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3M Company (96OI)

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Tuesday 22 February, 2011

3M Company

Annual Financial Report

RNS Number : 6072B
3M Company
21 February 2011
 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

  

   x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


 

For the fiscal year ended December 31, 2010

 

Commission file number 1-3285

 

3M COMPANY

 

State of Incorporation: Delaware


I.R.S. Employer Identification No. 41-0417775

 

Principal executive offices: 3M Center, St. Paul, Minnesota 55144

 

Telephone number: (651) 733-1110

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class


Name of each exchange
on which registered

Common Stock, Par Value $.01 Per Share


New York Stock Exchange, Inc.
Chicago Stock Exchange, Inc.

 

Note: The common stock of the Registrant is also traded on the SWX Swiss Exchange.

Securities registered pursuant to section 12(g) of the Act: None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x    No  o

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o    No  x

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x


Accelerated filer o


Non-accelerated filer o

(Do not check if a smaller
reporting company)


Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  o     No  x

 

The aggregate market value of voting stock held by nonaffiliates of the Registrant, computed by reference to the closing price and shares outstanding, was approximately $62.6 billion as of January 31, 2011 (approximately $56.3 billion as of June 30, 2010, the last business day of the Registrant's most recently completed second quarter).

 

Shares of common stock outstanding at January 31, 2011: 711,805,978.

 

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Company's definitive proxy statement (to be filed pursuant to Regulation 14A within 120 days after Registrant's fiscal year-end of December 31, 2010) for its annual meeting to be held on May 10, 2011, are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.

 

This document (excluding exhibits) contains 124 pages.

The table of contents is set forth on page 2. The exhibit index begins on page 121.

 

3M COMPANY

FORM 10-K

For the Year Ended December 31, 2010

 

TABLE OF CONTENTS

 





Beginning
Page

 

PART I






 

ITEM 1


Business..................................................................................................................


3


 

 







 

ITEM 1A


Risk Factors.............................................................................................................


9


 







 

ITEM 1B


Unresolved Staff Comments.......................................................................................


10


 







 

ITEM 2


Properties.................................................................................................................


10


 







 

ITEM 3


Legal Proceedings.....................................................................................................


10


 







 

ITEM 4


Removed and Reserved..............................................................................................


10


 







 

PART II






 

ITEM 5


Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities...............................................................................


10


 







 

ITEM 6


Selected Financial Data.............................................................................................


12


 







 

ITEM 7


Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................................................................


13


 







 

ITEM 7A


Quantitative and Qualitative Disclosures About Market Risk..........................................


40


 







 

ITEM 8


Financial Statements and Supplementary Data............................................................


41


 







 



Index to Financial Statements....................................................................................


41


 







 

ITEM 9


Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................................................................................


118


 







 

ITEM 9A


Controls and Procedures............................................................................................


118


 







 

ITEM 9B


Other Information.......................................................................................................


118


 







 

PART III






 

ITEM 10


Directors, Executive Officers and Corporate Governance...............................................


119


 







 

ITEM 11


Executive Compensation............................................................................................


119


 







 

ITEM 12


Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...............................................................................................


119


 







 

ITEM 13


Certain Relationships and Related Transactions, and Director Independence..................


120


 







 

ITEM 14


Principal Accounting Fees and Services......................................................................


120


 







 

PART IV






 

ITEM 15


Exhibits, Financial Statement Schedules....................................................................


120


 







 



Index to Exhibits.......................................................................................................


121


 



3M COMPANY

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2010

PART I

 

Item 1. Business.

 

3M Company was incorporated in 1929 under the laws of the State of Delaware to continue operations begun in 1902. The Company's ticker symbol is MMM. As used herein, the term "3M" or "Company" includes 3M Company and its subsidiaries unless the context indicates otherwise. In this document, for any references to Note 1 through Note 19, refer to the Notes to Consolidated Financial Statements in Item 8.

 

Available Information

 

The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. The Company files annual reports, quarterly reports, proxy statements and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

3M also makes available free of charge through its website (http://investor.3M.com) the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.

 

General

 

3M is a diversified technology company with a global presence in the following businesses: Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security and Protection Services; and Electro and Communications. 3M is among the leading manufacturers of products for many of the markets it serves. Most 3M products involve expertise in product development, manufacturing and marketing, and are subject to competition from products manufactured and sold by other technologically oriented companies.

 

At December 31, 2010, the Company employed 80,057 people (full-time equivalents), with 32,955 employed in the United States and 47,102 employed internationally.

 

Business Segments

 

As discussed in Note 17 to the Consolidated Financial Statements, effective in the first quarter of 2010, 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.

 

3M continues to manage its operations in six operating business segments: Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security and Protection Services; and Electro and Communications. 3M's six business segments bring together common or related 3M technologies, enhancing the development of innovative products and services and providing for efficient sharing of business resources. These segments have worldwide responsibility for virtually all 3M product lines. Certain small businesses and lab-sponsored products, as well as various corporate assets and expenses, are not attributed to the business segments. Financial information and other disclosures relating to 3M's business segments and operations in major geographic areas are provided in the Notes to Consolidated Financial Statements.

 

Industrial and Transportation Business: The Industrial and Transportation segment serves a broad range of markets, such as appliance, paper and packaging, food and beverage, electronics, automotive original equipment manufacturer (OEM) and automotive aftermarket (auto body shops and retail). Industrial and Transportation products include tapes, a wide variety of coated and non-woven abrasives, adhesives, specialty materials, filtration products, energy control products, closure systems for personal hygiene products, acoustic systems products, and components and products that are used in the manufacture, repair and maintenance of automotive, marine, aircraft and specialty vehicles.

 

Major industrial products include vinyl, polyester, foil and specialty industrial tapes and adhesives; Scotch® Masking Tape, Scotch® Filament Tape and Scotch® Packaging Tape; packaging equipment; 3M™ VHB™ Bonding Tapes; conductive, low surface energy, hot melt, spray and structural adhesives; reclosable fasteners; label materials for durable goods; and coated, nonwoven and microstructured surface finishing and grinding abrasives for the industrial market. 3M Purification Inc. (previously referred to as CUNO Incorporated), provides a comprehensive line of filtration products for the separation, clarification and purification of fluids and gases. Other industrial products include fluoroelastomers for seals, tubes and gaskets in engines; and engineering fluids. In addition, this segment provides 3M™ Scotchtint™ Window Film for buildings; 3M™ Ultra Safety and Security Window Film for property and personal protection during destructive weather conditions; closure systems for personal hygiene products; and acoustic systems products.

 

Major transportation products include insulation components, including components for catalytic converters; functional and decorative graphics; abrasion-resistant films; masking tapes; fasteners and tapes for attaching nameplates, trim, moldings, interior panels and carpeting; coated, nonwoven and microstructured finishing and grinding abrasives; structural adhesives; and other specialty materials. In addition, 3M provides paint finishing and detailing products, including a complete system of cleaners, dressings, polishes, waxes and other products.

 

Health Care Business: The Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, dental and orthodontic practitioners, and health information systems. Products and services provided to these and other markets include medical and surgical supplies, skin health and infection prevention products, inhalation and transdermal drug delivery systems, dental and orthodontic products (oral care), health information systems, and food safety products.

 

In the medical and surgical areas, 3M is a supplier of medical tapes, dressings, wound closure products, orthopedic casting materials, electrodes and stethoscopes. In infection prevention, 3M markets a variety of surgical drapes, masks and preps, as well as sterilization assurance equipment. Other products include drug delivery systems, such as metered-dose inhalers, transdermal skin patches and related components. In addition, in the fourth quarter of 2010, 3M acquired Arizant Inc., a manufacturer of patient warming solutions designed to prevent hypothermia in surgical settings. Dental and orthodontic products include restoratives, adhesives, finishing and polishing products, crowns, impression materials, preventive sealants, professional tooth whiteners, prophylaxis and orthodontic appliances. In health information systems, 3M develops and markets computer software for hospital coding and data classification, and provides related consulting services. 3M provides food safety products that make it faster and easier for food processors to test the microbiological quality of food.

 

Display and Graphics Business: The Display and Graphics segment serves markets that include electronic display, traffic safety and commercial graphics. This segment includes optical film solutions for LCD electronic displays; computer screen filters; reflective sheeting for transportation safety; commercial graphics sheeting and systems; and mobile interactive solutions, including mobile display technology, visual systems products, and computer privacy filters.

 

The optical film business provides films that serve numerous market segments of the electronic display industry. 3M provides distinct products for five market segments, including products for: 1) LCD computer monitors, 2) LCD televisions, 3) hand-held devices such as cellular phones, 4) notebook PCs and 5) automotive displays. In traffic safety systems, 3M provides reflective sheetings used on highway signs, vehicle license plates, construction work-zone devices, trucks and other vehicles, and also provides pavement marking systems. Major commercial graphics products include films, inks, digital signage systems and related products used to produce graphics for vehicles, signs and interior surfaces. The mobile interactive solutions business focuses on bringing technology to the projection market, including mobile display technology in addition to its visual communication products that serve the world's office and education markets with overhead projectors and transparency films, as well as equipment and materials for electronic and multimedia presentations. In addition, this business includes desktop and notebook computer screen filters that address needs for light control, privacy viewing and glare reduction.

 

Consumer and Office Business: The Consumer and Office segment serves markets that include consumer retail, office retail, home improvement, building maintenance and other markets. Products in this segment include office supply products, stationery products, construction and home improvement products (do-it-yourself), home care products, protective material products, certain consumer retail personal safety products, and consumer health care products. Major consumer and office products include Scotch® brand products, such as Scotch® Magic™ Tape, Scotch® Glue Stick and Scotch® Cushioned Mailer; Post-it® Products, such as Post-it® Flags, Post-it® Note Pads, Post-it® Labeling & Cover-up Tape, and Post-it® Pop-up Notes and Dispensers; construction and home improvement products, including surface-preparation and wood-finishing materials, Command™ Adhesive Products and Filtrete™ Filters for furnaces and air conditioners; home care products, including Scotch-Brite® Scour Pads, Scotch-Brite® Scrub Sponges, Scotch-Brite™ Microfiber Cloth products, O-Cel-O™ Sponges and Scotchgard™ Fabric Protectors; protective material products; certain maintenance-free respirators; certain consumer retail personal safety products, including safety glasses and hearing protectors; and Nexcare™ Adhesive Bandages. In July 2009, 3M acquired ACE® branded (and related brands) elastic bandage, supports and thermometer product lines.

 

Safety, Security and Protection Services Business: The Safety, Security and Protection Services segment serves a broad range of markets that increase the safety, security and productivity of workers, facilities and systems. Major product offerings include personal protection products, safety and security products (including border and civil security solutions), cleaning and protection products for commercial establishments, track and trace solutions, and roofing granules for asphalt shingles. In the fourth quarter of 2010, 3M acquired Cogent Inc. and Attenti Holdings S.A. Cogent Inc. is a provider of finger, palm, face and iris biometric systems for governments, law enforcement agencies, and commercial enterprises. Attenti Holdings S.A. is a supplier of remote people-monitoring technologies used for offender-monitoring applications and to assist eldercare facilities in monitoring and enhancing the safety of patients. In April 2008, 3M acquired Aearo Holding Corp., the parent company of Aearo Technologies Inc. (hereafter referred to as Aearo). Aearo manufactures and sells personal protection and energy absorbing products, which expanded 3M's platform by adding hearing protection as well as eyewear and fall protection product lines to 3M's existing line of respiratory products. The consumer retail portion of Aearo's business is included in 3M's Consumer and Office business segment. The thermal acoustic systems portion of Aearo's business is included in 3M's Industrial and Transportation business segment.

 

This segment's products include certain maintenance-free and reusable respirators, personal protective equipment, electronic surveillance products, films that protect against counterfeiting, and reflective materials that are widely used on apparel, footwear and accessories, enhancing visibility in low-light situations. 3M's Track and Trace Solutions business utilizes radio frequency identification (RFID) technology to provide a growing array of solutions - from library patron self-checkout systems to tracking packages. Other products include spill-control sorbents; 3M™ Thinsulate™ Insulation and 3M™ Thinsulate™ Lite Loft™ Insulation; nonwoven abrasive materials for floor maintenance and commercial cleaning; floor matting; and natural and color-coated mineral granules for asphalt shingles. In the second quarter of 2008, 3M completed the sale of its HighJump Software business which provided supply chain execution software solutions.

 

Electro and Communications Business: The Electro and Communications segment serves the electrical, electronics and communications industries, including electrical utilities; electrical construction, maintenance and repair; original equipment manufacturer (OEM) electrical and electronics; computers and peripherals; consumer electronics; telecommunications central office, outside plant and enterprise; as well as aerospace, military, automotive and medical markets; with products that enable the efficient transmission of electrical power and speed the delivery of information. Products include electronic and interconnect solutions, microinterconnect systems, high-performance fluids, high-temperature and display tapes, telecommunications products, electrical products, and touch screens and touch monitors.

 

Major electronic and electrical products include packaging and interconnection devices; high-performance fluids used in the manufacture of computer chips, and for cooling electronics and lubricating computer hard disk drives; high-temperature and display tapes; insulating materials, including pressure-sensitive tapes and resins; and related items. 3M™ Flexible Circuits use electronic packaging and interconnection technology, providing more connections in less space, and are used in ink-jet print cartridges, cell phones and electronic devices. This segment serves the world's telecommunications companies with a wide array of products for fiber-optic and copper-based telecommunications systems for rapid deployment in fixed and wireless networks. The 3M™ Aluminum Conductor Composite Reinforced (ACCR) electrical power cable, with an aluminum-based metal matrix at its core, increases transmission capacity for existing power lines. The touch systems business includes touch screens and touch monitors.

 

Distribution

 

3M products are sold through numerous distribution channels, including directly to users and through numerous wholesalers, retailers, jobbers, distributors and dealers in a wide variety of trades in many countries around the world. Management believes the confidence of wholesalers, retailers, jobbers, distributors and dealers in 3M and its products - a confidence developed through long association with skilled marketing and sales representatives - has contributed significantly to 3M's position in the marketplace and to its growth.

 



Research and Patents

 

Research and product development constitutes an important part of 3M's activities and has been a major driver of 3M's sales growth. Research, development and related expenses totaled $1.434 billion in 2010, $1.293 billion in 2009 and $1.404 billion in 2008. Research and development, covering basic scientific research and the application of scientific advances in the development of new and improved products and their uses, totaled $919 million in 2010, $838 million in 2009 and $851 million in 2008. Related expenses primarily include technical support provided by 3M to customers who are using existing 3M products; internally developed patent costs, which include costs and fees incurred to prepare, file, secure and maintain patents; and amortization of acquired patents.

 

The Company's products are sold around the world under various trademarks. The Company also owns, or holds licenses to use, numerous U.S. and foreign patents. The Company's research and development activities generate a steady stream of inventions that are covered by new patents. Patents applicable to specific products extend for varying periods according to the date of patent application filing or patent grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country.

 

The Company believes that its patents provide an important competitive advantage in many of its businesses. In general, no single patent or group of related patents is in itself essential to the Company as a whole or to any of the Company's business segments. The importance of patents in the Display and Graphics segment is described in "Performance by Business Segment" - "Display and Graphics Business" in Part II, Item 7, of this Form 10-K.

 

Raw Materials

 

In 2010, the Company experienced cost increases in most raw materials and transportation fuel costs. This was driven by higher basic feedstock costs, particularly oil-derived materials and metals. To date, the Company is receiving sufficient quantities of all raw 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. 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.

 

Environmental Law Compliance

 

3M's manufacturing operations are affected by national, state and local environmental laws around the world. 3M has made, and plans to continue making, necessary expenditures for compliance with applicable laws. 3M is also involved in remediation actions relating to environmental matters from past operations at certain sites. Refer to the "Environmental Matters and Litigation" section in Note 14, Commitments and Contingencies, for more detail.

 

Environmental expenditures relating to existing conditions caused by past operations that do not contribute to current or future revenues are expensed. Reserves for liabilities related to anticipated remediation costs are recorded on an undiscounted basis when they are probable and reasonably estimable, generally no later than the completion of feasibility studies or the Company's commitment to a plan of action. Environmental expenditures for capital projects that contribute to current or future operations generally are capitalized and depreciated over their estimated useful lives.

 

In 2010, 3M invested about $12 million in capital projects to protect the environment. This amount excludes expenditures for remediation actions relating to existing matters caused by past operations that do not contribute to current or future revenues, which are expensed. Capital expenditures for environmental purposes have included pollution control devices - such as wastewater treatment plant improvements, scrubbers, containment structures, solvent recovery units and thermal oxidizers - at new and existing facilities constructed or upgraded in the normal course of business. Consistent with the Company's policies stressing environmental responsibility, capital expenditures (other than for remediation projects) for known projects are presently expected to be about $30 million over the next two years for new or expanded programs to build facilities or modify manufacturing processes to minimize waste and reduce emissions.

 

While the Company cannot predict with certainty the future costs of such cleanup activities, capital expenditures or operating costs for environmental compliance, the Company does not believe they will have a material effect on its capital expenditures, earnings or competitive position.

