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In 2010, 3M, a global manufacturer and technology innovator, experienced strong sales growth in all business segments, particularly in Electro and Communications and Display and Graphics. Despite challenges such as the H1N1 pandemic and increased raw material costs, the company achieved record net sales and earnings per share for the year. 3M also made strategic acquisitions to further drive growth.

In 2010, 3M reported strong financial results with sales of $26.7 billion and earnings of $5.63 per diluted share, representing a 15.3% and 24.6% increase, respectively. The company invested heavily in research and development, driving innovation and new product sales, and also made significant sales and marketing investments in high-growth markets. 3M has been actively restructuring since 2008, resulting in cost savings of almost $400 million in 2009 and an additional $150 million in 2010.

In 2010, 3M achieved incremental savings of over $150 million and amended its vacation policy, resulting in additional operating income of $80 million. Sales in 2009 decreased by 8.5% due to the global economic slowdown, but in 2010, four of 3M's business segments experienced sales increases of over 10%, driven by growth in consumer electronics, automotive, renewable energy, and industrial manufacturing sectors.

In 2010, 3M saw a 14.4% increase in sales, with foreign currency effects contributing 1.0% to sales. Operating income margins also improved from 20.8% in 2009 to 22.2% in 2010. The company generated $5.2 billion in operating cash flows, and in 2011, the board authorized the repurchase of up to $7.0 billion of 3M's outstanding common stock. The company also increased its dividend by 4.8% for 2011, marking the 53rd consecutive year of dividend increases. 3M has a strong credit rating from both Standard & Poor's and Moody's Investors Service.

The company has a strong credit rating and sufficient access to capital markets for growth and acquisitions. In 2010, the company faced cost increases in raw materials and transportation fuel, but managed to avoid disruptions through careful inventory management and supply source development. For 2011, the company expects sales growth of 10% or more, with organic sales volume, currency effects, and acquisitions contributing to the growth. However, there are some factors that will negatively impact earnings, including pension and postretirement expenses and a vacation policy change.

In 2010, 3M made changes to its vacation policy, resulting in a reduction in liabilities and a positive impact on operating results. However, this benefit will not carry over into 2011, negatively impacting year-over-year comparisons. Additionally, 3M's pension and postretirement plans were 90% funded at the end of 2010, with the company expecting to contribute $400 million to $600 million in cash to these plans in 2011.

In 2010, 3M incurred a one-time, non-cash income tax charge of $84 million due to changes in the tax treatment of Medicare Part D reimbursements under the Patient Protection and Affordable Care Act. In 2009 and 2008, the company also experienced net losses from restructuring and other actions, which impacted operating income and net income. These actions included restructuring, exit activities, and losses related to the sale of businesses, partially offset by gains from the sale of real estate.

In 2010, the company experienced a 14.4% increase in local-currency sales, with all major geographic areas showing growth. However, in 2009, there was a decline of 5.6% in local-currency sales, with the exception of the Latin America and Canada area. Operating expenses in both years were impacted by restructuring charges and gains/losses on real estate transactions.

Administrative (SG&A) expenses as a percentage of net sales increased by 0.5 percentage points in 2010 compared to 2009. This increase was primarily due to higher advertising and promotion expenses, as well as increased employee-related expenses. However, these increases were partially offset by cost savings from restructuring actions taken in prior years. Overall, the company experienced positive growth in organic sales volume and improved factory utilization levels, which contributed to a decrease in cost of sales as a percentage of net sales.

In 2010, 3M increased its sales and marketing expenses by 14% and made significant investments in advertising and promotion, which are expected to drive sales volumes. General and administrative costs remained under control, increasing at a slower rate than sales growth. In 2009, restructuring expenses and exit activities increased SG&A expenses, but in 2010, savings from restructuring and other actions helped decrease SG&A expenses. Research, development, and related expenses increased by 11% in 2010.

In 2010, 3M increased its research and development expenses by 11% to support its growth initiatives, while also reducing R&D as a percentage of net sales. The company also incurred a loss from the sale of HighJump Software in 2008. Operating income as a percentage of sales improved in 2010 compared to the previous two years, and interest expense decreased due to lower debt balances and interest rates.

The company experienced a decline in interest income in 2009 due to lower yields on investments, resulting in lower cash and cash equivalent balances. The effective tax rate decreased in 2010, primarily due to international tax benefits and adjustments to income tax reserves. The company expects its effective tax rate for 2011 to be approximately 29.5 percent.

The discussion of income taxes in the Form 10-K highlights the net income attributable to noncontrolling interest, primarily related to Sumitomo 3M Limited in Japan. It also mentions the currency effects on net income, estimating an increase of $15 million in 2010 and a decrease of $220 million in 2009. The report also mentions the performance by business segment, with disclosures provided in Item 1 and financial information in the Notes to the Consolidated Financial Statements.

