-market weakness and lower attachment rates in
LCD TVs.
Fourth-quarter 2011 sales increased in every major geographic region, with Latin America/Canada up 9.7 percent,
the U.S. up 7.4 percent, Europe/Middle East/Africa up 4.4 percent, and Asia Pacific up 2.8 percent. Excluding optical
systems, Asia Pacific sales increased 7.6 percent. Of the 5.7 percent worldwide sales growth, 3.3 points was from
the combined impact of higher organic volume of 1.3 points and selling price growth of 2.0 points, 2.3 points was
from acquisitions, and 0.1 points was from favorable currency effects. Organic volume growth of 1.3 percent reflected
slower growth in Asia Pacific, partially due to weakness across the electronics market and slower growth in China, in
addition to weakness in Western Europe.
During 2011, 3M was impacted by the first-quarter earthquake and tsunami in Japan and by the fourth-quarter
flooding in Thailand. Automobile and electronic manufacturers were most impacted; thus, 3M’s automotive OEM and
electronics-related businesses were most affected. 3M estimates that combined direct and indirect business
disruption resulting from the 2011 Japan natural disaster, net of the benefit from sales of 3M products used in the
reconstruction efforts and initial insurance recoveries, plus the impact of Thailand flooding, reduced 2011 sales
growth by an estimated 0.8 percentage points and earnings by approximately 6 cents per diluted share, with most of
this impact in the first half of 2011. In the fourth quarter of 2011, the flooding in Thailand reduced sales growth by an
estimated $35 million and operating income by $20 million, with this operating income effect offset by $23 million in
insurance recoveries related to the earthquake and tsunami in Japan. Japan represented approximately 9 percent of
total 3M sales for total year 2011. As conditions improve, 3M has been working to capture additional sales for its
businesses, such as products used in clean-up (construction and home improvement products), safety-related
products (respirator masks and personal protective equipment), energy savings/refurbishment products (window
films) and products that help in the rebuilding effort (traffic safety, telecommunication/utility and commercial
construction). Related to these natural disasters, based on 3M’s current assessment, no material asset or investment