 

Executive Officers

 

Following is a list of the executive officers of 3M, and their age, present position, the year elected to their present position and other positions they have held during the past five years. No family relationships exist among any of the executive officers named, nor is there any undisclosed arrangement or understanding pursuant to which any person was selected as an officer. This information is presented as of the date of the 10-K filing (February 16, 2011).

 

Name


Age


Present Position


Year
Elected to Present Position


Other Positions Held During 2006-2010

 

George W. Buckley.....


63


Chairman of the Board, President and Chief Executive Officer


2005



 










 

 

Patrick D. Campbell....


58


Senior Vice President and Chief Financial Officer


2002



 










 

Joaquin Delgado..........


51


Executive Vice President, Electro and Communications Business


2009


Vice President and General Manager, Electronics Markets Materials Division, 2007-2009

 









Vice President, Research and Development and New Business Ventures, Consumer and Office Business, 2005-2007

 










 

Joe E. Harlan..............


51


Executive Vice President, Consumer and Office Business


2009


Executive Vice President, Electro and Communications Business, 2004-2009

 










 

Michael A. Kelly..........


54


Executive Vice President, Display and Graphics Business


2006


Division Vice President, Occupational Health and Environmental Safety Division, 2003-2006

 










 

Roger H.D. Lacey........


60


Senior Vice President, Strategy and Corporate Development


2010


Vice President, Corporate Strategy and Marketing Development, 2007-2009

 









Staff Vice President, Corporate Strategy and Marketing Development, 2006-2007

 









Staff Vice President, eBusiness and Corporate Planning and Strategy, 2000-2006

 










 

Angela S. Lalor...........


45


Senior Vice President, Human Resources


2006



 










 

Jean Lobey.................


58


Executive Vice President, Safety, Security and Protection Services Business


2005



 










 

Robert D. MacDonald..


60


Senior Vice President, Marketing and Sales


2004



 










 

Frederick J. Palensky..


61


Executive Vice President, Research and Development and Chief Technology Officer


2006


Executive Vice President, Enterprise Services, 2005-2006

 










 

Brad T. Sauer.............


51


Executive Vice President, Health Care Business


2004



 

Executive Officers (continued)

 

Name


Age


Present Position


Year
Elected to Present Position


Other Positions Held During 2006-2010

 

Hak Cheol Shin...........


53


Executive Vice President, Industrial and Transportation Business


2006



 










 

 

Marschall I. Smith.......


66


Senior Vice President, Legal Affairs and General Counsel


2007


Vice President and General Counsel Brunswick Corporation, 2001-2007

 










 

Inge G. Thulin.............


57


Executive Vice President, International Operations


2004



 










 

John K. Woodworth.....


59


Senior Vice President, Corporate Supply Chain Operations


2006


Vice President, Asia Pacific, 2004-2006

 

Cautionary Note Concerning Factors That May Affect Future Results

 

This Annual Report on Form 10-K, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission, in materials delivered to shareholders and in press releases. In addition, the Company's representatives may from time to time make oral forward-looking statements.

 

Forward-looking statements relate to future events and typically address the Company's expected future business and financial performance. Words such as "plan," "expect," "aim," "believe," "project," "target," "anticipate," "intend," "estimate," "will," "should," "could" and other words and terms of similar meaning, typically identify such forward-looking statements. In particular, these include, among others, statements relating to the Company's

         ·       strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance, and market position,

         ·       worldwide economic and capital markets conditions, such as interest rates, foreign currency exchange rates, and financial conditions of our suppliers and customers,

         ·       new business opportunities, product development, and future performance or results of current or anticipated products,

         ·       the scope, nature or impact of acquisition, strategic alliance and divestiture activities,

         ·       the outcome of contingencies, such as legal and regulatory proceedings,

         ·       future levels of indebtedness, common stock repurchases and capital spending,

         ·       future availability of and access to credit markets,

         ·       pension and postretirement obligation assumptions and future contributions, asset impairments, tax liabilities, and

         ·       the effects of changes in tax, environmental and other laws and regulations in the United States and other countries in which we operate.

 

The Company assumes no obligation to update or revise any forward-looking statements.

 

Forward-looking statements are based on certain assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those reflected in any such forward-looking statements depending on a variety of factors. Important information as to these factors can be found in this document, including, among others, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings of "Overview", "Critical Accounting Estimates" and "Financial Condition and Liquidity."  Discussion of these factors is incorporated by reference from Part I, Item 1A, "Risk Factors," of this document, and should be considered an integral part of Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."  For additional information concerning factors that may cause actual results to vary materially from those stated in the forward-looking statements, see our reports on Form 10-K, 10-Q and 8-K filed with the SEC from time to time.

 

Item 1A. Risk Factors

 

Provided below is a cautionary discussion of what we believe to be the most important risk factors applicable to the Company. Discussion of these factors is incorporated by reference into and considered an integral part of Part II, Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations."

 

* Results are impacted by the effects of, and changes in, worldwide economic and capital markets conditions. The Company operates in more than 65 countries and derives approximately two-thirds of its revenues from outside the United States. The Company's business is subject to global competition and may be adversely affected by factors in the United States and other countries that are beyond its control, such as disruptions in financial markets or downturns in economic activity in specific countries or regions, or in the various industries in which the Company operates; social, political or labor conditions in specific countries or regions; or adverse changes in the availability and cost of capital, interest rates, tax rates, or regulations in the jurisdictions in which the Company operates.

 

* The Company's credit ratings are important to 3M's cost of capital. The major rating agencies routinely evaluate the Company's credit profile and assign debt ratings to 3M. The Company currently has an AA- credit rating, with a stable outlook, from Standard & Poor's and an Aa2 credit rating, with a stable outlook, from Moody's Investors Service. This evaluation is based on a number of factors, which include financial strength, business and financial risk, as well as transparency with rating agencies and timeliness of financial reporting. The Company's current ratings have served to lower 3M's borrowing costs and facilitate access to a variety of lenders. Failure to maintain the current ratings level would adversely affect the Company's cost of funds and could adversely affect liquidity and access to capital markets.

 

* The Company's results are affected by competitive conditions and customer preferences. Demand for the Company's products, which impacts revenue and profit margins, is affected by (i) the development and timing of the introduction of competitive products; (ii) the Company's response to downward pricing to stay competitive; (iii) changes in customer order patterns, such as changes in the levels of inventory maintained by customers and the timing of customer purchases which may be affected by announced price changes, changes in the Company's incentive programs, or the customer's ability to achieve incentive goals; and (iv) changes in customers' preferences for our products, including the success of products offered by our competitors, and changes in customer designs for their products that can affect the demand for some of the Company's products.

 

* Foreign currency exchange rates and fluctuations in those rates may affect the Company's ability to realize projected growth rates in its sales and earnings. Because the Company's financial statements are denominated in U.S. dollars and approximately two-thirds of the Company's revenues are derived from outside the United States, the Company's results of operations and its ability to realize projected growth rates in sales and earnings could be adversely affected if the U.S. dollar strengthens significantly against foreign currencies.

 

* The Company's growth objectives are largely dependent on the timing and market acceptance of its new product offerings, including its ability to continually renew its pipeline of new products and to bring those products to market. This ability may be adversely affected by difficulties or delays in product development, such as the inability to identify viable new products, obtain adequate intellectual property protection, or gain market acceptance of new products. There are no guarantees that new products will prove to be commercially successful.

 

* The Company's future results are subject to fluctuations in the costs and availability of purchased components, compounds, raw materials and energy, including oil and natural gas and their derivatives, due to shortages, increased demand, supply interruptions, currency exchange risks, natural disasters and other factors. The Company depends on various components, compounds, raw materials, and energy (including oil and natural gas and their derivatives) supplied by others for the manufacturing of its products. It is possible that any of its supplier relationships could be interrupted due to natural and other disasters and other events, or be terminated in the future. Any sustained interruption in the Company's receipt of adequate supplies could have a material adverse effect on the Company. In addition, while the Company has a process to minimize volatility in component and material pricing, no assurance can be given that the Company will be able to successfully manage price fluctuations or that future price fluctuations or shortages will not have a material adverse effect on the Company.

 

* Acquisitions, strategic alliances, divestitures, and other unusual events resulting from portfolio management actions and other evolving business strategies, and possible organizational restructuring could affect future results. The Company monitors its business portfolio and organizational structure and has made and may continue to make acquisitions, strategic alliances, divestitures and changes to its organizational structure. With respect to acquisitions, future results will be affected by the Company's ability to integrate acquired businesses quickly and obtain the anticipated synergies.

 

* The Company's future results may be affected if the Company generates fewer productivity improvements than estimated. The Company utilizes various tools, such as Lean Six Sigma, to improve operational efficiency and productivity. There can be no assurance that all of the projected productivity improvements will be realized.

 

* The Company's future results may be affected by various legal and regulatory proceedings and legal compliance risks, including those involving product liability, antitrust, environmental, the U.S. Foreign Corrupt Practices Act and other anti-bribery, anti-corruption, or other matters. The outcome of these legal proceedings may differ from the Company's expectations because the outcomes of litigation, including regulatory matters, are often difficult to reliably predict. Various factors or developments can lead the Company to change current estimates of liabilities and related insurance receivables where applicable, or make such estimates for matters previously not susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in future charges that could have a material adverse effect on the Company's results of operations or cash flows in any particular period. For a more detailed discussion of the legal proceedings involving the Company and the associated accounting estimates, see the discussion in Note 14 "Commitments and Contingencies" within the Notes to Consolidated Financial Statements.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

3M's general offices, corporate research laboratories, and certain division laboratories are located in St. Paul, Minnesota. The Company operates 76 manufacturing facilities in 28 states. The Company operates 115 manufacturing and converting facilities in 38 countries outside the United States.

 

3M owns the majority of its physical properties. 3M's physical facilities are highly suitable for the purposes for which they were designed. Because 3M is a global enterprise characterized by substantial intersegment cooperation, properties are often used by multiple business segments.

 

Item 3. Legal Proceedings.

 

Discussion of legal matters is incorporated by reference from Part II, Item 8, Note 14, "Commitments and Contingencies," of this document, and should be considered an integral part of Part I, Item 3, "Legal Proceedings."

 

Item 4. Removed and Reserved.

 

PART II

 

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Equity compensation plans' information is incorporated by reference from Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," of this document, and should be considered an integral part of Item 5. At January 31, 2011, there were 104,261 shareholders of record. 3M's stock is listed on the New York Stock Exchange, Inc. (NYSE), the Chicago Stock Exchange, Inc., and the SWX Swiss Exchange. Cash dividends declared and paid totaled $.525 per share for each quarter of 2010, and $.51 per share for each quarter of 2009. Stock price comparisons follow:

 

Stock price comparisons (NYSE composite transactions)

 

(Per share amounts)


First
Quarter


Second
Quarter


Third
Quarter


Fourth
Quarter


Year


2010 High .............................................


$

85.17


$

90.52


$

88.38


$

91.49


$

91.49


2010 Low ..............................................


77.25


67.98


77.04


83.00


67.98


2009 High ..............................................


$

59.81


$

61.46


$

76.00


$

84.32


$

84.32


2009 Low ...............................................


40.87


48.72


57.81


71.62


40.87


 

Issuer Purchases of Equity Securities

 

Repurchases of 3M common stock are made to support the Company's stock-based employee compensation plans and for other corporate purposes. In February 2007, 3M's Board of Directors authorized a two-year share repurchase of up to $7.0 billion for the period from February 12, 2007 to February 28, 2009. In February 2009, 3M's Board of Directors extended this share repurchase authorization with no pre-established end date. In February 2011, 3M's Board of Directors replaced the Company's existing repurchase program with a new repurchase program. This new program authorizes the repurchase of up to $7.0 billion of 3M's outstanding common stock, with no pre-established end date.

 

Issuer Purchases of Equity

Securities (registered pursuant to

Section 12 of the Exchange Act)

 

Period


Total
Number of
Shares
 Purchased (1)


Average Price
Paid per Share


Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs (2)


Maximum
Approximate
Dollar Value
of Shares
that May
Yet Be
Purchased
under the
Plans or
Programs


 









(Millions)


 

January 1-31, 2010 .........................................


19,104


$

83.92


-


$

2,567


 

 

February 1-28, 2010 .......................................


16,058


$

79.26


-


$

2,567


March 1-31, 2010 ...........................................


213,121


$

81.05


192,000


$

2,551


 

Total January 1-March 31, 2010 ...................


248,283


$

81.15


192,000


$

2,551


 

April 1-30, 2010 .............................................


392,863


$

87.51


321,900


$

2,523


 

May 1-31, 2010 ..............................................


2,476,176


$

82.38


2,199,700


$

2,342


 

June 1-30, 2010 .............................................


1,885,942


$

77.16


1,884,400


$

2,197


 

Total April 1-June 30, 2010 ..........................


4,754,981


$

80.73


4,406,000


$

2,197


 

July 1-31, 2010 ..............................................


76,382


$

86.34


-


$

2,197


 

August 1-31, 2010 ..........................................


30,592


$

86.41


-


$

2,197


 

September 1-30, 2010 ....................................


16,091


$

84.40


-


$

2,197


 

Total July 1-September 30, 2010 ...............


123,065


$

86.11


-


$

2,197


 

October 1-31, 2010 ........................................


153,840


$

85.40


127,500


$

2,186


 

November 1-30, 2010 ......................................


2,692,245


$

85.00


2,675,000


$

1,959


 

December 1-31, 2010 .....................................


2,600,252


$

85.90


2,514,600


$

1,743


 

Total October 1-December 31, 2010 .............


5,446,337


$

85.44


5,317,100


$

1,743


 

 

Total January 1-December 31, 2010 .................


10,572,666


$

83.23


9,915,100


$

1,743


 

(1)         The total number of shares purchased includes: (i) shares purchased under the Board's authorizations described above, and (ii) shares purchased in connection with the exercise of stock options.

 

(2)         The total number of shares purchased as part of publicly announced plans or programs includes shares purchased under the Board's authorizations described above.

 

Item 6. Selected Financial Data.

 

(Dollars in millions, except per share amounts)


2010


2009


2008


2007


2006


 

Years ended December 31:












 

Net sales .................................


$

26,662


$

23,123


$

25,269


$

24,462


$

22,923


 

Net income attributable to 3M .................


4,085


3,193


3,460


4,096


3,851


 

 

Per share of 3M common stock:












 

Net income attributable to 3M - basic .......


5.72


4.56


4.95


5.70


5.15


 

Net income attributable to 3M - diluted ......


5.63


4.52


4.89


5.60


5.06


 

Cash dividends declared and paid per 3M common share .........................


2.10


2.04


2.00


1.92


1.84


 

At December 31:












Total assets ...............................


$

30,156


$

27,250


$

25,793


$

24,699


$

21,294


 

Long-term debt (excluding portion due within one year) and long-term capital lease obligations ...


4,277


5,204


5,224


4,088


1,112


 

 

Items included in the preceding table which had a significant impact on results are summarized as follows. 2010 included a one-time, non-cash income tax charge of $84 million, or 12 cents per diluted share, resulting from the March 2010 enactment of the Patient Protection and Affordable Care Act, including modifications made in the Health Care and Education Reconciliation Act of 2010. 2009 results included net losses that decreased operating income by $194 million and net income attributable to 3M by $119 million. 2009 included restructuring actions ($209 million pre-tax, $128 million after tax and noncontrolling interest), which were partially offset by a gain on sale of real estate ($15 million pre-tax, $9 million after tax). 2008 results included net losses that decreased operating income by $269 million and net income attributable to 3M by $194 million. 2008 included restructuring actions ($229 million pre-tax, $147 million after-tax and noncontrolling interest), exit activities ($58 million pre-tax, $43 million after-tax) and losses related to the sale of businesses ($23 million pre-tax, $32 million after-tax), which were partially offset by a gain on sale of real estate ($41 million pre-tax, $28 million after-tax). 2007 results included net gains that increased operating income by $681 million and net income attributable to 3M by $448 million. 2007 included gains related to the sale of businesses ($849 million pre-tax, $550 million after-tax) and a gain on sale of real estate ($52 million pre-tax, $37 million after-tax), which were partially offset by increases in environmental liabilities ($134 million pre-tax, $83 million after-tax), restructuring actions ($41 million pre-tax, $27 million after-tax), and exit activities ($45 million pre-tax, $29 million after-tax). 2006 results included net gains that increased operating income by $523 million and net income attributable to 3M by $438 million. 2006 included net benefits from gains related to the sale of certain portions of 3M's branded pharmaceuticals business ($1.074 billion pre-tax, $674 million after-tax) and favorable income tax adjustments ($149 million), which were partially offset by restructuring actions ($403 million pre-tax, $257 million after-tax), acquired in-process research and development expenses ($95 million pre-tax and after-tax), settlement costs of an antitrust class action ($40 million pre-tax, $25 million after-tax), and environmental obligations related to the pharmaceuticals business ($13 million pre-tax, $8 million after-tax).