The Industrial and Transportation segment of the company serves various markets including appliances, paper and packaging, food and beverage, electronics, automotive OEM and aftermarket. In 2010, sales in this segment increased by 18.7% to $8.6 billion, driven primarily by organic volume growth. Foreign currency impacts added 1.2% to the sales growth.

In 2010, the Industrial and Transportation business segment of the company experienced strong sales growth across all major geographic regions, with Asia Pacific leading the way. Operating income also increased significantly, with a focus on investing in growth opportunities such as acquisitions and capital spending in renewable energy and industrial adhesives and tapes. In 2009, the segment faced challenges due to sales declines, leading to restructuring and cost reduction efforts.

In 2009, the company experienced a decline in sales due to lower volumes and end-market declines. They implemented restructuring actions, including plant shut-downs and employee furloughs, resulting in charges of $89 million. Despite these challenges, the company recorded operating income of $1.3 billion with operating income margins of 17.4 percent. Additionally, the company had previously invested in TI&M, an Austrian maker of flat flexible cable and circuitry, but exercised a put option to sell back its ownership interest and recovered approximately $25 million of its investment.

In February 2007, the company recovered $25 million of its investment from a Belgian investor, while two other investors filed for bankruptcy in Austria. The company expects to recover approximately $8.7 million through the bankruptcy process and is pursuing the remaining balance from the sellers' bank. The Health Care segment, which accounts for 17% of consolidated sales, saw a 5.2% increase in local-currency sales in 2010, driven by acquisitions and growth in various markets. Operating income increased by 1.0% to $1.4 billion, with operating income margins at 30.2%.

In 2009, 3M's sales grew by 3.6% in local currencies, with positive contributions from nearly all businesses. The Health Care segment recorded charges of $20 million for restructuring actions, while the Display and Graphics segment serves markets such as electronic display, traffic safety, and commercial graphics. 3M's long-term expectation is for operating income margins to be in the high 20's as they continue to invest in growing the business.

In 2010, 3M's Display and Graphics segment saw a significant increase in sales, up 24% year-on-year, driven by strong growth in optical systems and commercial graphics businesses. Despite the expiration of some optical film patents, 3M continues to innovate and file patents for new technology and products. Operating income for the segment in 2010 was $946 million, representing 24.4% of sales. In contrast, in 2009, sales declined 4% to $3.1 billion, but operating income increased 1.3% to $590 million.

by strong performance in the office retail and home improvement markets. The segment's operating income increased by 15.2 percent to $590 million, with operating income margins improving to 15.1 percent. This growth was driven by higher sales volumes, improved pricing, and cost management initiatives. The company's acquisitions also contributed to the segment's sales growth in 2010.

In 2010, the company experienced a 1.0 percent increase in sales growth due to currency impacts. Sales growth was driven by various product categories, including office supplies, consumer health care, and home care. The company also saw growth in different geographic regions, with Asia Pacific, Latin America/Canada, and the United States leading the way. The Consumer and Office operating income increased by 12.3 percent to $840 million, with operating income margins of 21.8 percent. In 2009, the company faced challenges with a decline in sales, partially due to lower spending by retail consumers and commercial customers. However, acquisitions contributed to sales growth, particularly in the retail drug store channel. Operating income margins improved in 2009 compared to the previous year. The Safety, Security and Protection Services segment, which accounts for 12.4 percent of consolidated sales, offers a range of products that enhance worker safety, facility security, and system productivity.

In 2010, 3M saw an 8.0% increase in sales for their Safety, Security, and Protection Services, with organic volume and acquisitions driving local-currency growth of nearly 50%. The company's security systems business, corrosion protection products, track and trace products, and building and commercial services were strong contributors to sales growth, with Latin America and Asia Pacific leading in terms of geographic sales growth.

In 2010, Europe/Middle East Africa sales growth was driven by Central East Europe and Middle East Africa. Operating income for the year was $707 million, with a margin of 21.4 percent. However, operating income declined by 2.4 percent due to H1N1-related comparisons and acquisition-related costs. In 2009, sales in the Safety, Security and Protection Services segment declined by 8.0 percent in dollar-terms and 2.7 percent in local currencies, primarily due to the global economic downturn. Despite the sales decline, operating income margins increased to 23.6 percent. The segment also recorded charges related to restructuring actions and gains from the sale of assets.

In 2010, 3M's Electro and Communications Business saw a significant increase in sales, with a growth of 28.4% in US dollars and 27.0% in local currency. The sales growth was driven by the electronics markets materials, electronic solutions, and touch systems businesses, as well as strong growth in the electrical markets business. Operating income for the segment was $631 million, or 21.6% of sales, showing significant improvement compared to the previous year.

