3M 2005 Annual Report Download - page 40

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the CRT rear projection television market along with the phase out of the commercial videotape business. Sales growth
in the Consumer and Office segment was broad-based across the many channels 3M serves, most notably in the
mass-market consumer and home improvement retail channels. For the Electro and Communications segment, sales
growth was led by demand for 3M electronic products for the semiconductor manufacturers, along with continued
strong growth in electrical products for insulating, testing and sensing. Sales growth in the Safety, Security and
Protection Services segment was driven by continued strong demand for personal protection products and solutions,
particularly respiratory protection products, along with strong demand for cleaning and protection products for
commercial buildings. Sales growth in the Transportation segment was led by both the automotive OEM and repair
markets. Refer to the Performance by Business Segment section for a more detailed discussion of the results of
the respective segments.
Geographically, U.S. sales revenue increased 4.9%, Asia Pacific local-currency sales (which exclude translation
impacts) increased 10.6%, European local-currency sales increased 0.9%, and the combined Latin America and
Canada area local-currency sales increased 1.3%. Refer to the Performance by Geographic Area section for a more
detailed discussion of the results for the respective areas.
Operating income in 2005 increased by 9.4% versus 2004, as all seven business segments posted increases. The
combination of solid sales growth and positive benefits from corporate initiatives helped drive the increase in
operating income. The Company estimates that cost reduction projects related to initiatives provided a combined
incremental benefit to operating income of approximately $400 million in 2005. These initiatives contributed more
than $400 million to operating income in both 2004 and 2003.
3M generated $4.258 billion of operating cash flows in 2005, essentially flat when compared to 2004, and ended
the year with $1.072 billion of cash and cash equivalents. In 2005, the Company utilized approximately $3.6 billion
of cash to repurchase 3M common stock under its share repurchase authorization and to pay dividends, and
contributed $788 million to its pension and postretirement plans. 3M’s debt to total capital ratio (total capital
defined as debt plus equity) as of December 31, 2005, was approximately 19%. 3M has an AA credit rating from
Standard & Poor’s and an Aa1 credit rating from Moody’s Investors Service.
The Company experienced both price increases and supply limitations affecting several oil-derived raw materials
in 2005, which is expected to carry forward into 2006, but to date the Company is receiving sufficient quantities of
such materials to meet its reasonably foreseeable production requirements. It is impossible to predict future shortages
of raw materials or the impact any such shortages would have. Hurricanes Katrina and Rita resulted in tight supply
conditions and significant increases in energy costs, fuel surcharges and prices for certain natural gas and
petroleum-related raw materials and their derivatives. 3M has avoided disruption to its manufacturing operations
through careful management of existing raw material inventories and development and qualification of additional
supply sources. 3M manages commodity price risks through negotiated supply contracts, price protection
agreements and forward physical contracts. Fluctuations in foreign currency exchange rates also impact results,
although the Company minimizes this effect through hedging about half of this impact. 3M will also continue, as it
has for many years, to incur expenses (insured and uninsured) in managing its litigation and environmental
contingencies.
In 2006, 3M expects to drive profitable growth by investing in its most promising commercialization, geographic
and technology opportunities, with part of this investment coming from savings generated through continuous
operational improvements. The Company expects solid sales growth across the majority of its business portfolio.
The Company’s long history and unique ability to match technological solutions with the needs of its customers
has resulted in a steady flow of new products and solutions, with this trend expected to continue in 2006. In
addition, the Company’s increasing focus on products and solutions for emerging economies, such as Asia and
Eastern Europe, is expected to foster significant growth in 2006. The Company expects to increase both research
and development and capital expenditures in 2006, led primarily by growth programs. Research, development and
related expenses totaled $1.242 billion in 2005, or 5.9% of sales. The Company expects 2006 capital expenditures
to total approximately $1.1 billion, compared with $943 million in 2005, providing the capacity to meet expected
growth.
While 3M anticipates solid sales growth across the majority of its businesses, sales are expected to decline in a
few of its businesses. In Health Care, 3M expects continued solid growth in its core medical and dental
businesses as 3M continues to invest in fast growth areas such as the alternate care segment in medical, digital
dentistry, and emerging markets. However, 3M expects declines in its personal care business (which will become
part of the combined Industrial and Transportation segment in 2006) and in its branded pharmaceuticals business
(Health Care) to persist throughout 2006. 3M experienced a sales decline in the fourth quarter of 2005 for