3M 2005 Annual Report Download - page 39

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13
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products. In 2005, 3M
managed its operations in seven operating business segments: Health Care; Industrial; Display and Graphics;
Consumer and Office; Electro and Communications; Safety, Security and Protection Services; and Transportation.
Refer to the Performance by Business Segment section for discussion of segment changes effective in the first
quarter of 2006.
3M’s 2005 performance demonstrated the operational strength of 3M and the value of the diversification of the 3M
business portfolio. 3M’s sourcing organization and the businesses worked together to maintain customer service,
while successfully managing the business to avoid supply disruptions in the face of hurricanes and shortages of key
raw materials. 3M increased its dividend 16.7%, the 47
th
consecutive year of 3M dividend increases, and repurchased
$2.3 billion of stock under its stock repurchase authorization. The combination of dividends and stock buy-backs
returned a total of $3.6 billion to shareholders during 2005. 3M also acquired CUNO, a liquid filtration company.
In 2005, 3M reported record net sales of $21.167 billion and record net income of $3.199 billion, or $4.12 per diluted
share, compared with net sales of $20.011 billion and net income of $2.990 billion, or $3.75 per diluted share, in
2004. The combination of a 5.8% increase in net sales, including core local-currency sales growth of 4.1% (which
excludes the impact of businesses acquired in the last 12 months), and declining manufacturing costs as a percent
of sales, resulted in a 23.7% operating income profit margin.
In 2005, income before cumulative effect of accounting change totaled $3.234 billion, or $4.16 per diluted share.
As of December 31, 2005, 3M adopted Financial Accounting Standards Board Interpretation (FASB) No. 47,
“Accounting for Conditional Asset Retirement Obligations” (FIN 47). The adoption of FIN 47 resulted in an after tax
charge of $35 million, which is reflected as a cumulative change in accounting principle (refer to Note 1 to the
Consolidated Financial Statements for more detail). In addition, during 2005, 3M completed its evaluation of the
repatriation provision of the American Jobs Creation Act of 2004 and repatriated approximately $1.8 billion of foreign
earnings into the U.S. pursuant to its provisions. As a consequence, in the second quarter of 2005, 3M recorded a tax
expense of $75 million, net of available foreign tax credits. Combined, these two items reduced net income by
$110 million in 2005.
The following table contains sales and operating income results by business segment for the years ended
December 31.
2005 vs. 2004
2005 2004 % change
(Dollars in millions) Net % of Oper. Net % of Oper. Net Oper.
Sales Total Income Sales Total Income Sales Income
Business Segments
Health Care $ 4,373 20.7% $1,215 $ 4,230 21.1% $1,123 3.4% 8.2%
Industrial 3,806 18.0% 735 3,444 17.2% 610 10.5% 20.5%
Display and Graphics 3,558 16.8% 1,159 3,416 17.1% 1,133 4.2% 2.3%
Consumer and Office 2,986 14.1% 576 2,861 14.3% 542 4.4% 6.3%
Electro and Communications 2,333 11.0% 463 2,224 11.1% 342 4.9% 35.4%
Safety, Security and
Protection Services 2,292 10.8% 553 2,125 10.6% 491 7.9% 12.6%
Transportation 1,772 8.4% 461 1,674 8.4% 426 5.8% 8.1%
Corporate and
Unallocated 47 0.2% (153) 37 0.2% (89)
Total Company $21,167 100% $5,009 $20,011 100% $4,578 5.8% 9.4%
3M’s performance in 2005 was broad-based, with all seven business segments contributing to positive local-currency
sales growth. Sales growth in Health Care was led by 3M’s core medical and dental businesses and strong growth in
health information systems, which helped overcome the growth challenges of the pharmaceuticals and personal care
businesses. Sales growth in the Industrial segment was led by industrial adhesives and tapes, as well as the abrasives
businesses. The CUNO acquisition added 5.1% to Industrial sales growth. Display and Graphics sales growth in
display enhancement films used in flat-panel devices was partially offset by the continued decline in lens systems for