 



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:

 

·       Overview

·       Results of Operations

·       Performance by Business Segment

·       Performance by Geographic Area

·       Critical Accounting Estimates

·       New Accounting Pronouncements

·       Financial Condition and Liquidity

·       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 2010, 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; Display and Graphics; Consumer and Office; Safety, Security and Protection Services; and Electro and Communications.

 

Fourth-quarter 2010 sales grew nearly 10 percent to $6.7 billion, despite negative comparisons from H1N1 and moderating sales growth in optical films for LCD TVs. Sales growth was broad-based, with organic sales volumes expanding in all businesses, led by a 19.8 percent increase in Electro and Communications and a 14.7 percent increase in Display and Graphics. Geographically, organic sales volume was strongest in Asia Pacific at 18.1 percent and Latin America at 12.2 percent. Net income attributable to 3M in the fourth quarter of 2010 was $928 million, or $1.28 per diluted shares, compared to $935 million, or $1.30 per diluted share, in the fourth quarter of 2009. Fourth-quarter income was penalized by year-on-year H1N1-related comparisons, increases in raw material costs, and investments to accelerate future growth. 3M continues to invest in research and development, sales and marketing (including advertising and merchandising investments), and also incurred acquisition-related costs in the fourth quarter. 3M made several large fourth-quarter 2010 acquisitions, including Arizant Inc., Attenti Holdings S.A. and Cogent Inc.

 

For total year 2010, 3M achieved record net sales and diluted earnings per share, while investing significantly to improve long-term growth. For example, research, development and related expenses of $1.4 billion helped to drive innovation and new product sales. 3M also accelerated sales and marketing investments in high-growth markets to help secure future growth. The Company posted 2010 sales of $26.7 billion and earnings of $5.63 per diluted share, up 15.3 percent and 24.6 percent, respectively. All businesses posted positive organic volume growth, led by Electro and Communications at 26.9 percent, Display and Graphics at 26.5 percent, and Industrial and Transportation at 16.9 percent. Including special items (discussed below), net income attributable to 3M in 2010 was $4.085 billion, or $5.63 per diluted share, compared to $3.193 billion or $4.52 per diluted share, in 2009, and $3.460 billion, or $4.89 per diluted share, in 2008.

 

In 2010, 3M recorded a one-time, non-cash income tax charge of $84 million, or 12 cents per diluted share, resulting from the March 2010 enactment of the Patient Protection and Affordable Care Act, including modifications made in the Health Care and Education Reconciliation Act of 2010. Refer to the special items discussion at the end of this overview section for more detail.

 

3M has been aggressively restructuring the company since early 2008 and continued this effort through the third quarter of 2009, with these restructuring actions and exit activities resulting in an aggregate reduction of approximately 6,400 positions. The related net restructuring charges and other special items reduced net income attributable to 3M for year 2009 by $119 million, or $0.17 per diluted share. Special items reduced net income attributable to 3M for year 2008 by $194 million, or $0.28 per diluted share. Refer to the special items discussion at the end of this overview section for more detail. These restructuring actions and exit activities resulted in savings of almost $400 million in 2009 and additional incremental savings of more than $150 million in 2010, with the majority of

2010's benefit in the first half of the year. In addition, 3M amended its policy regarding banked vacation in 2009, which added more than $100 million to operating income in 2009, with a benefit of approximately $80 million in 2010.

 

Sales in 2009 totaled $23.1 billion, a decrease of 8.5 percent from 2008. In 2009, the global economic slowdown dramatically affected comparisons for 3M's businesses. Substantial end-market declines and inventory takedowns in major industries, including automotive, consumer electronics and general industrial manufacturing, resulted in significantly lower sales and income. Accordingly, 3M reduced its cost structure, lowered manufacturing output and intensified its attention to operational improvement. The combination of these actions drove operating income margins of 20.8 percent in 2009, compared to 20.6 percent in 2008. Restructuring charges and other special items reduced this operating income margin by approximately one percentage point in both 2009 and 2008.

 

In 2010, four of 3M's six business segments posted sales increases in excess of 10 percent. Operating income margins were 21 percent or higher in all six of the Company's business segments. The following table contains sales and operating income results by business segment for the years ended December 31, 2010 and 2009.

 



2010


2009


2010 vs. 2009
% change


 

(Dollars in millions)


Net
Sales


% of
Total


Oper.
Income


Net
Sales


% of
Total


Oper.
Income


Net
Sales


Oper.
Income


 

Business Segments


















 

Industrial and Transportation ...


$

8,581


32.2

%

$

1,799


$

7,232


31.3

%

$

1,259


18.7

%

42.9

%

 

Health Care ...........................


4,521


17.0

%

1,364


4,294


18.6

%

1,350


5.3

%

1.0

%

 

 

Display and Graphics .............


3,884


14.6

%

946


3,132


13.5

%

590


24.0

%

60.3

%

 

Consumer and Office ..............


3,853


14.4

%

840


3,471


15.0

%

748


11.0

%

12.3

%

 

Safety, Security and Protection Services ............................


3,308


12.4

%

707


3,064


13.3

%

724


8.0

%

(2.4

)%

 

Electro and Communications ..


2,922


11.0

%

631


2,276


9.8

%

322


28.4

%

96.0

%

 

Corporate and Unallocated ......


9


0.0

%

(277

)

12


0.1

%

(100

)





Elimination of Dual Credit .......


(416

)

(1.6

)%

(92

)

(358

)

(1.6

)%

(79

)





 



















 

Total Company ......................


$

26,662


100.0

%

$

5,918


$

23,123


100.0

%

$

4,814


15.3

%

22.9

%

 

 

In 2010, sales increased 15.3 percent, led by Electro and Communications at 28.4 percent, Display and Graphics at 24.0 percent, Industrial and Transportation at 18.7 percent, and Consumer and Office at 11.0 percent. Sales growth in these business segments was led by consumer electronics, automotive OEM, renewable energy, and broad-based consumer and office growth, as well as sales growth in those businesses that serve the broad industrial manufacturing sector. Local-currency sales (which includes volume, selling price and acquisition impacts, but excludes divestiture and translation impacts) increased 14.4 percent. Foreign currency effects added 1.0 percent to sales, while divestiture impacts reduced sales by 0.1 percent. Operating income margins for the 2010 were 22.2 percent, compared to 20.8 percent in 2009. Refer to the section entitled "Performance by Business Segment" and "Performance by Geographic Area" later in MD&A for discussion by business segment and geographic area of sales change and items that impacted reported operating income. Refer to Note 17 for discussion of Corporate and Unallocated and Elimination of Dual Credit.

 

3M generated $5.2 billion of operating cash flows in 2010, an increase of $233 million when compared to 2009. This followed an increase of $408 million when comparing 2009 to 2008. In 2010, the Company utilized approximately $1.5 billion of cash to pay dividends. In February 2011, 3M's Board of Directors authorized the repurchase of up to $7.0 billion of 3M's outstanding common stock, replacing the Company's existing repurchase program. This authorization has no pre-established end date. The Company repurchased $854 million of 3M common stock in 2010. In 2009, with the Company's emphasis on maintaining ample liquidity and enhancing balance sheet strength, share repurchase activity was minimal, as no broker repurchases of stock were made. This compared to repurchases of 3M common stock of $1.6 billion in 2008. In February 2011, 3M's Board of Directors authorized a dividend increase of 4.8 percent for 2011, marking the 53rd consecutive year of dividend increases for 3M. 3M's debt to total capital ratio (total capital defined as debt plus equity) at December 31, 2010 was 25 percent, compared to 30 percent at December 31, 2009, and 39 percent at December 31, 2008. A portion of the increase in debt at year-end 2008 was the result of a strategy to build and maintain a cash buffer in the U.S. given the difficult market environment at that point in time. 3M has an AA- credit rating with a stable outlook from Standard & Poor's and an Aa2 credit rating with a stable outlook from Moody's Investors Service. In addition to cash on hand, the Company has sufficient access to capital markets to meet currently anticipated growth and acquisition investment funding needs.

 

In 2010, the Company experienced cost increases in most raw materials and transportation fuel costs. This was driven by higher basic feedstock costs, particularly oil-derived materials and metals. To date the Company is receiving sufficient quantities of all raw 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. 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.

 

In 2011, 3M expects sales growth of 10 percent or more, with organic sales volume growing 5.5 to 7.5 percent, currency effects adding 1 to 2 percent (assuming December 31, 2010 exchange rates), and acquisitions adding 4 to 6 percent for the year. This expected sales growth and related incremental operating income, including a benefit from currency effects (assuming December 31, 2010 exchange rates), should more than offset the items that will negatively impact earnings, as summarized below.

 

There are a few major items that will negatively impact earnings in 2011. First, as discussed further below, 3M expects that pension and postretirement expense will decrease 2011 earnings, when compared to 2010, by approximately 22 cents per diluted share. A banked vacation policy change made in 2009 will also negatively impact earnings in 2011. Prior to 2009, 3M allowed employees to bank a certain amount of unused vacation. Effective January 1, 2009, 3M employees were given two years to use their previously banked vacation, with the resulting reduction in 3M's liability benefiting both 2009 and 2010 operating results. This change resulted in an estimated 8 cent per diluted share benefit in 2010 results, which will not carry-over into 2011, and thus, will negatively impact 2011 versus 2010 comparisons. Finally, 3M's early assessment of the income tax rate indicates an expected 2011 effective tax rate of approximately 29.5 percent compared to 27.7 percent for 2010.

 

On a worldwide basis, 3M's pension and postretirement plans were 90 percent funded at year-end 2010. The U.S. qualified plan, which is approximately 71 percent of the worldwide pension obligation, was 97 percent funded, the non-qualified pension plan was not funded, and the international pension plans were 89 percent funded. Asset returns in 2010 for the U.S. qualified plan were 14.4% while the year-end 2010 discount rate was 5.23%, down 0.54 percentage points from the 2009 discount rate of 5.77%. 3M expects to contribute $400 million to $600 million of cash to its global pension and postretirement plans in 2011. The Company does not have a required minimum pension contribution obligation for its U.S. plans in 2011. 3M expects pension and postretirement benefit expense in 2011 to increase by approximately $213 million pre-tax, or 22 cents per diluted share, when compared to 2010. Refer to critical accounting estimates within MD&A and Note 11 (Pension and Postretirement Benefit Plans) for additional information concerning 3M's pension and post-retirement plans.

 

Forward-looking statements in Item 7 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to the section entitled "Cautionary Note Concerning Factors That May Affect Future Results" in Item 1 and the risk factors provided in Item 1A for discussion of these risks and uncertainties).

 

Special Items:

 

Special items represent significant charges or credits that are important to understanding changes in the Company's underlying operations.

 

In 2010, 3M recorded a one-time, non-cash income tax charge of $84 million, or 12 cents per diluted share, resulting from the March 2010 enactment of the Patient Protection and Affordable Care Act, including modifications made in the Health Care and Education Reconciliation Act of 2010 (collectively, the "Act"). The charge is due to a reduction in the value of the company's deferred tax asset as a result of the Act's change to the tax treatment of Medicare Part D reimbursements. This item is discussed in more detail in Note 8 (Income Taxes).

 

In 2009, net losses for restructuring and other actions decreased operating income by $194 million and net income attributable to 3M by $119 million, or $0.17 per diluted share. 2009 included restructuring actions ($209 million pre-tax, $128 million after tax and noncontrolling interest), which were partially offset by a gain on sale of real estate ($15 million pre-tax, $9 million after tax). The gain on sale of real estate relates to the June 2009 sale of a New Jersey roofing granule facility, which is recorded in cost of sales within the Safety, Security and Protection Services business segment. Restructuring is discussed in more detail in Note 4 (Restructuring Actions and Exit Activities).

 

In 2008, net losses for restructuring and other actions decreased operating income by $269 million and net income attributable to 3M by $194 million, or $0.28 per diluted share. 2008 included restructuring actions ($229 million pre-tax, $147 million after-tax and noncontrolling interest), exit activities ($58 million pre-tax, $43 million after-tax) and losses related to the sale of businesses ($23 million pre-tax, $32 million after-tax), which were partially offset by a gain on sale of real estate ($41 million pre-tax, $28 million after-tax). Divestiture impacts, restructuring actions and exit activities are discussed in more detail in Note 2 (Acquisitions and Divestitures) and Note 4 (Restructuring Actions and Exit Activities). Concerning the real estate gain, 3M received proceeds and recorded a gain in 2008 for a sale-leaseback transaction relative to an administrative location in Italy.

RESULTS OF OPERATIONS

 

Net Sales:

 



2010


2009


 



U.S.


Intl.


Worldwide


U.S.


Intl.


Worldwide


 

Net sales (millions) .........


$

9,210


$

17,452


$

26,662


$

8,509


$

14,614


$

23,123


 

% of worldwide sales ...


34.5

%

65.5

%



36.8

%

63.2

%



 

Components of net sales change:














 

Volume - organic ..........


7.0

%

17.6

%

13.7

%

(11.9

)%

(8.1

)%

(9.5

)%

 

 

Volume - acquisitions ...


1.1


0.8


0.9


2.4


1.9


2.1


Price .............................


0.1


(0.4

)

(0.2

)

2.5


1.5


1.8


 

Local-currency sales (including acquisitions) .


8.2


18.0


14.4


(7.0

)

(4.7

)

(5.6

)

 

Divestitures ....................


-


(0.1

)

(0.1

)

(0.3

)

(0.1

)

(0.1

)

 

Translation .....................


-


1.5


1.0


-


(4.4

)

(2.8

)

 

Total sales change ..........


8.2

%

19.4

%

15.3

%

(7.3

)%

(9.2

)%

(8.5

)%

 

 

In 2010, local-currency sales increased 14.4 percent. All major geographic areas showed local-currency sales increases, led by Asia Pacific. Worldwide local-currency sales growth was led by Electro and Communications at 27 percent, Display and Graphics at 23 percent, Industrial and Transportation at 17.5 percent and Consumer and Office at 10 percent. Refer to the sections entitled "Performance by Business Segment" and "Performance by Geographic Area" later in MD&A for additional discussion of sales change.

 

In 2009, local-currency sales declined 5.6 percent. All major geographic areas showed local-currency declines, with the exception of the combined Latin America and Canada area, which was flat. Health Care had local-currency sales growth of 3.6 percent, while all other business segments experienced declines. Fourth-quarter 2009 local-currency sales increased 6.4 percent, with all business segments and major geographic areas showing improvement.

 



Operating Expenses:

 

(Percent of net sales)


2010


2009


2008


2010
Versus
2009


2009
Versus
2008


 

Cost of sales .........................


51.9

%

52.4

%

52.9

%

(0.5)

%

 (0.5)

%

 

Selling, general and administrative expenses ..................................


20.5


21.2


20.8


(0.7

)

0.4


 

 

Research, development and related expenses ..........................


5.4


5.6


5.6


(0.2

)

-


(Gain)/loss from sale of businesses ......


-


-


0.1


-


(0.1

)

 

Operating income .....................


22.2

%

20.8

%

20.6

%

1.4

%

0.2

%

 

 

As discussed in the preceding overview section, 2009 included restructuring charges, partially offset by a gain on sale of real estate, which combined decreased operating income by $194 million, or 0.9 percent of net sales. In 2008, the combination of restructuring actions, exit activities and a loss on sale of businesses, partially offset by a gain on sale of real estate, decreased operating income by $269 million, or 1.1 percent of net sales. There were no special items that impacted operating income in 2010. The following tables summarize the 2009 and 2008 special items by income statement caption.

 



2009 Restructuring and Other Summary






 

(Millions)


Restructuring
actions


Gain on sale of
real estate


Total






 

Cost of sales .........................................


$

110


$

(15

)

$

95






 

Selling, general and administrative expenses ...........................................


91


-


91






 

Research, development and related expenses ...........................................


8


-


8






 

Total operating income penalty (benefit) ....


$

209


$

(15

)

$

194






 
















 



2008 Restructuring and Other Summary


 

(Millions)


Restructuring
actions


Exit
activities


Loss on sale
of
businesses


Gain on sale
of real
estate


Total


 

Cost of sales .........................................


$

84


$

38


$

-


$

-


$

122


 

Selling, general and administrative expenses ...........................................


135


17


-


(41

)

111


 

 

Research, development and related expenses ...........................................


10


3


-


-


13


Loss from sale of businesses ..................


-


-


23


-


23


 

Total operating income penalty (benefit) ....


$

229


$

58


$

23


$

(41

)

$

269


 

 

Cost of Sales:

 

Cost of sales includes manufacturing, engineering and freight costs. Cost of sales, measured as a percent of net sales, was 51.9 percent in 2010, a decrease of 0.5 percentage points from 2009. A number of positive factors impacted year-on-year results. These factors included 13.7 percent growth in organic sales volume, improved factory utilization levels, along with cost savings related to prior years' restructuring actions. In addition, 2009 included a penalty of 0.5 percentage points (as a percent of net sales) related to special items. As discussed in Note 4 (Restructuring Actions and Exit Activities), in 2009, 3M recorded $209 million in restructuring charges, of which $110 million was recorded in cost of sales. This was partially offset by a $15 million gain on sale of a New Jersey roofing granule facility, which was also recorded in cost of sales. In addition, 3M decided to swap Venezuelan bolivars into U.S. dollars in 2009, given the economic conditions in Venezuela at that time, which also negatively impacted cost of sales in 2009. These year-on-year net benefits were partially offset by pricing impacts, as selling prices declined 0.2 percent year-on-year, and raw material prices increased approximately 2 percent year-on-year on a gross basis.