In 2009, the company experienced a decline in sales due to the global economic downturn, particularly in the telecom infrastructure, commercial construction, and utilities sectors. Operating income for the year was $322 million, with a margin of 14.2 percent. The company also incurred charges of $11 million related to restructuring actions, primarily for employee severance and benefits.

In 2008, the company experienced a decrease in operating income due to restructuring actions, exit activities, and a loss on sale of businesses. However, in 2010, sales increased by 15.3%, driven by organic volume increases in every major geographic region. International operations represented nearly two-thirds of the company's sales in both 2010 and 2009.

The company has experienced fluctuations in employment levels, with a decrease of 4,348 positions in 2009 due to restructuring actions, but an increase of 5,222 positions since 2009, primarily through acquisitions and expansion in developing economies. The company is also focusing on aligning its manufacturing and sourcing with geographic market sales to improve customer service and reduce costs. Capital spending has varied in recent years, with a reduction in 2009 due to economic conditions, but the company plans to invest approximately $1.3 to $1.4 billion in 2011 to support global growth opportunities. It is important to consider the company's critical accounting estimates when analyzing its financial statements.

The company considers its most critical accounting estimates to be related to legal proceedings, pension and postretirement obligations, asset impairments, and income taxes. These estimates have been discussed with the Audit Committee of the company's Board of Directors. The company's estimates for liabilities and insurance receivables related to legal proceedings, as well as its measurement of plan assets and benefit obligations for pension and postretirement plans, are particularly important.

The company determines the discount rate used to measure plan liabilities for pension and postretirement benefit plans. The discount rate reflects the current rate at which the liabilities could be settled and has decreased from the previous year. The expected return on plan assets is also a significant factor in determining pension expense, with the rate remaining the same as the previous year.

The company's international pension plan had a weighted average expected return of 6.58% in 2011, similar to the previous year. The company recognized a total consolidated pre-tax pension and postretirement expense of $322 million in 2010, which is expected to increase to approximately $535 million in 2011. Changes in the expected long-term rate of return on plan assets and the discount rate used to measure plan liabilities could have significant impacts on pension expenses. Additionally, the company's net property, plant, and equipment totaled $7.3 billion, and net identifiable intangible assets totaled $1.8 billion as of December 31, 2010. Management closely monitors and adjusts estimates and assumptions related to the recoverability of these assets.

In 2009, 3M's Security Systems Division experienced a loss of a UK passport contract, leading to a reassessment of their long-lived assets and goodwill. As a result, a non-cash impairment charge of approximately $13 million was recorded in the second quarter of 2009, and accelerated depreciation/amortization was taken. As of December 31, 2010, 3M's goodwill totaled approximately $6.8 billion, and annual impairment testing is performed in the fourth quarter of each year.

In its Form 10-K, 3M discusses its impairment testing process for reporting units, which are generally divisions within the company. Impairment losses are recognized when the carrying amount of a reporting unit's net assets exceeds its estimated fair value, which is determined using earnings and a price/earnings ratio or discounted cash flow analysis. 3M did not combine any reporting units for impairment testing and determined that no impairment existed for reporting units impacted by changes in the segment structure.

In 2010, 3M conducted annual impairment testing for its various reporting units. The fair values for most units exceeded their carrying values by more than 30%, indicating no impairment. However, the Security Systems Division, acquired through the Cogent Inc. acquisition, will be closely monitored for any potential impairment indicators in 2011. 3M primarily used an industry price-earnings ratio approach and discounted cash flows approach to determine fair values, resulting in an implied control premium of approximately 23% for the company.

Based on the Form 10-K, 3M's market value was approximately $62 billion in September 2010, but if each reporting unit was valued individually, the market value would be approximately $76 billion. No goodwill impairment was indicated for any of the reporting units. However, factors such as changes in economic conditions and customer preferences could result in future impairment charges. 3M will continue to monitor its reporting units for any indicators of impairment.

The company is engaged in negotiations and resolving disputes with taxing authorities in various jurisdictions. They record potential tax liabilities based on their estimate of additional taxes due, following guidance provided by ASC 740. The ultimate resolution of these uncertainties may result in a payment that is materially different from the current estimate, which could impact expenses and tax benefits recognized. The company has a strong capital structure and consistent cash flows, providing reliable access to capital markets. They generate significant ongoing cash flow, which has been used for various purposes.

The company has a strong financial position with significant cash flow and a healthy liquidity position. They have used their cash flow for share repurchases, dividends, and acquisitions, including three acquisitions in 2010 totaling $1.4 billion. The company's net debt, defined as total debt less cash and marketable securities, is an important measure of liquidity and they have sufficient liquidity to meet growth plans and obligations.

