2005



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 47th 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.



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