 

Cost of sales as a percent of net sales decreased 0.5 percentage points in 2009 compared to 2008. As discussed above, 2009 included a net penalty of 0.5 percentage points, or $95 million, related to special items. In 2008, $122 million in restructuring and exit activities were recorded in cost of sales. Thus, restructuring and other items were $27 million lower year-on-year, benefiting cost of sales by 0.1 percentage point. Other benefits to cost of sales as a percent of net sales included increases in selling prices and a slight decrease in material costs. The Company was also able to mitigate organic volume declines through reductions in 3M's manufacturing cost structure. Finally, in response to deteriorating conditions in Venezuela, 3M Venezuela swapped bolivars into U.S. dollars in 2009. While increasing cost of sales, these actions mitigated 3M's exposure to future exchange rate risks.

 

Selling, General and Administrative Expenses:

 

Selling, general and administrative (SG&A) expenses increased 12 percent in 2010 when compared to 2009. In 2010, sales and marketing expenses increased 14 percent, which included advertising and promotion investment increases of over 20 percent in 2010. These increased investments are expected to help drive sales volumes, both now and into the future. In addition, 3M has increased both sales coverage and its marketing strength, particularly in faster-growing emerging economies. In 2010, general and administrative costs remained under control, as these costs increased at approximately half the rate of 2010 sales growth. SG&A expenses, measured as a percent of net sales, decreased 0.7 percentage points in 2010 compared to 2009. As indicated in Note 4, restructuring expenses of $91 million were recorded in SG&A expenses in 2009. Measured as a percent of sales, these restructuring expenses increased 2009 SG&A expenses by 0.4 percentage points.

 

Selling, general and administrative (SG&A) expenses as a percent of net sales increased 0.4 percentage points in 2009 when compared to 2008, but decreased $338 million in dollars, helped by savings from restructuring and other actions. In the sales and marketing area, advertising and merchandising costs were down year-on-year, but were up in the fourth quarter. As indicated above, restructuring expenses increased 2009 SG&A expenses as a percent of sales by 0.4 percentage points. In 2008, restructuring actions and exit activities, net of a gain on sale of real estate, increased SG&A by $111 million, which increased SG&A as a percent of sales by 0.5 percentage points. In the fourth quarter of 2008, as part of its restructuring program, 3M took aggressive actions to reduce general and administrative expenses and also pared back selling and marketing costs in certain businesses.

 

Research, Development and Related Expenses:

 

Research, development and related expenses (R&D) increased 11 percent in 2010 compared to 2009, as 3M continued to support its key growth initiatives. R&D as a percent of net sales declined to 5.4 percent from 5.6 percent in both 2009 and 2008. R&D expenses in dollars declined approximately 8 percent in 2009 compared to 2008. Overall dollar spending in 2009 was impacted by company-wide cost initiatives, such as reductions in indirect spending.

 

Gain/Loss from Sale of Businesses:

 

In June 2008, 3M completed the sale of HighJump Software to Battery Ventures, a technology venture capital and private equity firm. 3M received proceeds of $85 million for this transaction and recognized, net of assets sold, transaction and other costs, a pre-tax loss of $23 million (recorded in the Safety, Security and Protection Services segment) in the second quarter of 2008.

 

Operating Income:

 

3M uses operating income as one of its primary business segment performance measurement tools. Operating income was 22.2 percent of sales in 2010, compared to 20.8 percent of sales in 2009 and 20.6 percent of sales in 2008. 2009 was negatively impacted by restructuring expenses, net of a gain on sale of real estate, which combined decreased operating income by 0.9 percentage points ($194 million). 2008 was negatively impacted by restructuring actions, exit activities and a loss on sale of businesses that were partially offset by a gain on sale of real estate, which combined decreased operating income by 1.1 percentage points ($269 million).

 

Interest Expense and Income:

 

(Millions)


2010


2009


2008


Interest expense .....................................................................


$

201


$

219


$

215


Interest income .......................................................................


(38

)

(37

)

(105

)

Total ...................................................................................


$

163


$

182


$

110


 

Interest Expense: Interest expense decreased in 2010, driven by lower average U.S. debt balances and lower interest rates. Interest expense increased slightly in 2009, primarily due to higher average U.S. long-term debt balances largely offset by benefits from reduced short-term balances and lower interest rates.

 

Interest Income: In 2010, interest income was basically unchanged from 2009, with higher average cash and cash equivalent balances largely offset by lower interest rates. Interest income declined in 2009 when compared to 2008, primarily due to lower yields on investments.

 

Provision for Income Taxes:

 

(Percent of pre-tax income)


2010


2009


2008


Effective tax rate .....................................................................


27.7

%

30.0

%

31.1

%

 

The effective tax rate for 2010 was 27.7 percent, compared with 30.0 percent in 2009 and 31.1 percent in 2008. The most significant item that decreased the effective tax rate in both 2010 and 2009 related to international taxes. In 2010, this was due primarily to the 2010 tax benefits resulting from the corporate alignment transactions that allowed the Company to increase its ownership of a foreign subsidiary. The transactions are described in the section of Note 6 entitled "Purchase of Subsidiary Shares and Transfers of Ownership Interest Involving Non-Wholly Owned Subsidiaries."

 

The effective tax rate for 2010 also includes a one-time income tax charge of $84 million as a result of the March 2010 enactment of the Patient Protection and Affordable Care Act, including modifications made in the Health Care and Education Reconciliation Act of 2010. Adjustments to income tax reserves and the Domestic Manufacturer's deduction also benefited year-on-year effective tax rates.

 

On December 17, 2010, the provision for the research and development credit was extended by the "2010 Tax Relief Act" for expenditures incurred up to December 31, 2012. The provision for the credit had expired on December 31, 2009. The Company recognized the full year benefit of the credit in the fourth quarter of 2010. The benefit of the credit for the full year in 2010 is not materially different from the full year benefit in 2009.

 

The company currently expects that its effective tax rate for total year 2011 will be approximately 29.5 percent. The rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits and changes in tax laws, as well as recurring factors, such as the geographic mix of income before taxes.

 

Refer to Note 8 for further discussion of income taxes.

 

Net Income Attributable to Noncontrolling Interest:

 

(Millions)


2010


2009


2008


Net Income Attributable to Noncontrolling Interest ......................


$

78


$

51


$

60


 

Net income attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M ownership interests in 3M consolidated entities. The changes in noncontrolling interest amounts are primarily related to Sumitomo 3M Limited (Japan), which is 3M's most significant consolidated entity with non-3M ownership interests. As of December 31, 2010, 3M's effective ownership in Sumitomo 3M Limited is 75 percent.

 

Currency Effects:

 

Currency Effects: 3M estimates that year-on-year currency effects, including hedging impacts, increased net income attributable to 3M by approximately $15 million in 2010 and decreased net income attributable to 3M by approximately $220 million in 2009. 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 and the negative impact of swapping Venezuelan bolivars into U.S. dollars. 3M estimates that year-on-year derivative and other transaction gains and losses decreased net income attributable to 3M by approximately $115 million in 2010 and had an immaterial impact in 2009.

 



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 17 to the Consolidated Financial Statements, effective in the first quarter of 2010, 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 Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security and Protection Services; and Electro and Communications. Information related to 3M's business segments is presented in the tables that follow. Local-currency sales change amounts are separated into organic local-currency sales (which include both organic volume impacts plus selling price impacts) and acquisition impacts. The divestiture impact, translation impact and total sales change are also provided for each segment.

 

As discussed in the preceding overview and results of operations section, the combination of restructuring actions and other special items significantly impacted 2009 and 2008 results. There were no special items that impacted operating income in 2010. The following tables summarize these special items by business segment.

 



2009 Restructuring and Other Summary






 

(Millions)


Restructuring
actions


Gain on
sale of
real estate


Total






 

Industrial and Transportation ....................


$

89


$

-


$

89






 

Health Care ...........................................


20


-


20






 

 

Display and Graphics .............................


22


-


22






 

Consumer and Office ..............................


13


-


13






 

Safety, Security and Protection Services ..


16


(15

)

1






 

Electro and Communications ...................


11


-


11






Corporate and Unallocated ......................


38


-


38






 

Total operating income penalty (benefit) ....


$

209


$

(15

)

$

194






 
















 



2008 Restructuring and Other Summary


 

(Millions)


Restructuring
actions


Exit
activities


Loss
on sale of
businesses


Gain on
sale of
real estate


Total


 

Industrial and Transportation ....................


$

40


$

26


$

-


$

-


$

66


 

Health Care ...........................................


51


9


-


-


60


 

 

Display and Graphics .............................


24


18


-


-


42


 

Consumer and Office ..............................


18


-


-


-


18


 

Safety, Security and Protection Services ..


12


3


23


-


38


 

Electro and Communications ...................


7


-


-


-


7


Corporate and Unallocated ......................


77


2


-


(41

)

38


 

Total operating income penalty (benefit) ....


$

229


$

58


$

23


$

(41

)

$

269


 

 

The following discusses total year results for 2010 compared to 2009, and also discusses 2009 compared to 2008, for each business segment.

 



Industrial and Transportation Business (32.2% of consolidated sales):

 



2010


2009


2008


 

Sales (millions).....................................................................


$

8,581


$

7,232


$

8,294


 

Sales change analysis:








 

 

Organic local-currency sales (volume and price) ........


17.3

%

(12.8)

%

0.2

%

Acquisitions .....................................


0.2


2.6


4.6


 

Local-currency sales ..............................


17.5

%

(10.2)

%

4.8

%

 

Translation ......................................


1.2


(2.6

)

3.0


 

Total sales change ..................................


18.7

%

(12.8)

%

7.8

%

 









 

Operating income (millions) ............................


$

1,799


$

1,259


$

1,568


 

Percent change ....................................


42.9

%

(19.7)

%

(1.4

)%

 

 

Percent of sales ....................................


21.0

%

17.4

%

18.9

%

 

The Industrial and Transportation segment serves a broad range of markets, such as appliance, paper and packaging, food and beverage, electronics, automotive original equipment manufacturer (OEM) and automotive aftermarket (auto body shops and retail). Industrial and Transportation products include tapes, a wide variety of coated and non-woven abrasives, adhesives, specialty materials, filtration products, energy control products, closure systems for personal hygiene products, acoustic systems products, and components and products that are used in the manufacture, repair and maintenance of automotive, marine, aircraft and specialty vehicles.

 

Year 2010 results:

 

Sales in Industrial and Transportation increased 18.7 percent to $8.6 billion. In local-currency terms, sales increased 17.5 percent, driven almost entirely by organic volume. Foreign currency impacts added 1.2 percent to 2010 sales growth. Geographically, local-currency sales growth increased in all major geographic regions, led by Asia Pacific. Local-currency sales growth was broad-based across the portfolio, led by renewable energy, automotive OEM, energy and advanced materials, aerospace, abrasives systems, and industrial adhesives and tapes.

 

Operating income increased 43 percent to $1.8 billion in 2010, with operating income margins of 21.0 percent. In 2009, this business segment recorded charges of $89 million related to restructuring actions, with this charge comprised of employee-related liabilities for severance and benefits of $84 million and fixed asset impairments of $5 million.

 

Industrial and Transportation continues to invest aggressively to accelerate its growth capability. In February 2011, 3M completed its acquisition of the tape-related assets of Alpha Beta Enterprise Co. Ltd., a leading manufacturer of box sealing tape and masking tape headquartered in Taipei, Taiwan. In addition, in December 2010, 3M announced that it had entered into an agreement to acquire Winterthur Technologies AG (Winterthur) by way of a public tender offer. The associated offer period was extended to February 25, 2011 (refer to Note 2 for additional information). Winterthur, based in Zug, Switzerland, is a leading global supplier of precision grinding technology serving customers in the area of hard-to-grind precision applications in industrial, automotive, aircraft, and cutting tools. Capital spending in the Industrial and Transportation business included solar energy in the U.S. and industrial adhesives and tapes in China. Capital spending on these projects will carry over into 2011.

 



Year 2009 results:

 

Industrial and Transportation is a large and highly diversified set of businesses that, when taken together, correlate well with the overall economy. Early in 2009, the business saw significant sales declines that required swift and aggressive restructuring and cost reduction plans to offset the impact of lower volumes, including the impact of large inventory declines in the wholesale distribution channel. Inventories began to stabilize around mid-year 2009.

 

In 2009, sales were $7.2 billion, down 12.8 percent in dollars and down 10.2 percent in local currency. Foreign currency impacts penalized sales for the year by 2.6 percent. Sales increased in the renewable energy and automotive aftermarket businesses, but sales decreased in the other businesses, impacted by end-market declines. This segment announced restructuring actions in 2009, along with plant shut-downs, furloughs and mandatory vacation across the operation. In 2009, this business segment recorded charges of $89 million related to restructuring actions, with this charge comprised of employee-related liabilities for severance and benefits of $84 million and fixed asset impairments of $5 million. Including these special items, 2009 operating income was $1.3 billion and operating income margins were 17.4 percent. This segment recorded $66 million related to restructuring and exit activities in 2008.

 

Investment:

 

In March 2005, 3M's automotive business completed the purchase of 19 percent of TI&M Beteiligungsgesellschaft mbH (TI&M) for approximately $55 million. TI&M is the parent company of I&T Innovation Technology Entwicklungsund Holding Aktiengesellschaft (I&T), an Austrian maker of flat flexible cable and circuitry. Pursuant to a Shareholders Agreement, 3M marketed the firm's flat flexible wiring systems for automotive interior applications to the global automotive market. I&T filed a petition for bankruptcy protection in August 2006. As part of its agreement to purchase the shares of TI&M, the Company was granted a put option, which gave the Company the right to sell back its entire ownership interest in TI&M to the other investors from whom 3M acquired its 19 percent interest. The put option became exercisable January 1, 2007. The Company exercised the put option and recovered approximately $25 million of its investment from one of the investors based in Belgium in February 2007. The other two TI&M investors from whom 3M purchased its shares have filed a bankruptcy petition in Austria. The Company expects to recover approximately $8.7 million through the bankruptcy process and is pursuing recovery of the balance of its investment, first, from the sellers' bank and, to extent not made whole, pursuant to the terms of the Share Purchase Agreement. The Company believes collection of its remaining investment is probable and, as a result, no impairment reserve has been recorded.

 



Health Care Business (17.0% of consolidated sales):

 



2010


2009


2008


 

Sales (millions) ....................................................................


$

4,521


$

4,294


$

4,303


 

Sales change analysis:








 

 

Organic local-currency sales (volume and price) ...............


4.0

%

2.7

%

5.0

%

Acquisitions ..................................................................


1.2


0.9


1.7


 

Local-currency sales .....................................................


5.2

%

3.6

%

6.7

%

 

Divestitures ...................................................................


(0.2

)

-


(0.1

)

 

Translation ....................................................................


0.3


(3.8

)

1.5


 

Total sales change ............................................................


5.3

%

(0.2)

%

8.1

%

 









 

Operating income (millions) ...................................................


$

1,364


$

1,350


$

1,175


 

Percent change ................................................................


1.0

%

14.9

%

(37.6

)%

 

 

Percent of sales ...............................................................


30.2

%

31.4

%

27.3

%

 

The Health Care segment serves markets that include medical clinics and hospitals, pharmaceuticals, dental and orthodontic practitioners, and health information systems. Products and services provided to these and other markets include medical and surgical supplies, skin health and infection prevention products, inhalation and transdermal drug delivery systems, dental and orthodontic products (oral care), health information systems, and food safety products.

 

Year 2010 results:

 

Health Care local-currency sales increased 5.2 percent, including a benefit of 1.2 percent from acquisitions, primarily related to the Arizant Inc. acquisition in the fourth quarter. Arizant Inc. is a leading manufacturer of patient warming solutions designed to prevent hypothermia in surgical settings. Currency impacts increased sales by 0.3 percent. On a geographic basis, all regions posted positive local-currency sales growth, led by Asia Pacific and Latin America/Canada. Local currency sales growth was broad-based, led by skin and wound care, drug delivery systems, health information systems, infection prevention and oral care.

 

Operating income increased 1.0 percent to $1.4 billion, and operating income margins were 30.2 percent. Health Care recorded charges of $20 million related to restructuring actions in 2009, with this charge comprised of employee-related liabilities for severance and benefits. Lower year-on-year H1N1-related sales penalized both sales and operating income in 2010. 3M's long-term expectation is that operating income margins will be in the high 20's, as 3M continues to invest to grow this business.

 

Year 2009 results:

 

In 2009, sales were $4.3 billion, up 3.6 percent in local currencies. This growth was broad-based, with positive contributions from nearly all businesses. Sales growth was led by the infection prevention and skin and wound care businesses, which provide a multitude of products that improve patient treatment outcomes and increase efficiency for health care providers. 3M also drove positive local-currency sales growth in the oral care business. On a geographic basis, sales growth rates were highest in Asia Pacific, Latin America and Canada.