The company had an increase in working capital primarily due to increases in cash, marketable securities, accounts receivable, and inventories, offset by increases in current liabilities. They meet their short-term liquidity needs through commercial paper issuances and have a credit facility and lines of credit available. They also have a shelf registration statement for future securities sales for general corporate purposes.

In summary, 3M issued several fixed rate notes between 2007 and 2008, and entered into an interest rate swap to convert one of the notes to a floating rate. The company has strong credit ratings and a solid balance sheet with ample cash and marketable securities. They have a history of paying dividends and recently increased their quarterly dividend and authorized a significant share repurchase program.

The Board of Directors has authorized a new stock repurchase program of up to $7.0 billion, with no set end date. The company expects to contribute between $400 million to $600 million to its pension and postretirement plans in 2011, but believes it has sufficient cash flow and balance sheet strength to fund future pension needs without compromising growth opportunities. The company uses various working capital measures, including a combined index, which declined from 5.5 to 5.3 at the end of 2010, due to increased receivables and inventories.

In 2010, the company experienced an increase in inventories and accounts payable compared to the previous year, primarily due to increased demand and acquisitions. Cash flows from operating activities increased in 2010, mainly driven by higher net income, but were offset by working capital increases.

In 2009, the company experienced a decrease in capital of $617 million, primarily due to working capital increases. However, operating cash flows were positively impacted by changes in deferred and accrued income taxes. In addition, the company defines free cash flow as net cash provided by operating activities minus purchases of property, plant, and equipment, and uses it as a measure of performance and cash generation.

The company has made significant investments in property, plant, and equipment to support growth and increase manufacturing efficiency. Capital spending increased in 2010 compared to 2009, with plans for continued spending in 2011. The company is also actively considering acquisitions, investments, and strategic alliances, as well as potential divestments of certain businesses.

The company engages in investments and strategic alliances, and may also divest certain businesses. They primarily invest in asset-backed securities, agency securities, corporate medium-term note securities, and other securities. The company does not expect the risk related to its holdings in asset-backed securities to materially impact its financial condition or liquidity.

During the first quarter of 2010, 3M purchased a portion of its shares held by Sumitomo Electric Industries for approximately $63 million in cash and entered into a note payable of approximately $188 million. The company's total debt decreased from $5.7 billion in 2009 to $5.5 billion in 2010, representing 25% of total capital at year-end 2010. Repayment of debt in 2010 included $350 million in Dealer Remarketable Securities and a portion of the debt related to the purchase of Sumitomo 3M shares.

The company has made significant repayments of debt in recent years, including the repayment of a $400 million medium-term note in 2009 and the repayment of debt acquired upon the acquisition of Aearo in 2008. In terms of shareholder returns, the company has been actively repurchasing its own stock, with $854 million in shares purchased in 2010. Additionally, the company has a long history of paying dividends, with $1.5 billion paid out in 2010 and a 4.8% increase in the quarterly dividend in 2011.

The company's off-balance sheet arrangements primarily consist of distributions to noncontrolling interests, excess tax benefits from stock-based compensation, changes in cash overdraft balances, and principal payments for capital leases. The company does not utilize special purpose entities for off-balance sheet financing and has indemnification provisions in place for specific risks, but these are not expected to have a material impact on the company's financials. The company has significant contractual obligations, including long-term debt payments and unconditional purchase obligations.

manage its exposure to various financial risks, including interest rate risk, foreign currency exchange risk, and commodity price risk. These derivative instruments are primarily used for hedging purposes and are accounted for as either fair value hedges or cash flow hedges. The fair value of these derivative instruments is recorded on the balance sheet as either an asset or liability, with changes in fair value recognized in earnings or other comprehensive income, depending on the nature of the hedge. The Company also enters into derivative instruments that do not qualify for hedge accounting, which are recorded at fair value with changes in fair value recognized in earnings. The Company is exposed to credit risk in the event of nonperformance by the counterparties to these derivative instruments, but it does not anticipate any significant losses from such nonperformance. The Company does not use derivative instruments for speculative purposes.

The Company manages financial risks through contractual derivative arrangements, such as foreign exchange forward contracts, options, swaps, and interest rate swaps. A financial risk management committee oversees these activities and establishes policies and procedures for control, valuation, risk analysis, and monitoring. The Company also uses negotiated supply contracts, price protection agreements, and forward physical contracts to manage commodity price risks. A Monte Carlo simulation technique was used to assess the risk of loss or benefit in after-tax earnings of financial instruments and derivatives.

The company faces foreign exchange rate risk and interest rate volatility, with potential impacts on after-tax earnings. A 1 percent price change in purchased components and materials could result in a pre-tax cost or savings of $62 million per year, while a 10 percent price change in global energy exposure could result in a pre-tax cost or savings of $38 million per year. Derivative instruments are used to hedge a portion of these exposures.