3M 2007 Annual Report Download - page 24

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Provision for Income Taxes:
(Percent of pre-tax income) 2007 2006 2005
Effective tax rate 32.1% 30.6% 33.7%
The effective tax rate for 2007 was 32.1%, compared with 30.6% in 2006. The Company’s 2007 tax rate benefited
from reduced international tax rates and an increased benefit for the domestic manufacturer’s deduction, but was
penalized by the elimination of the foreign export sales benefit. The Company’s 2006 tax rate included benefits from
adjustments to its reserves for tax contingencies following the settlement of income tax audits. Refer to Note 8 for
additional information.
The tax rate for 2006 was 30.6%, compared with 33.7% in 2005. As discussed above, the Company’s 2006 tax rate
included benefits from adjustments to its reserves for tax contingencies. In 2005, the Company repatriated
approximately $1.7 billion of foreign earnings under the American Jobs Creation Act of 2004 (Jobs Act). The Jobs Act
provided 3M the opportunity to tax-effectively repatriate foreign earnings for U.S. qualifying investments specified by 3M’s
domestic reinvestment plan. As a consequence, in the second quarter of 2005, 3M recorded a tax expense of $75 million,
net of available foreign tax credits, which negatively impacted the 2005 effective worldwide tax rate by 1.6%. No similar
repatriation occurred in 2006 since this Jobs Act provision only applied to 2005.
Minority Interest:
(Millions) 2007 2006 2005
Minority interest $55 $51 $55
Minority interest expense eliminates the income or loss attributable to non-3M ownership interests in 3M consolidated
entities. 3M’s most significant consolidated entity with non-3M ownership interests is Sumitomo 3M Limited in Japan (3M
owns 75% of Sumitomo 3M Limited).
Cumulative Effect of Accounting Change:
As of December 31, 2005, the Company adopted FASB Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations” (FIN 47). This accounting standard applies to the fair value of a liability for an asset retirement
obligation associated with the retirement of tangible long-lived assets and where the liability can be reasonably
estimated. Conditional asset retirement obligations exist for certain of the Company’s long-term assets. The fair value
of these obligations is recorded as liabilities on a discounted basis. Over time the liabilities are accreted for the change
in the present value and the initial capitalized costs are depreciated over the useful lives of the related assets. The
adoption of FIN 47 resulted in the recognition of an asset retirement obligation liability of $59 million at December 31,
2005 and an after-tax charge of $35 million for 2005, which was reflected as a cumulative change in accounting
principle in the Consolidated Statement of Income. At December 31, 2007, the asset retirement obligation liability was
$59 million.
Currency Effects:
3M estimates that year-on-year currency effects, including hedging impacts, increased net income by approximately
$150 million in 2007, $20 million in 2006 and $115 million in 2005. This estimate includes the effect of translating profits
from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations
in the United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce
foreign currency exchange rate risks. 3M estimates that year-on-year derivative and other transaction gains and losses
increased net income by approximately $10 million in 2007, had an immaterial impact on net income in 2006, and
increased net income by approximately $50 million in 2005.
PERFORMANCE BY BUSINESS SEGMENT
Disclosures relating to 3M’s business segments are provided in Item 1, Business Segments. Financial information and
other disclosures are provided in the Notes to the Consolidated Financial Statements. As discussed in Note 16 to the
Consolidated Financial Statements, effective in the first quarter of 2007, 3M made certain product moves between its
business segments in its continuing effort to drive growth by aligning businesses around markets and customers. Segment
information presented herein reflects the impact of these changes for all periods presented. The reportable segments
are the Health Care segment, Industrial and Transportation segment, Display and Graphics segment, Consumer and
Office segment, Safety, Security and Protection Services segment, and Electro and Communications segment.
Information related to 3M’s business segments is presented in the tables that follow. Local-currency sales (which
include both core and acquisition volume impacts, plus price impacts) are provided for each segment. The divestiture
impact, translation impact and total sales change are also provided for each segment.