 

Health Care recorded charges of $20 million related to restructuring actions in 2009, with this charge comprised of employee-related liabilities for severance and benefits. In 2008, this business segment recorded charges of $60 million related to restructuring and exit activities, primarily comprised of severance and related benefits, but also including $14 million in asset impairments. Including these charges, full-year operating income in Health Care grew 15 percent to $1.35 billion, with operating income margins of 31.4 percent in 2009.

 



Display and Graphics Business (14.6% of consolidated sales):

 



2010


2009


2008


 

Sales (millions) ....................................................................


$

3,884


$

3,132


$

3,268


 

Sales change analysis:








 

 

Organic local-currency sales (volume and price) ...............


23.0


(5.6)

%

(18.0

)%

Acquisitions ..................................................................


-


2.8


0.1


 

Local-currency sales .....................................................


23.0

%

(2.8)

%

(17.9

)%

 

Divestitures ...................................................................


-


-


(0.3

)

 

Translation ....................................................................


1.0


(1.4

)

1.6


 

Total sales change ............................................................


24.0

%

(4.2)

%

(16.6

)%

 









 

Operating income (millions) ...................................................


$

946


$

590


$

583


 

Percent change ................................................................


60.3

%

1.3

%

(50.0

)%

 

 

Percent of sales ...............................................................


24.4

%

18.8

%

17.8

%

 

The Display and Graphics segment serves markets that include electronic display, traffic safety and commercial graphics. This segment includes optical film solutions for LCD electronic displays; computer screen filters; reflective sheeting for transportation safety; commercial graphics sheeting and systems; and mobile interactive solutions, including mobile display technology, visual systems products, and computer privacy filters. The optical film business provides films that serve numerous market segments of the electronic display industry. 3M provides distinct products for five market segments, including products for: 1) LCD computer monitors 2) LCD televisions 3) handheld devices such as cellular phones 4) notebook PCs and 5) automotive displays. The optical business includes a number of different products that are protected by various patents and groups of patents. These patents provide varying levels of exclusivity to 3M for a number of such products. As some of 3M's optical film patents begin to expire in the next few years, 3M will likely see more competition in these products. 3M continues to innovate in the area of optical films and files patents on its new technology and products. 3M's proprietary manufacturing technology and know-how also provide a competitive advantage to 3M independent of its patents.

 

Year 2010 results:

 

Sales in Display and Graphics were $3.9 billion, up 24.0 percent year-on-year. Sales increased 23.0 percent in local currencies, which was entirely organic. Foreign currency impacts increased sales growth by 1.0 percent. Sales rose in all businesses, with the strongest growth in 3M's optical systems and commercial graphics businesses. In the fourth quarter of 2010, while sales growth moderated in optical films for LCD TVs, local-currency sales were still up more than 10 percent year-on-year. Sales in 2010 were up slightly in the traffic safety systems business and mobile interactive solutions division, which focuses on products that improve projection, personalization and privacy for mobile device users. Geographically, sales growth was led by Asia Pacific, Latin America/Canada, and the United States.

 

Operating income in 2010 totaled $946 million, or 24.4 percent of sales. In 2009, this business segment recorded net charges of $22 million related to restructuring actions, with this charge comprised of employee-related liabilities for severance and benefits and fixed asset impairments.

 

Year 2009 results:

 

In 2009, sales in Display and Graphics declined 4 percent to $3.1 billion, and operating income increased 1.3 percent to $590 million. Sales grew in traffic safety systems and optical systems, but declined in commercial graphics as the global recession significantly slowed spending on corporate advertising.

 

In 2009, operating income margins were 18.8 percent, negatively impacted by 0.8 percentage points due to net restructuring charges of $22 million. This net aggregate charge included fixed asset impairments of $13 million and employee-related severance/benefits/other of $9 million, which is recorded net of adjustments to previously recorded restructuring charges. In 2008, restructuring charges and exit activities reduced operating income by $42 million. These expenses were comprised of severance/related benefits and asset impairments.

 



Consumer and Office Business (14.4% of consolidated sales):

 



2010


2009


2008


 

Sales (millions) ....................................................................


$

3,853


$

3,471


$

3,578


 

Sales change analysis:








 

 

Organic local-currency sales (volume and price) ...............


7.1


(3.1)

%

(0.8

)%

Acquisitions ..................................................................


2.9


2.6


1.8


 

Local-currency sales .....................................................


10.0

%

(0.5)

%

1.0

%

 

Translation ....................................................................


1.0


(2.5

)

1.4


 

Total sales change ............................................................


11.0

%

(3.0)

%

2.4

%

 









 

Operating income (millions) ...................................................


$

840


$

748


$

683


 

Percent change ................................................................


12.3

%

9.5

%

(3.8

)%

 

 

Percent of sales ...............................................................


21.8

%

21.5

%

19.1

%

 

The Consumer and Office segment serves markets that include consumer retail, office retail, home improvement, building maintenance and other markets. Products in this segment include office supply products, stationery products, construction and home improvement products (do-it-yourself), home care products, protective material products, certain consumer retail personal safety products, and consumer health care products.

 

Year 2010 results:

 

Sales in Consumer and Office increased 11.0 percent in 2010 to $3.9 billion. Local-currency sales increased 10.0 percent, which included 7.1 percent from organic growth and 2.9 percent from acquisitions. Acquisition growth for 2010 was primarily comprised of the July 2009 acquisition of ACE® and related brands, which sells elastic bandage, supports and thermometer product lines through consumer channels in North America, and the April 2010 acquisition of the A-One branded label business. In addition, the January 2010 acquisition of Incavas Industria de Cabos e Vassouras Ltda., a manufacturer of floor care products, contributed to acquisition sales growth. Foreign currency impacts added 1.0 percent to sales growth.

 

2010 sales growth was broad-based, led by office supply products, consumer health care, home care, do-it-yourself products and stationery products. On a geographic basis, sales growth was led by Asia Pacific, Latin America/Canada and the United States.

 

Consumer and Office operating income increased 12.3 percent to $840 million, with operating income margins of 21.8 percent. In 2009, this business segment recorded charges of $13 million related to restructuring actions, with this charge comprised of employee-related liabilities for severance and benefits.

 

Year 2009 results:

 

In 2009, sales declined 3.0 percent to $3.5 billion, partially due to organic volume declines of 3.1 percent, driven by lower spending by both retail consumers and commercial customers for most of the year. In addition, currency effects decreased sales growth by 2.5 percent. Acquisitions contributed 2.6 percent to 2009 local-currency sales, largely related to two purchases. In December 2008, 3M purchased Futuro, a leading supplier of braces, supports and compression hosiery. In July 2009, 3M purchased ACE® Products, one of the strong consumer health care brands, from Becton, Dickinson and Company. These investments, combined with 3M's own successful brands, provide critical mass in the retail drug store channel.

 

Operating income margins were at 21.5 percent for the year, up over 2 percentage points versus 2008. In 2009, this business segment recorded charges of $13 million related to restructuring actions, with this charge comprised of employee-related liabilities for severance and benefits. 2008 includes $18 million in restructuring charges.

 



Safety, Security and Protection Services Business (12.4% of consolidated sales):

 



2010


2009


2008


 

Sales (millions) ....................................................................


$

3,308


$

3,064


$

3,330


 

Sales change analysis:








 

 

Organic local-currency sales (volume and price) ...............


6.3


(5.0

)

4.3


Acquisitions ..................................................................


1.2


2.3


10.9


 

Local-currency sales .....................................................


7.5

%

(2.7)

%

15.2

%

 

Divestitures ...................................................................


-


(0.9

)

(1.8

)

 

Translation ....................................................................


0.5


(4.4

)

1.8


 

Total sales change ............................................................


8.0

%

(8.0)

%

15.2

%

 









 

Operating income (millions) ...................................................


$

707


$

724


$

689


 

Percent change ................................................................


(2.4)

%

5.1

%

20.3

%

 

 

Percent of sales ...............................................................


21.4

%

23.6

%

20.7

%

 

The Safety, Security and Protection Services segment serves a broad range of markets that increase the safety, security and productivity of workers, facilities and systems. Major product offerings include personal protection products, safety and security products (including border and civil security solutions), cleaning and protection products for commercial establishments, track and trace solutions, and roofing granules for asphalt shingles. In the second quarter of 2008, 3M completed the sale of its HighJump Software business which provided supply chain execution software solutions. 3M's Track and Trace Solutions utilize radio frequency identification (RFID) technology to provide a growing array of solutions - from library patron self-checkout systems to tracking packages.

 

Year 2010 results:

 

Safety, Security and Protection Services sales increased 8.0 percent in 2010. Local-currency sales growth was 7.5 percent, which included a 1.2 percent benefit from acquisitions. Foreign exchange impacts added 0.5 percent to sales. The acquisition benefit primarily related to two fourth-quarter 2010 acquisitions, namely Attenti Holdings S.A. and Cogent Inc. Attenti Holdings S.A. is a supplier of remote people-monitoring technologies used for offender-monitoring applications and to assist eldercare facilities in monitoring and enhancing the safety of patients. Cogent Inc. is a provider of finger, palm, face and iris biometric systems for governments, law enforcement agencies, and commercial enterprises.

 

3M's security systems business led 2010 sales growth, helped by strong organic volume and acquisition growth (Cogent Inc.) that drove local-currency growth of nearly 50 percent. Corrosion protection products, track and trace products (helped by acquisition growth related to Attenti Holdings S.A.) and building and commercial services also were strong contributors to sales growth. Sales of personal protection products increased in 2010, despite negative year-on-year impacts from H1N1. Industrial minerals sales also increased for the year, helped by a strong fourth quarter of 2010. Geographically, local-currency sales growth was broad-based, led by Latin America and Asia Pacific. Europe/Middle East Africa sales growth was led by Central East Europe and Middle East Africa.

 

Operating income for 2010 was $707 million, with a 21.4 percent operating income margin. Operating income declined 2.4 percent, penalized by year-on-year H1N1-related comparisons, which reduced Safety, Security and Protection Services sales growth rates by approximately 6 percent year-on-year. In addition, fourth-quarter 2010 acquisition-related costs also penalized operating income. In 2009, this business segment recorded charges of $16 million related to restructuring actions, with this charge comprised of employee-related liabilities for severance and benefits. This charge was largely offset by a gain of $15 million related to the sale of 3M's New Jersey roofing granule facility.

 

Year 2009 results:

 

In 2009, sales in Safety, Security and Protection Services totaled $3.1 billion, down 8.0 percent in dollar-terms and 2.7 percent in local currencies. 3M drove positive local-currency growth in personal protection products, but all other businesses posted declines for the full year. The global economic downturn negatively impacted the industrial and construction-related businesses within this segment.

 

Despite the 8 percent sales decline for the year, operating income margins rose to 23.6 percent. In 2009, this business segment recorded charges of $16 million related to restructuring actions, comprised of employee-related liabilities for severance and benefits. This charge was partially offset by a gain of $15 million related to the sale of 3M's New Jersey roofing granule facility. In the second quarter of 2008, 3M completed the sale of its HighJump Software business and recognized a pre-tax loss of $23 million. In addition, 3M recorded restructuring charges and exit activities that totaled $15 million in 2008.

 

In June 2009, 3M's Security Systems Division was notified that the UK government decided to award its passport production to a competitor upon the expiration of 3M's existing UK passport contract in October 2010. Refer to "Critical Accounting Estimates" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional discussion.

 

Electro and Communications Business (11.0% of consolidated sales):

 



2010


2009


2008


 

Sales (millions) ....................................................................


$

2,922


$

2,276


$

2,835


 

Sales change analysis:








 

 

Organic local-currency sales (volume and price) ...............


27.0


(18.4)

%

(2.0

)%

Acquisitions ..................................................................


-


0.6


0.4


 

Local-currency sales .....................................................


27.0

%

(17.8)

%

(1.6

)%

 

Divestitures ...................................................................


(0.5

)

(0.2

)

-


 

Translation ....................................................................


1.9


(1.7

)

2.7


 

Total sales change ............................................................


28.4

%

(19.7)

%

1.1

%

 









 

Operating income (millions) ...................................................


$

631


$

322


$

540


 

Percent change ................................................................


96.0

%

(40.4)

%

7.9

%

 

 

Percent of sales ...............................................................


21.6

%

14.2

%

19.1

%

 

The Electro and Communications segment serves the electrical, electronics and communications industries, including electrical utilities; electrical construction, maintenance and repair; original equipment manufacturer (OEM) electrical and electronics; computers and peripherals; consumer electronics; telecommunications central office, outside plant and enterprise; as well as aerospace, military, automotive and medical markets; with products that enable the efficient transmission of electrical power and speed the delivery of information. Products include electronic and interconnect solutions, micro interconnect systems, high-performance fluids, high-temperature and display tapes, telecommunications products, electrical products, and touch screens and touch monitors.

 

Year 2010 results:

 

Electro and Communications sales were $2.9 billion in 2010, an increase of 28.4 percent in U.S. dollars and 27.0 percent in local currency. Foreign currency impacts added 1.9 percent to 2010 sales growth, while divestiture impacts reduced sales by 0.5 percent. Sales expanded in all geographic regions, led by Asia Pacific and the United States. Sales growth was led by the electronics markets materials, electronic solutions and touch systems businesses, which each had local-currency sales growth of greater than 25 percent. 3M also saw strong growth in the electrical markets business. 3M's telecom infrastructure-related business increased slightly year-on-year.

 

Operating income was $631 million in 2010, or 21.6 percent of sales, which was significantly improved versus last year as the consumer electronic-related businesses showed significant year-on-year improvements. In 2009, this business segment recorded charges of $11 million related to restructuring actions, with this charge comprised of employee-related liabilities for severance and benefits.

 

Year 2009 results:

 

In 2009, sales were $2.3 billion, down 19.7 percent, with local-currency sales declining 17.8 percent, foreign currency translation reducing sales by 1.7 percent, and divestitures reducing sales by 0.2 percent. The global economic downturn weighed heavily on all businesses, particularly telecom infrastructure, commercial construction and utilities.

 

Operating income for the year was $322 million, with operating income margins of 14.2 percent. Operating income in 2009 included charges of $11 million related to restructuring actions, with this charge comprised of employee-related liabilities for severance and benefits. Operating income in 2008 was impacted by $7 million in restructuring expenses.

 



PERFORMANCE BY GEOGRAPHIC AREA

 

While 3M manages its businesses globally and believes its business segment results are the most relevant measure of performance, the Company also utilizes geographic area data as a secondary performance measure. Export sales are generally reported within the geographic area where the final sales to 3M customers are made. A portion of the products or components sold by 3M's operations to its customers are exported by these customers to different geographic areas. As customers move their operations from one geographic area to another, 3M's results will follow. Thus, net sales in a particular geographic area are not indicative of end-user consumption in that geographic area.

 

Financial information related to 3M operations in various geographic areas is provided in Note 18. Operating income results by geographic area were significantly impacted by restructuring and other items. In 2009, restructuring actions, partially offset by a gain on sales of real estate, decreased worldwide operating income by $194 million, with the largest impact in Europe, Asia Pacific and the United States. In 2008, restructuring actions, exit activities and a loss on sale of businesses, which were partially offset by a gain on sale of real estate, decreased worldwide operating income by $269 million, with the largest impact in the United States and Europe.

 

A summary of key information and discussion related to 3M's geographic areas follow:

 



2010




United
States


Asia Pacific


Europe,
Middle East
and Africa


Latin
America/
Canada


Other
Unallocated


Worldwide


Net sales (millions) .......


$

9,210


$

8,259


$

6,259


$

2,950


$

(16

)

$

26,662


% of worldwide sales ....


34.5

%

31.0

%

23.5

%

11.0

%

-


100.0

%

Components of net sales change:














Volume - organic ........


7.0

%

30.3

%

7.4

%

12.1

%

-


13.7

%

Price ...................


0.1


(1.6

)

0.1


1.1


-


(0.2

)

Organic local-currency sales


7.1


28.7


7.5


13.2


-


13.5


Acquisitions .............


1.1


0.9


0.4


1.3


-


0.9


Local-currency sales ......


8.2


29.6


7.9


14.5


-


14.4


Divestitures ..............


-


-


(0.3

)

-


-


(0.1

)

Translation ..............


-


5.3


(2.8

)

2.7


-


1.0


Total sales change ........


8.2

%

34.9

%

4.8

%

17.2

%

-


15.3

%















Operating income (millions) .


$

1,636


$

2,400


$

1,112


$

797


$

(27

)

$

5,918


Percent change ........


(0.2

)%

57.1

%

10.9

%

26.5

%

-


22.9

%

 

For total year 2010, as shown in the preceding table, sales rose 15.3 percent, driven largely by organic volume increases of 13.7 percent. Every major geographic region expanded sales, with total sales in Asia Pacific up 34.9 percent, Latin America/Canada up 17.2 percent, the United States up 8.2 percent, and Europe, Middle East and Africa up 4.8 percent. Investments in innovation and new product development, sales and marketing capability and localized manufacturing created new growth opportunities in adjacent market spaces. For 2010, international operations represented nearly two-thirds of 3M's sales.

 



2009




United
States


Asia Pacific


Europe,
Middle East
and Africa


Latin
America/
Canada


Other
Unallocated


Worldwide


Net sales (millions) .......


$

8,509


$

6,120


$

5,972


$

2,516


$

6


$

23,123


% of worldwide sales ....


36.8

%

26.5

%

25.8

%

10.9

%

-


100.0

%

Components of net sales change:














Volume - organic ........


(11.9

)%

(3.4

)%

(11.9

)%

(10.0

)%

-


(9.5)

%

Price ...................


2.5


(1.9

)

1.9


8.6


-


1.8


Organic local-currency sales


(9.4

)

(5.3

)

(10.0

)

(1.4

)

-


(7.7

)

Acquisitions .............


2.4


0.5


3.5


1.4


-


2.1


Local-currency sales ......


7.0


(4.8

)

(6.5

)

-


-


(5.6

)

Divestitures ..............


(0.3

)

-


(0.1

)

-


-


(0.1

)

Translation ..............


-


0.1


(7.4

)

(7.6

)

-


(2.8

)

Total sales change ........


(7.3

)%

(4.7

)%

(14.0

)%

(7.6

)%

-


(8.5)

%















Operating income (millions) .


$

1,640


$

1,528


$

1,003


$

631


$

12


$

4,814


Percent change ........


3.9

%

(8.1

)%

(22.5

)%

(9.1

)%

-


(7.7)

%

 

For total year 2009, as shown in the preceding table, all major geographic areas showed sales declines; however, year-on-year sales growth improved each quarter throughout the year. In the fourth quarter of 2009, sales growth of 11.1 percent was broad-based. Every major geographic region expanded sales, with strong performances in Asia Pacific at 22 percent and Latin America and Canada each at 19 percent. With respect to organic volume, Asia Pacific led the way at nearly 19 percent for the fourth quarter. Korea, China and Taiwan posted the most significant increases, driven by a combination of improved local demand along with the pickup in global electronics. Organic volumes were flat to slightly down in other geographic regions, which is an improvement versus the levels of decline seen in the first three quarters of 2009. For 2009, international operations represented approximately 63 percent of 3M's sales.

 

Geographic Area Supplemental Information

 



Employees as of
December 31,


Capital
Spending


Property, Plant and
Equipment - net


 

(Millions,

 except Employees)


2010


2009


2008


2010


2009


2008


2010


2009


 



















 

United States ..........


32,955


31,513


33,662


$

569


$

464


$

780


$

3,888


$

3,809


 

Asia Pacific ............


16,324


13,834


13,960


290


215


338


1,605


1,366


 

 

Europe, Middle East and Africa ....


18,120


17,743


19,185


151


162


253


1,239


1,318


Latin America and Canada ...............


12,658


11,745


12,376


81


62


100


547


507


 

Total Company ........


80,057


74,835


79,183


$

1,091


$

903


$

1,471


$

7,279


$

7,000


 

 

Employment:

 

At December 31, 2010, employment increased by 5,222 positions since year-end 2009, largely driven by acquisitions (estimated 1,850 full-time equivalents) and additions in developing economies. At December 31, 2009, employment declined by 4,348 positions since year-end 2008, largely driven by restructuring actions taken in the fourth quarter of 2008 through the third quarter of 2009.

 

Capital Spending/Net Property, Plant and Equipment:

 

The bulk of 3M capital spending historically has been in the United States, resulting in higher net property, plant and equipment balances in the United States. The Company is striving to more closely align its manufacturing and sourcing with geographic market sales, and because approximately two-thirds of sales are outside the United States, this would increase production outside the United States, helping to improve customer service, lower transportation costs, and reduce working capital requirements. Capital expenditures were $1.091 billion in 2010, compared to $903 million in 2009 and $1.471 billion in 2008. In response to global economic conditions, the Company reduced its capital spending significantly in 2009. A substantial amount of the 2009 spending was carryover from 2008 or for tooling needed for new products and continued operations. The Company expects 2011 capital spending to be approximately $1.3 to $1.4 billion as 3M continues to fund growth opportunities around the world.

 

CRITICAL ACCOUNTING ESTIMATES

 

Information regarding significant accounting policies is included in Note 1. As stated in Note 1, the preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

The Company believes its most critical accounting estimates relate to legal proceedings, the Company's pension and postretirement obligations, asset impairments and income taxes. Senior management has discussed the development, selection and disclosure of its critical accounting estimates with the Audit Committee of 3M's Board of Directors.

 

Legal Proceedings:

 

The categories of claims for which the Company has a probable and estimable liability, the amount of its liability accruals, and the estimates of its related insurance receivables are critical accounting estimates related to legal proceedings. Please refer to the section entitled "Process for Disclosure of Liabilities and Insurance Receivables Related to Legal Proceedings" (contained in "Legal Proceedings" in Note 14) for additional information about such estimates.

 

Pension and Postretirement Obligations:

 

3M has various company-sponsored retirement plans covering substantially all U.S. employees and many employees outside the United States. The Company accounts for its defined benefit pension and postretirement health care and life insurance benefit plans in accordance with Accounting Standard Codification (ASC) 715, Compensation - Retirement Benefits,  in measuring plan assets and benefit obligations and in determining the amount of net periodic benefit cost. ASC 715 requires employers to recognize the underfunded or overfunded status of a defined benefit pension or postretirement plan as an asset or liability in its statement of financial position and recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income, which is a component of stockholders' equity.

 

Pension benefits associated with these plans are generally based primarily on each participant's years of service, compensation, and age at retirement or termination. Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of expense and liability measurement. See Note 11 for additional discussion of actuarial assumptions used in determining pension and postretirement health care liabilities and expenses.

 

The Company determines the discount rate used to measure plan liabilities as of the December 31 measurement date for the U.S. pension and postretirement benefit plans. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. Using this methodology, the Company determined a discount rate of 5.23% for U.S. pension and 5.09% for U.S. postretirement to be appropriate as of December 31, 2010, which is a decrease from the 5.77% and 5.62% rates, respectively, used as of December 31, 2009. For the international pension and postretirement plans the discount rates also reflect the current rate at which the associated liabilities could be effectively settled at the end of the year. The weighted average discount rate for international pension plans as of December 31, 2010 was 5.04%, a decrease from the 5.30% rate used as of December 31, 2009.

 

A significant element in determining the Company's pension expense in accordance with ASC 715 is the expected return on plan assets, which is based on historical results for similar allocations among asset classes. For the U.S. pension plan, the expected long-term rate of return on an annualized basis for 2011 is 8.50%, the same as 2010. Refer to Note 11 for information on how the 2011 rate was determined. Return on assets assumptions for international pension and other post-retirement benefit plans are calculated on a plan-by-plan basis using plan asset allocations and expected long-term rate of return assumptions. The weighted average expected return for the international pension plan is 6.58% for 2011, comparable to the weighted average expected return of 6.90% for 2010.

 

For the year ended December 31, 2010, the Company recognized total consolidated pre-tax pension and postretirement expense (after settlements, curtailments and special termination benefits) of $322 million, up from $223 million in 2009. Pension and postretirement expense (before settlements, curtailments and special termination benefits) is anticipated to increase to approximately $535 million in 2011, an increase of $213 million compared to 2010. For the pension plans, holding all other factors constant, a 0.25 percentage point increase/decrease in the expected long-term rate of return on plan assets would decrease/increase 2011 pension expense by approximately $27 million for U.S. pension plans and approximately $11 million for international pension plans. Also, holding all other factors constant, a 0.25 percentage point increase in the discount rate used to measure plan liabilities would decrease 2011 pension expense by approximately $30 million for U.S. pension plans and approximately $10 million for international pension plans. In addition, a 0.25 percentage point decrease in the discount rate used to measure plan liabilities would increase 2011 pension expense by approximately $31 million for U.S. pension plans and approximately $20 million for international pension plans.

 

Asset Impairments:

 

As of December 31, 2010, net property, plant and equipment totaled $7.3 billion and net identifiable intangible assets totaled $1.8 billion. Management makes estimates and assumptions in preparing the consolidated financial statements for which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed in the business, including assets of acquired businesses. These estimates and assumptions are closely monitored by management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or an impairment recorded based on a change in the expected use of the asset or performance of the related asset group. Impairments recorded in 2009 and 2008 related to restructuring actions and other exit activities are discussed in Note 4.

 

In June 2009, 3M's Security Systems Division (within the Safety, Security and Protection Services business segment) was notified that the UK government decided to award the production of its passports to a competitor upon the expiration of 3M's existing UK passport contracts in October 2010. As a result of this event, in June 2009, 3M tested the long lived assets associated with the UK passport activity for recoverability and also reassessed their remaining useful lives. In addition, 3M tested goodwill for impairment at the reporting unit (Security Systems Division) level. The result of the June 2009 test of recoverability of long lived assets associated with the UK passport activity indicated that the asset grouping's carrying amount of approximately $54 million (before impairment) exceeded the remaining expected cash flows. Accordingly, 3M recorded a non-cash impairment charge of approximately $13 million in the second quarter of 2009 to write these assets down to their fair value. In addition, accelerated depreciation/amortization was taken over the period June 2009 through the date of expiration of the contract based on a reassessment of the remaining expected useful life of these assets.

 

3M goodwill totaled approximately $6.8 billion as of December 31, 2010. 3M's annual goodwill impairment testing is performed in the fourth quarter of each year, using September 30 net book values. Impairment testing for goodwill is done at a reporting unit level, with all goodwill assigned to a reporting unit. Reporting units are one level below the business segment level (3M has six business segments at December 31, 2010), but can be combined when reporting units within the same segment have similar economic characteristics. At 3M, reporting units generally correspond to a division. 3M did not combine any of its reporting units for impairment testing.

 

An impairment loss generally would be recognized when the carrying amount of the reporting unit's net assets exceeds the estimated fair value of the reporting unit. The estimated fair value of a reporting unit is determined using earnings for the reporting unit multiplied by a price/earnings ratio for comparable industry groups, or by using a discounted cash flow analysis. 3M typically uses the price/earnings ratio approach for stable and growing businesses that have a long history and track record of generating positive operating income and cash flows. 3M uses the discounted cash flow approach for start-up, loss position and declining businesses, but also uses discounted cash flow as an additional tool for businesses that may be growing at a slower rate than planned due to economic or other conditions.

 

As discussed in Note 17 to the Consolidated Financial Statements, effective in the first quarter of 2010, 3M made certain product moves between its business segments. For those changes that resulted in reporting unit changes, the Company applied the relative fair value method to determine the impact to reporting units. During the first quarter of 2010, the Company completed its assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed. The discussion that follows relates to the separate fourth quarter 2010 annual impairment test and is in the context of the segment structure that existed at that time.

 

As of September 30, 2010, 3M had 38 primary reporting units, with eight reporting units accounting for approximately 71 percent of the goodwill. These eight reporting units were comprised of the following divisions: 3M Purification Inc., Occupational Health and Environmental Safety, Optical Systems, 3M ESPE, Communication Markets, Industrial Adhesives and Tapes, Security Systems, and Health Information Systems.

 

The fair values for the majority of reporting units were in excess of carrying value by more than 30 percent. The fair values for Optical Systems and 3M Purification Inc., based on fourth quarter 2010 testing, were in excess of carrying value by approximately 23 percent and 26 percent, respectively, with no impairment indicated. As part of its annual impairment testing in the fourth quarter, 3M used a weighted-average discounted cash flow analysis for Optical Systems and 3M Purification Inc., using projected cash flows that were weighted based on different sales growth and terminal value assumptions, among other factors. The weighting was based on management's estimates of the likelihood of each scenario occurring. In the fourth quarter of 2010, 3M made several larger acquisitions. These acquisitions (with their reporting unit indicated) included Arizant Inc. (Infection Prevention), Cogent Inc. (Security Systems) and Attenti Holdings S.A. (Track and Trace), with goodwill of approximately $512 million, $295 million and $122 million, respectively. Due to the significance of the Cogent Inc. acquisition with respect to its reporting unit, 3M will be monitoring the Security Systems Division in 2011 for any triggering events or other indicators of impairment.

 

In 2010, for those reporting units whose fair value was in excess of carrying value by more than 30 percent, 3M primarily used an industry price-earnings ratio approach, but also used a discounted cash flows approach for certain reporting units. Based on the fair values determined using discounted cash flows for certain reporting units and the industry price-earnings ratio approach for the remaining reporting units, at September 30, 2010, 3M's implied control premium was approximately 23 percent. The control premium is defined as the sum of the individual reporting units estimated market values compared to 3M's total Company market value, with the sum of the individual values typically being larger than the value for the total Company. At September 30, 2010, 3M's market value was approximately $62 billion, but if each reporting unit was valued individually, 3M's market value would be approximately $76 billion using a 23 percent control premium. 3M is an integrated materials enterprise, thus; many of 3M's businesses could not easily be sold on a stand-alone basis. Based on its annual test in the fourth quarter of 2010, no goodwill impairment was indicated for any of the reporting units. In addition, 3M's market value at both September 30, 2010 and December 31, 2010 of approximately $62 billion and $61 billion, respectively, was significantly in excess of its equity of approximately $16 billion.

 

Factors which could result in future impairment charges, among others, include changes in worldwide economic conditions, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk factors are discussed in Item 1A, "Risk Factors", of this document. As of December 31, 2010, 3M had approximately $1 billion of goodwill related to 3M Purification Inc. and $750 million related to Optical Systems. In addition, as a result of the Cogent Inc. acquisition in the fourth quarter of 2010, Security Systems Division goodwill increased to approximately $500 million. If future non-cash impairment charges are taken, 3M would expect that only a portion of the long-lived assets or goodwill would be impaired. 3M will continue to monitor its reporting units in 2011 for any triggering events or other indicators of impairment.

 

Income Taxes:

 

The extent of 3M's operations involves dealing with uncertainties and judgments in the application of complex tax regulations in a multitude of jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes will be due. The Company follows guidance provided by ASC 740, Income Taxes, regarding uncertainty in income taxes, to record these liabilities (refer to Note 8 for additional information). The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the tax liabilities. If the Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary.

 



NEW ACCOUNTING PRONOUNCEMENTS

 

Information regarding new accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.

 

FINANCIAL CONDITION AND LIQUIDITY

 

As indicated in the following table, at December 31, 2010, 3M had $5.018 billion of cash, cash equivalents, and marketable securities and $5.452 billion of debt. Debt included $4.183 billion of long-term debt, $1.185 billion related to the current portion of long-term debt and short-term borrowings of $84 million. The strength of 3M's capital structure and consistency of its cash flows provide 3M reliable access to capital markets. Additionally, the Company's maturity profile is staggered to ensure refinancing needs in any given year are reasonable in proportion to the total portfolio.

 

The Company generates significant ongoing cash flow, which has been used, in part, to fund share repurchase activities, pay dividends on 3M common stock, and for acquisitions. As discussed in Note 2, in the fourth quarter of 2010, the Company purchased Arizant Inc., Attenti Holdings S.A. and Cogent Inc. As a result, cash outflows (including repayment of acquired debt, but net of cash and marketable securities acquired) for these three acquisitions totaled approximately $1.4 billion. 3M was able to complete these acquisitions without incurring additional debt, while maintaining a strong cash, cash equivalents and marketable securities position.

 

At December 31








(Millions)


2010


2009


2008










Total Debt ..............................................................................


$

5,452


$

5,710


$

6,718


Less: Cash, cash equivalents and marketable securities ............


5,018


4,609


2,574


Net Debt ................................................................................


$

434


$

1,101


$

4,144


 

The Company defines net debt as total debt less cash, cash equivalents and marketable securities. 3M considers net debt to be an important measure of liquidity and its ability to meet ongoing obligations. This measure is not defined under U.S. generally accepted accounting principles and may not be computed the same as similarly titled measures used by other companies.

 

Cash, cash equivalents and marketable securities at December 31, 2010 totaled approximately $5.0 billion, helped by cash flows from operating activities of $5.2 billion. The Company has sufficient liquidity to meet currently anticipated growth plans, including capital expenditures, working capital investments and acquisitions. The Company does not utilize derivative instruments linked to the Company's stock. However, the Company does have contingently convertible debt that, if conditions for conversion are met, is convertible into shares of 3M common stock (refer to Note 10 in this document).

 

The Company's financial condition and liquidity are strong. Various assets and liabilities, including cash and short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. Working capital (defined as current assets minus current liabilities) totaled $6.126 billion at December 31, 2010, compared with $5.898 billion at December 31, 2009. Working capital increases were primarily attributable to increases in cash and cash equivalents, short-term marketable securities, accounts receivable and inventories, which were largely offset by decreases in working capital driven by increases in current liabilities, primarily short-term debt and accounts payable.

 

Primary short-term liquidity needs are met through U.S. commercial paper and euro commercial paper issuances. The Company maintains a commercial paper program that allows 3M to have a maximum of $3 billion outstanding with a maximum maturity of 397 days from date of issuance. As of December 31, 2010 and 2009, 3M had no outstanding commercial paper. The Company believes it is unlikely that its access to the commercial paper market will be restricted. Effective April 30, 2007, the Company has a $1.5-billion five-year credit facility, which has provisions for the Company to request an increase of the facility up to $2 billion (at the lenders' discretion), and providing for up to $150 million in letters of credit. At December 31, 2010, available short-term committed lines of credit, including the preceding $1.5 billion five-year credit facility, totaled approximately $1.674 billion worldwide, of which approximately $255 million was utilized in connection with normal business activities. Debt covenants do not restrict the payment of dividends.

 

The Company has a "well-known seasoned issuer" shelf registration statement, effective February 17, 2009, which registers an indeterminate amount of debt or equity securities for future sales. No securities have been issued under this shelf. The Company intends to use the proceeds from future securities sales off this shelf for general corporate purposes. In connection with a prior "well-known seasoned issuer" shelf registration, in June 2007 the Company established a $3 billion medium-term notes program. Three debt securities have been issued under this medium-term notes program. First, in December 2007, 3M issued a five-year, $500 million, fixed rate note with a coupon rate of 4.65%. Second, in August 2008, 3M issued a five-year, $850 million, fixed rate note with a coupon rate of 4.375%. Third, in October 2008, the Company issued a three-year $800 million, fixed rate note with a coupon rate of 4.50%. The Company entered into an interest rate swap to convert this $800 million note to a floating rate.

 

The Company has an AA- credit rating, with a stable outlook, from Standard & Poor's and an Aa2 credit rating, with a stable outlook, from Moody's Investors Service. The Company's $350 million of Dealer Remarketable Securities had ratings triggers (BBB-/Baa3 or lower) that would require repayment of debt. These securities were retired upon maturity in December 2010. In addition, under the $1.5-billion five-year credit facility agreement, 3M is required to maintain its EBITDA to Interest Ratio as of the end of each fiscal quarter at not less than 3.0 to 1. This is calculated (as defined in the agreement) as the ratio of consolidated total EBITDA for the four consecutive quarters then ended to total interest expense on all funded debt for the same period. At December 31, 2010, this ratio was approximately 35 to 1.

 

3M's cash and cash equivalents balance at December 31, 2010 totaled $3.377 billion, with an additional $1.641 billion in current and long-term marketable securities. 3M's strong balance sheet and liquidity provide the Company with significant flexibility to take advantage of numerous opportunities going forward. The Company will continue to invest in its operations to drive growth, including continual review of acquisition opportunities. 3M paid dividends of $1.5 billion in 2010, and has a long history of dividend increases. In February 2011, 3M's Board of Directors increased the quarterly dividend on 3M common stock by 4.8 percent to 55 cents per share, equivalent to an annual dividend of $2.20 per share. In February 2011, 3M's Board of Directors also authorized the repurchase of up to $7.0 billion of 3M's outstanding common stock, replacing the Company's existing repurchase program. This authorization has no pre-established end date.

 

In 2011, the Company expects to contribute in cash an amount in the range of $400 million to $600 million to its U.S. and international pension and postretirement plans. The Company does not have a required minimum pension contribution obligation for its U.S. plans in 2011. Therefore, the amount of the anticipated discretionary contribution could vary significantly depending on the U.S. qualified plans' funded status as of the 2011 measurement date and the anticipated tax deductibility of the contribution. Future contributions will also depend on market conditions, interest rates and other factors. 3M believes its strong cash flow and balance sheet will allow it to fund future pension needs without compromising growth opportunities.

 

The Company uses various working capital measures that place emphasis and focus on certain working capital assets and liabilities. These measures are not defined under U.S. generally accepted accounting principles and may not be computed the same as similarly titled measures used by other companies. One of the primary working capital measures 3M uses is a combined index, which includes accounts receivable, inventory and accounts payable. This combined index (defined as quarterly net sales - fourth quarter at year-end - multiplied by four, divided by ending net accounts receivable plus inventory less accounts payable) was 5.3 at December 31, 2010, a decline from 5.5 at December 31, 2009. Receivables increased $365 million, or 11.2 percent, compared with December 31, 2009, with higher December 2010 sales compared to December 2009 sales contributing to this increase. In addition, acquisitions increased accounts receivable by $93 million and currency translation increased accounts receivable by $82 million, as the U.S. dollar weakened in aggregate against a multitude of currencies. Inventories increased $516 million, or 19.6 percent, compared with December 31, 2009. The inventory increases are partially attributable to the increase in demand in 2010. In addition, acquisitions increased inventories by $77 million year-on-year, while currency translation increased inventories by $35 million. Accounts payable increased $209 million compared with December 31, 2009, with acquisitions accounting for $46 million of this increase and currency translation accounting for $16 million, with the balance primarily related to improvement in business activity.

 



Cash flows from operating, investing and financing activities are provided in the tables that follow. Individual amounts in the Consolidated Statement of Cash Flows exclude the effects of acquisitions, divestitures and exchange rate impacts on cash and cash equivalents, which are presented separately in the cash flows. Thus, the amounts presented in the following operating, investing and financing activities tables reflect changes in balances from period to period adjusted for these effects.

 

Cash Flows from Operating Activities:

 

Years ended December 31








 

(Millions)


2010


2009


2008


 









 

Net income including noncontrolling interest ..............................


$

4,163


$

3,244


$

3,520


 

Depreciation and amortization ..................................................


1,120


1,157


1,153


 

 

Company pension contributions ................................................


(556

)

(659

)

(421

)

 

Company postretirement contributions ......................................


(62

)

(133

)

(53

)

 

Company pension expense ......................................................


271


176


89


 

Company postretirement expense ............................................


51


47


16


 

Stock-based compensation expense ........................................


274


217


202


 

Loss/(gain) from sale of businesses ..........................................


-


-


23


 

Income taxes (deferred and accrued income taxes) ....................


85


554


(44

)

 

Excess tax benefits from stock-based compensation .................


(53

)

(14

)

(21

)

 

Accounts receivable ................................................................


(189

)

55


197


 

Inventories ..............................................................................


(404

)

453


(127

)

 

Accounts payable ...................................................................


146


109


(224

)

 

Product and other insurance receivables and claims ...................


49


64


153


Other - net ...........................................................................


279


(329

)

70


 

Net cash provided by operating activities ...................................


$

5,174


$

4,941


$

4,533


 

 

Cash flows from operating activities can fluctuate significantly from period to period, as pension funding decisions, tax timing differences and other items can significantly impact cash flows. In the third quarter of 2009, the Company contributed $600 million to its U.S. defined benefit pension plan in shares of the Company's common stock, which is considered a non-cash financing activity. This non-cash activity is not reflected in the operating or financing section of the cash flows.

 

In 2010, cash flows provided by operating activities increased $233 million compared to 2009. The main positive contribution to operating cash flows related to year-on-year increases in net income including noncontrolling interest. Operating cash flows were penalized by working capital increases of $447 million in 2010, compared to working capital decreases of $617 million in 2009. 3M defines working capital as accounts receivable, inventories and accounts payable. These working capital increases were partially attributable to the rapid increase in demand in 2010. In addition, operating cash flows in 2009 benefited from changes in deferred and accrued income taxes.

 

In 2009, cash flows provided by operating activities increased $408 million compared to 2008. The main positive contribution to operating cash flows related to working capital decreases of $617 million in 2009, compared to working capital increases of $154 million in 2008. 3M defines working capital as accounts receivable, inventories and accounts payable. In addition, 3M's deferred and accrued income tax positions benefited 2009 cash flows. These positive contributions were partially offset by a decrease of $276 million in net income including noncontrolling interest. The category, "Other-net," in the preceding table reflects changes in other asset and liability accounts. This includes the impact of cash outlays for restructuring payments, net of restructuring expenses, which on a combined basis reduced liabilities (Note 4). In addition, decreases in banked vacation accruals reduced liabilities.

 



Free Cash Flow (non-GAAP measure):

 

In addition, to net cash provided by operating activities, 3M uses free cash flow as a useful measure of performance and as an indication of the strength of the Company and its ability to generate cash. 3M defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment (which is classified as an investing activity). Free cash flow is not defined under U.S. generally accepted accounting principles (GAAP). Therefore, it should not be considered a substitute for income or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other companies. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. Below find a recap of free cash flow for 2010, 2009 and 2008.

 

Years ended December 31








(Millions)


2010


2009


2008










Net cash provided by operating activities ...................................


$

5,174


$

4,941


$

4,533


Purchases of property, plant and equipment (PP&E) ..................


(1,091

)

(903

)

(1,471

)

Free Cash Flow ......................................................................


$

4,083


$

4,038


$

3,062


 

Cash Flows from Investing Activities:

 

Years ended December 31








 

(Millions)


2010


2009


2008


 

Purchases of property, plant and equipment (PP&E) ..................


$

(1,091

)

$

(903

)

$

(1,471

)

 

Proceeds from sale of PP&E and other assets ..........................


25


74


87


 

 

Acquisitions, net of cash acquired ............................................


(1,830

)

(69

)

(1,394

)

 

Proceeds from sale of businesses ............................................


-


5


88


 

Purchases and proceeds from sale or maturities of marketable securities and investments - net ..........................................


273


(839

)

291


Other investing activities ..........................................................


(66

)

-


-


 

Net cash used in investing activities ..........................................


$

(2,689

)

$

(1,732

)

$

(2,399

)

 

 

Investments in property, plant and equipment enable growth in diverse markets, helping to meet product demand and increasing manufacturing efficiency. Capital spending increased to $1.091 billion in 2010, compared to $903 million in 2009. In 2010, in the U.S., 3M invested in film manufacturing assets for optical systems and other non-optical businesses which use similar technology. In Singapore, 3M is increasing capacity at its multi-purpose manufacturing facility. 3M investments in the Industrial and Transportation business included solar energy in the U.S. and industrial adhesives and tapes in China. 3M also invested in optical film capacity in Korea. Capital spending on some of the preceding projects will carry over into 2011. The Company expects 2011 capital spending to be approximately $1.3 to $1.4 billion as 3M continues to fund growth opportunities around the world.

 

In response to global economic conditions, the Company reduced its capital spending significantly in 2009. A substantial amount of the 2009 spending was carryover from 2008 or for tooling needed for new products and continued operations. In 2008, major facility efforts included completion of production lines in the United States for both Consumer and Office and Health Care, an R&D laboratory in Korea, a tape building in Poland, and numerous tape lines and building expansions in China. In 2008, 3M also made progress towards completion of investments in a Singapore multi-purpose manufacturing facility and film production facilities and made progress towards completion of manufacturing cost reduction investments in two of its U.S. film manufacturing plants.

 

Refer to Note 2 for information on acquisitions. Note 2 also provides information on the proceeds from the sale of businesses. The Company is actively considering additional acquisitions, investments and strategic alliances, and from time to time may also divest certain businesses.

 

Purchases of marketable securities and investments and proceeds from sale (or maturities) of marketable securities and investments are primarily attributable to asset-backed securities, agency securities, corporate medium-term note securities and other securities, which are classified as available-for-sale. Interest rate risk and credit risk related to the underlying collateral may impact the value of investments in asset-backed securities, while factors such as general conditions in the overall credit market and the nature of the underlying collateral may affect the liquidity of investments in asset-backed securities. The coupon interest rates for asset-backed securities are either fixed rate or floating. Floating rate coupons reset monthly or quarterly based upon the corresponding monthly or quarterly LIBOR rate. Each individual floating rate security has a coupon based upon the respective LIBOR rate +/- an amount reflective of the credit risk of the issuer and the underlying collateral on the original issue date. Terms of the reset are unique to individual securities. Fixed rate coupons are established at the time the security is issued and are based upon a spread to a related maturity treasury bond. The spread against the treasury bond is reflective of the credit risk of the issuer and the underlying collateral on the original issue date. 3M does not currently expect risk related to its holdings in asset-backed securities to materially impact its financial condition or liquidity. Refer to Note 9 for more details about 3M's diversified marketable securities portfolio, which totaled $1.641 billion as of December 31, 2010. Additional purchases of investments include additional survivor benefit insurance and equity investments.

 

As discussed in Notes 6 and 10, during the quarter ended March 31, 2010, the Company's majority owned Sumitomo 3M Limited entity (Sumitomo 3M) purchased a portion of its shares held by its noncontrolling interest, Sumitomo Electric Industries, Ltd. (SEI), by paying cash of 5.8 billion Japanese Yen and entering into a note payable to SEI of 17.4 billion Japanese Yen (approximately $63 million and $188 million, respectively, based on applicable exchange rates at that time). The cash paid of approximately $63 million during the quarter ended March 31, 2010 as a result of the purchase of Sumitomo 3M shares from SEI is classified as "Other investing activities" in the consolidated statement of cash flows. The remainder of the purchase financed by the note payable to SEI is considered non-cash investing and financing activity in the first quarter of 2010. As discussed in Note 10, during the second quarter of 2010, 3M recorded a financed liability of 1.7 billion Japanese yen (approximately $18 million based on applicable exchange rates at that time), which is also considered a non-cash investing and financing activity.

 

Cash Flows from Financing Activities:

 

Years ended December 31








 

(Millions)


2010


2009


2008


 









 

Change in short-term debt - net ..............................................


$

(24

)

$

(536

)

$

361


 

Repayment of debt (maturities greater than 90 days) ..................


(556

)

(519

)

(1,080

)

 

Proceeds from debt (maturities greater than 90 days) .................


108


41


1,756


 

Total cash change in debt ........................................................


$

(472

)

$

(1,014

)

$

1,037


 

Purchases of treasury stock ....................................................


(854

)

(17

)

(1,631

)

 

 

Reissuances of treasury stock .................................................


666


431


289


 

Dividends paid to shareholders .................................................


(1,500

)

(1,431

)

(1,398

)

 

Excess tax benefits from stock-based compensation .................


53


14


21


Distributions to noncontrolling interests and other - net .............


(14

)

3


(84

)

 

Net cash used in financing activities .........................................


$

(2,121

)

$

(2,014

)

$

(1,766

)

 

 

Total debt at December 31, 2010 was $5.5 billion, compared to $5.7 billion at year-end 2009 and $6.7 billion at year-end 2008. Debt was higher at year-end 2008 as the result of a strategy to build and maintain a cash buffer in the U.S. given the difficult market environment at that point in time. Total debt was 25 percent of total capital (total capital is defined as debt plus equity) at year-end 2010, compared with 30 percent at year-end 2009, and 39 percent at year-end 2008. The net change in short-term debt is typically due to commercial paper activity. In 2010, major items in repayment of debt (maturities greater than 90 days) included repayment of $350 million in Dealer Remarketable Securities, which matured in December 2010, and repayment of a portion of debt related to the 5.8 billion Japanese Yen installment paid on September 30, 2010 (refer to Notes 6 and 10 for more detail). In addition, approximately $105 million in acquired debt related to 2010 acquisitions was subsequently repaid. In 2009, repayment of debt (maturities greater than 90 days) includes a $400 million medium-term note that matured in November 2009 and also includes repayments of commercial paper. In 2008, the repayment of debt for maturities greater than 90 days primarily represents debt acquired upon the acquisition of Aearo that was immediately repaid and repayment of commercial paper with maturities greater than 90 days. In 2010, proceeds from debt primarily include a 100.5 million Canadian Dollar loan. In 2008, proceeds from debt primarily include a five-year, $850 million, fixed rate note issued in August 2008 with a coupon rate of 4.375%, and a three-year, $800 million, fixed rate note issued in October 2008 with a coupon rate of 4.5% (refer to Note 10 for more information).

 

Repurchases of common stock are made to support the Company's stock-based employee compensation plans and for other corporate purposes. In February 2011, 3M's Board of Directors authorized the repurchase of up to $7.0 billion of 3M's outstanding common stock, replacing the Company's existing repurchase program. This authorization has no pre-established end date. In 2010, the Company purchased $854 million in shares, while in 2009 purchases were minimal as the Company had no broker purchases of treasury stock. In 2008, the Company purchased $1.6 billion in shares. For more information, refer to the table titled "Issuer Purchases of Equity Securities" in Part II, Item 5.

 

Cash dividends paid to shareholders totaled $1.5 billion ($2.10 per share) in 2010, $1.431 billion ($2.04 per share) in 2009 and $1.398 billion ($2.00 per share) in 2008. 3M has paid dividends since 1916. In February 2011, the Board of Directors increased the quarterly dividend on 3M common stock by 4.8 percent to 55 cents per share, equivalent to an annual dividend of $2.20 per share. This marked the 53rd consecutive year of dividend increases. Other cash flows from financing activities primarily include distributions to noncontrolling interests, excess tax benefits from stock-based compensation, changes in cash overdraft balances, and principal payments for capital leases.

 

Off-Balance Sheet Arrangements and Contractual Obligations:

 

As of December 31, 2010, the Company has not utilized special purpose entities to facilitate off-balance sheet financing arrangements. Refer to the section entitled "Warranties/Guarantees" in Note 14 for discussion of accrued product warranty liabilities and guarantees.

 

In addition to guarantees, 3M, in the normal course of business, periodically enters into agreements that require the Company to indemnify either major customers or suppliers for specific risks, such as claims for injury or property damage arising out of the use of 3M products or the negligence of 3M personnel, or claims alleging that 3M products infringe third-party patents or other intellectual property. While 3M's maximum exposure under these indemnification provisions cannot be estimated, these indemnifications are not expected to have a material impact on the Company's consolidated results of operations or financial condition.

 

A summary of the Company's significant contractual obligations as of December 31, 2010, follows:

 

Contractual Obligations

 





Payments due by year


 















After


 

(Millions)


Total


2011


2012


2013


2014


2015


2015


 

Long-term debt, including current portion (Note 10) ...........................


$

5,368


$

1,185


$

752


$

922


$

1,413


$

-


$

1,096


 

Interest on long-term debt .................


1,909


207


181


156


119


64


1,182


 

 

Operating leases (Note 14) ...............


442


139


104


69


41


25


64


 

Capital leases (Note 14) ...................


111


17


18


18


17


4


37


Unconditional purchase obligations and other .....................


1,238


890


152


89


44


22


41


 

Total contractual cash obligations......


$

9,068


$

2,438


$

1,207


$

1,254


$

1,634


$

115


$

2,420


 

 

Long-term debt payments due in 2011 include $160 million of floating rate notes. The floating rate notes are classified as current portion of long-term debt as the result of put provisions associated with these debt instruments. Additionally, payments due in 2012 include the $226 million carrying amount of Convertible Notes, and payments due in 2013 include $73 million of floating rate notes, as a result of put provisions.

 

Unconditional purchase obligations are defined as an agreement to purchase goods or services that is enforceable and legally binding on the Company. Included in the unconditional purchase obligations category above are certain obligations related to take or pay contracts, capital commitments, service agreements and utilities. These estimates include both unconditional purchase obligations with terms in excess of one year and normal ongoing purchase obligations with terms of less than one year. Many of these commitments relate to take or pay contracts, in which 3M guarantees payment to ensure availability of products or services that are sold to customers. The Company expects to receive consideration (products or services) for these unconditional purchase obligations. Contractual capital commitments are included in the preceding table, but these commitments represent a small part of the Company's expected capital spending in 2011 and beyond. The purchase obligation amounts do not represent the entire anticipated purchases in the future, but represent only those items for which the Company is contractually obligated. The majority of 3M's products and services are purchased as needed, with no unconditional commitment. For this reason, these amounts will not provide a reliable indicator of the Company's expected future cash outflows on a stand-alone basis.

 

Other obligations, included in the preceding table within the caption entitled "Unconditional purchase obligations and other," include the current portion of the liability for uncertain tax positions under ASC 740. The Company is not able to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time; therefore, the long-term portion of the net tax liability of $352 million is excluded from the preceding table. Refer to Note 8 for further details.

 

As discussed in Note 11, the Company does not have a required minimum pension contribution obligation for its U.S. plans in 2011 and Company contributions to its U.S. and international pension plans are expected to be largely discretionary in 2011 and future years; therefore, amounts related to these plans are not included in the preceding table.

 

FINANCIAL INSTRUMENTS

 

The Company enters into contractual derivative arrangements in the ordinary course of business to manage foreign currency exposure, interest rate risks and commodity price risks. A financial risk management committee, composed of senior management, provides oversight for risk management and derivative activities. This committee determines the Company's financial risk policies and objectives, and provides guidelines for derivative instrument utilization. This committee also establishes procedures for control and valuation, risk analysis, counterparty credit approval, and ongoing monitoring and reporting.

 

The Company enters into foreign exchange forward contracts, options and swaps to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies and certain intercompany financing transactions. The Company manages interest rate risks using a mix of fixed and floating rate debt. To help manage borrowing costs, the Company may enter into interest rate swaps. Under these arrangements, the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The Company manages commodity price risks through negotiated supply contracts, price protection agreements and forward physical contracts.

 

A Monte Carlo simulation technique was used to test the Company's exposure to changes in currency and interest rates and assess the risk of loss or benefit in after-tax earnings of financial instruments, derivatives and underlying exposures outstanding at December 31, 2010. The model (third-party bank dataset) used a 95 percent confidence level over a 12-month time horizon. The model used analyzed 18 currencies, interest rates related to three currencies, and five commodities, but does not purport to represent what actually will be experienced by the Company. This model does not include certain hedge transactions, because the Company believes their inclusion would not materially impact the results. Foreign exchange rate risk of loss or benefit increased in 2010, primarily due to increases in exposures, which is one of the key drivers in the valuation model. Interest rate volatility decreased in 2010 because interest rates are currently very low and are projected to remain low, based on forward rates. The following table summarizes the possible adverse and positive impacts to after-tax earnings related to these exposures.

 



Adverse impact on


Positive impact on


 



after-tax earnings


after-tax earnings


 

(Millions)


2010


2009


2010


2009


 

Foreign exchange rates ..................................


$

(108

)

$

(81

)

$

120


$

91


 

Interest rates .................................................


(4

)

(11

)

4


4


 

 

Commodity rates ...........................................


(15

)

(20

)

12


13


 

The global exposures related to purchased components and materials are such that a 1 percent price change would result in a pre-tax cost or savings of approximately $62 million per year. The global energy exposure is such that a 10 percent price change would result in a pre-tax cost or savings of approximately $38 million per year. Derivative instruments are used to hedge approximately 1 percent of the purchased components and materials exposure and are used to hedge approximately 10 percent of this energy exposure.

 



Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

In the context of Item 7A, market risk refers to the risk of loss arising from adverse changes in financial and derivative instrument market rates and prices, such as fluctuations in interest rates and foreign currency exchange rates. The Company discusses risk management in various places throughout this document, including discussions in Item 7 concerning Financial Condition and Liquidity, and Financial Instruments, and in the Notes to Consolidated Financial Statements (Long-Term Debt and Short-Term Borrowings, Derivatives, Fair Value Measurements, and the Derivatives and Hedging Activities accounting policy). All derivative activity is governed by written policies, and a value-at-risk analysis is provided for these derivatives. The Company does not have leveraged derivative positions. However, the Company does have contingently convertible debt that, if conditions for conversion are met, is convertible into shares of 3M common stock (refer to Note 10 in this document).

 



 

Item 8. Financial Statements and Supplementary Data.

 

Index to Financial Statements

 


Beginning
page

 



 

Management's Responsibility for Financial Reporting..............................................................................

42

 

 



 

Management's Report on Internal Control Over Financial Reporting..........................................................

42

 



 

Report of Independent Registered Public Accounting Firm.......................................................................

43

 



 

Consolidated Statement of Income for the years ended December 31, 2010, 2009 and 2008.......................

44

 



 

Consolidated Balance Sheet at December 31, 2010 and 2009.................................................................

45

 



 

Consolidated Statement of Changes in Equity and Comprehensive Income for the years ended December 31, 2010, 2009 and 2008...................................................................................................

46

 



 

Consolidated Statement of Cash Flows for the years ended December 31, 2010, 2009 and 2008................

48

 



 

Notes to Consolidated Financial Statements..........................................................................................

49

 



 

Note 1. Significant Accounting Policies...........................................................................................

49

 

Note 2. Acquisitions and Divestitures..............................................................................................

56

 

Note 3. Goodwill and Intangible Assets...........................................................................................

60

 

Note 4. Restructuring Actions and Exit Activities.............................................................................

62

 

Note 5. Supplemental Balance Sheet Information.............................................................................

64

 

Note 6. Supplemental Equity and Comprehensive Income Information................................................

65

 

Note 7. Supplemental Cash Flow Information...................................................................................

67

 

Note 8. Income Taxes...................................................................................................................

68

 

Note 9. Marketable Securities........................................................................................................

71

 

Note 10. Long-Term Debt and Short-Term Borrowings......................................................................

73

 

Note 11. Pension and Postretirement Benefit Plans.........................................................................

76

 

Note 12. Derivatives......................................................................................................................

91

 

Note 13. Fair Value Measurements................................................................................................

95

 

Note 14. Commitments and Contingencies......................................................................................

100

 

Note 15. Employee Savings and Stock Ownership Plans..................................................................

110

 

Note 16. Stock-Based Compensation.............................................................................................

111

 

Note 17. Business Segments........................................................................................................

114

 

Note 18. Geographic Areas............................................................................................................

117

 

Note 19. Quarterly Data (Unaudited)...............................................................................................

117

 



 

Management's Responsibility for Financial Reporting

 

Management is responsible for the integrity and objectivity of the financial information included in this report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Where necessary, the financial statements reflect estimates based on management's judgment.

 

Management has established and maintains a system of internal accounting and other controls for the Company and its subsidiaries. This system and its established accounting procedures and related controls are designed to provide reasonable assurance that assets are safeguarded, that the books and records properly reflect all transactions, that policies and procedures are implemented by qualified personnel, and that published financial statements are properly prepared and fairly presented. The Company's system of internal control is supported by widely communicated written policies, including business conduct policies, which are designed to require all employees to maintain high ethical standards in the conduct of Company affairs. Internal auditors continually review the accounting and control system.

 

3M Company

 

Management's Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Management conducted an assessment of the Company's internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Based on the assessment, management concluded that, as of December 31, 2010, the Company's internal control over financial reporting is effective.

 

Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2010 excluded Cogent Inc., Arizant Inc. and Attenti Holdings S.A., which were all acquired by the Company in the fourth quarter of 2010 in purchase business combinations. Total assets and total net sales recorded by the Company related to these acquisitions, in the aggregate, represented less than 10 percent of consolidated total assets and less than 1 percent of consolidated net sales of the Company, respectively, as of and for the year ended December 31, 2010. Companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company under guidelines established by the Securities and Exchange Commission.

 

The Company's internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein, which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2010.

 

3M Company

 



 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and Board of Directors of 3M Company

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of 3M Company and its subsidiaries (the "Company") at December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting.  Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As described in Management's Report on Internal Control Over Financial Reporting, management has excluded Cogent Inc., Arizant Inc. and Attenti Holdings S.A. from its assessment of internal control over financial reporting as of December 31, 2010 because they were acquired by the Company in purchase business combinations during 2010.  We have also excluded Cogent Inc., Arizant Inc. and Attenti Holdings S.A. from our audit of internal control over financial reporting.  Cogent Inc., Arizant Inc. and Attenti Holdings S.A. are wholly-owned subsidiaries of the Company whose total assets and total net sales, in the aggregate, represent less than 10 percent and less than 1 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2010.

 

/s/ PricewaterhouseCoopers LLP

Minneapolis, MN

February 16, 2011

 



 

Consolidated Statement of Income

3M Company and Subsidiaries

Years ended December 31

 

(Millions, except per share amounts)


2010


2009


2008


 

Net sales ...............................................................................


$

26,662


$

23,123


$

25,269


 

Operating expenses.................................................................








 

Cost of sales .......................................................................


13,831


12,109


13,379


 

 

Selling, general and administrative expenses ..........................


5,479


4,907


5,245


 

Research, development and related expenses ........................


1,434


1,293


1,404


Loss from sale of businesses ................................................


-


-


23


 

Total operating expenses ..................................................


20,744


18,309


20,051


 

 

Operating income ....................................................................


5,918


4,814


5,218










 

Interest expense and income....................................................








 

 

Interest expense ..................................................................


201


219


215


Interest income ....................................................................


(38

)

(37

)

(105

)

 

Total interest expense (income) .........................................


163


182


110


 









 

Income before income taxes ....................................................


5,755


4,632


5,108


 

Provision for income taxes .......................................................


1,592


1,388


1,588


 

Net income including noncontrolling interest ..............................


$

4,163


$

3,244


$

3,520


 









 

Less: Net income attributable to noncontrolling interest ..............


78


51


60


 









 

Net income attributable to 3M ..................................................


$

4,085


$

3,193


$

3,460


 









 

Weighted average 3M common shares outstanding - basic .......


713.7


700.5


699.2


 

Earnings per share attributable to 3M common shareholders - basic ..................................................................................


$

5.72


$

4.56


$

4.95


 









 

Weighted average 3M common shares outstanding - diluted .....


725.5


706.7


707.2


 

Earnings per share attributable to 3M common shareholders - diluted ................................................................................


$

5.63


$

4.52


$

4.89


 









 

Cash dividends paid per 3M common share ...............................


$

2.10


$

2.04


$

2.00


 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.

 



 

Consolidated Balance Sheet

3M Company and Subsidiaries

At December 31

 

(Dollars in millions, except per share amount)


2010


2009


 

Assets






 

Current assets






 

Cash and cash equivalents ............................................................................


$

3,377


$

3,040


 

Marketable securities - current .....................................................................


1,101


744


 

 

Accounts receivable - net of allowances of $98 and $109 ................................


3,615


3,250


 

Inventories.....................................................................................................






 

Finished goods .........................................................................................


1,476


1,255


 

Work in process ........................................................................................


950


815


Raw materials and supplies ........................................................................


729


569


 

Total inventories ............................................................................................


3,155


2,639


 

Other current assets .....................................................................................


967


1,122


 

Total current assets ...................................................................................


12,215


10,795


 

Marketable securities - non-current ..............................................................


540


825


 

Investments ..................................................................................................


146


103


 

 

Property, plant and equipment .......................................................................


20,253


19,440


Less: Accumulated depreciation ....................................................................


(12,974

)

(12,440

)

 

Property, plant and equipment - net ..............................................................


7,279


7,000


 

Goodwill .......................................................................................................


6,820


5,832


 

 

Intangible assets - net .................................................................................


1,820


1,342


 

Prepaid pension benefits ...............................................................................


74


78


Other assets ................................................................................................


1,262


1,275


 

Total assets ..............................................................................................


$

30,156


$

27,250


 







 

Liabilities






 

 

Current liabilities






Short-term borrowings and current portion of long-term debt ..............................


$

1,269


$

613


 

Accounts payable .........................................................................................


1,662


1,453


 

 

Accrued payroll ............................................................................................


778


680


 

Accrued income taxes ..................................................................................


358


252


Other current liabilities ..................................................................................


2,022


1,899


 

Total current liabilities ................................................................................


6,089


4,897


 







 

 

Long-term debt ................................................................................................


4,183


5,097


 

Pension and postretirement benefits ..................................................................


2,013


2,227


Other liabilities .................................................................................................


1,854


1,727


 

Total liabilities ...........................................................................................


$

14,139


$

13,948


 







 

Commitments and contingencies (Note 14)






 

 







 

Equity






 

3M Company shareholders' equity:






Common stock, par value $.01 per share ........................................................


$

9


$

9


 

Shares outstanding - 2010: 711,977,608






 

 

Shares outstanding - 2009: 710,599,119






 

Additional paid-in capital ................................................................................


3,468


3,153


 

Retained earnings .........................................................................................


25,995


23,753


 

Treasury stock .............................................................................................


(10,266

)

(10,397

)

Accumulated other comprehensive income (loss) .............................................


(3,543

)

(3,754

)

 

Total 3M Company shareholders' equity ......................................................


15,663


12,764


 

 

Noncontrolling interest ......................................................................................


354


538


Total equity ...............................................................................................


$

16,017


$

13,302


 







 

Total liabilities and equity ...........................................................................


$

30,156


$

27,250


 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.

 



 

Consolidated Statement of Changes in Equity and Comprehensive Income

3M Company and Subsidiaries

Years Ended December 31

 

Consolidated Statement of Changes in Equity

 





3M Company Shareholders




 

(Millions)


Total


Common
Stock and
Additional
Paid-in
Capital


Retained
Earnings


Treasury
Stock


Unearned
Compensation


Accumulated
Other
Comprehensive
Income (Loss)


Non-
controlling
Interest


 

Balance at December 31, 2007


$

12,072


$

2,798


$

20,295


$

(10,520

)

$

(79

)

$

(747

)

$

325


 

















 

Net income ....................


3,520




3,460








60


 

 

Cumulative translation adjustment .............................


(806

)









(888

)

82


 

Defined benefit pension and postretirement plans adjustment .............................


(2,092

)









(2,072

)

(20

)

 

Debt and equity securities - unrealized gain (loss) ........


(11

)









(11

)

-


Cash flow hedging instruments - unrealized gain (loss) ........


72










72


-


 

Total comprehensive income ..


683














 

Dividends paid ($2.00 per share)


(1,421

)



(1,398

)







(23

)

 

 

Amortization of unearned
compensation ...............


39








39






 

Stock-based compensation, net of tax impacts ................


217


217












 

Reacquired stock ..............


(1,603

)





(1,603

)







Issuances pursuant to stock option and benefit plans ......


317




(130

)

447








 

Balance at December 31, 2008


$

10,304


$

3,015


$

22,227


$

(11,676

)

$

(40

)

$

(3,646

)

$

424


 

Net income ....................


3,244




3,193








51


 

Cumulative translation adjustment .............................


273










286


(13

)

 

 

Defined benefit pension and postretirement plans adjustment .............................


(314

)









(309

)

(5

)

 

Debt and equity securities - unrealized gain (loss) ........


10










10


-


Cash flow hedging instruments - unrealized gain (loss) ........


(80

)









(80

)

-


 

Total comprehensive income ..


3,133