To our shareholders
2008 was a year of tremendous challenge for 3M as it was for many companies. The people of 3M confronted the downturn with both resiliency and resolve.

Fighting through deteriorating economic conditions in the first half of the year and combating a secular transition of the Optical Systems Division, the company posted revenue growth of 9.3 percent in the fi rst six months of 2008.

The second half of the year was a different story. We worked hard to get ahead of the looming recession, making many adjustments in costs, staffi ng levels and capital projects in anticipation of the slowdown, and doing so before the need was apparent to many. We also dealt with the ongoing commoditization of our Optical Systems business, a trend which ran throughout the whole year. While the company’s corrective cost actions could not fully mitigate the accelerating slowdown in the second half of the year, they were certainly a signifi cant factor in our ability to make the best of a very tough situation.

For the total year, we posted sales of $25.3 billion, another all-time record, compared with $24.5 billion the year before. Net income was $3.5 billion, or $4.89 per share in 2008, versus $4.1 billion, or $5.60 per share, in the previous year. Excluding special items, 2008 earnings were $5.17 per share, versus $4.98 per share in 2007.

For many years, 3M’s prudent and conservative approach to managing its assets has been well known and for the most part highly regarded and appreciated by investors. As a direct result of this approach, we have been able to provide consistent returns to our shareholders through good times and bad. Even through a tough 2008, we still delivered a world class ROIC of 19.7 percent (20.8 percent excluding special items).

In 2008 alone, 3M additionally paid out $1.4 billion in dividends. In the last fi ve years, 3M has returned greater than 100 percent of reported net income to shareholders via dividends of $6.6 billion and an additional $11 billion in share buy-backs. In addition, even in this most uncertain of times, we increased our payback to shareholders by increasing our 2009 quarterly dividend to 51 cents per share. 3M has now increased its dividend every year for the last 51 years.

The real questions we all wrestle with are, how long and how deep will the recession be? Economists around the world have differing opinions and differing models and, of course, we do as well. I want you to be reassured that no matter how long its duration, 3M is well prepared to overcome the economic difficulties that face us all.

We have capable people all over 3M who know exactly what to do in times like this and we have already taken huge steps to protect and to advance our company.

Our recent actions are designed to properly balance our cost structure with our revenue stream. Nobody likes layoffs, but they are a fact of life in modern business. Our approach has been to do as many as necessary but as few as possible. We have used furloughs, pay cuts, overtime bans, mandatory vacations and stringent incidental cost control to limit the number of layoffs, but in the end some were needed.

In the fourth quarter alone, we reduced over 2,400 full-time positions worldwide, and about 3,500 over the full year. These job eliminations spanned all geographies, but were particularly focused on those businesses and economies experiencing the highest level of sales pressure. In addition, we have furloughed over 1,000 factory workers until production volumes return to more normal levels. Contract workers have been severely reduced. These 2008 actions in total are expected to save the company $250 to $300 million in 2009.

In October 2008, the leadership team decided to defer merit pay increases for all employees in 2009 (except in those cases where local laws prohibit it). We are also amending our policy on banked vacation—essentially phasing it out—which is expected to reduce expenses by an additional $100 million in each of the next two years.

Actions of this nature are neither pleasant nor uplifting, but they are absolutely essential for the company’s well-being and ultimately they are for the benefit of all stakeholders. As the need arises for further action, we will proceed with the care and thoroughness that you would expect from 3M. But the fact remains, we must continue to run the business as conditions dictate.

In a tight economy, cash is king. For 2009 we have already cut capital spending plans more than half a billion dollars, or down 35 percent, to around $900 million. A substantial amount of the remaining spending is simply carryover from 2008 or for the tooling needed for new products and continued operations. That said, we will continue to selectively invest in capacity such as in the solar energy market where demand for our products is very high.

All current spending is being done strictly on a “need to do” basis. We are targeting free cash flow conversion of greater than 100 percent and an improvement in inventory turns in 2009 of a minimum of 0.5 turns.

Many companies today are struggling for survival. At 3M we have a different mindset: we intend not just to survive, but to emerge from the downturn a stronger company. As George Bernard Shaw said, “the best way to predict the future is to create it.” We can only do that by taking absolute control of our own destiny. It means rigorous control of cash and costs, but it does not mean throwing the metaphorical baby out with the bath water.
Business is still about balance and, while remaining responsive to present-day developments, we must also keep an eye on the future. We must still invest in the future if we expect to thrive later on.

Toward that end, and despite these difficult times, we continue to invest significantly in R&D. We think it even more important right now to differentiate ourselves from the competition through great products and great service. We are working hard to earn new business as customers are gradually turning to proven and stable suppliers like 3M, companies with the demonstrated capability to deliver in good times and bad. Even in times of recession, a huge amount of economic activity is still ongoing. In a 5 percent recession there is still 95 percent of the business left and winning an increasing share of that business has to be our focus. We will of course prioritize our R&D investments rigorously, but the main point is that our commitment to innovation and new product development is not diminished one iota.

The world of competition for most companies changed sometime in the early to middle 1990s. After China re-emerged from its self-imposed Tiananmen Squarerelated isolation, it began to rise to its full stature as a broad scale manufacturing nation. At that point, sometime between 1993 and 1995, the basis of world manufacturing competition changed.

That is only 13 or 14 years ago, the blink of an eye in historical time, and companies that do not recognize and respond to this newly configured competitive landscape are likely to suffer from it. Gradually, piece by piece, top-quality electronics, hand and power tools, lighting, motorcycles, cars, industrial materials and consumables of all kinds have come onto the world scene from China. They have entered many new markets, almost always at the bottom to begin with, and then have established positions of strength almost everywhere.

We believe that the best way to defend our traditional positions of strength at the top of markets is also to be competitive and strong at or close to the bottom, because this is where new competition almost always enters. But it is not always an easy balance to achieve, and it has dangers as well as attractions. We have moved steadily along this pathway over the past three years and it has proved very effective. By launching products in the middle of the market and sometimes at the bottom—Filtrete™ brand filters are an example— growth has also been facilitated at the top of the market.

Innovation has been the driving force behind our course of action over the past three years to strengthen 3M’s core. This has helped us enormously and will continue to do so. Every one of our six businesses has expanded its product offerings either through reinvention or through acquisition. (Acquisitions bring speed as well as capability.) We have consciously created products to better serve the entire range of the market, from lower cost to premier products. This strategy has resulted in 3M gaining market share in almost all of our markets, but most notably in Safety, Security and Protection Services; Consumer and Office; and Industrial and Transportation.

I am confident that 3M will emerge much stronger from these challenging times and that we will be successful. In addition to having a strong culture of innovation, our confidence derives from several elements unique to 3M: the breadth of our portfolio, and our unequalled international strength. Clearly, 3M’s diversity continues to provide us some insulation against economic cycles.

Our diversity may not shield us as effectively as it has in the past because, today, the world’s economies are more or less synchronized in a downward contraction owing to the worldwide banking crisis. Nevertheless, it is reassuring to have businesses such as Health Care and Safety, Security and Protection Services in our arsenal. Over the next economic cycle, markets will recover and will drift out of phase and the full power of 3M’s diversity will be evident once again.

3M’s international sales now approach 64 percent of our total revenue. We have increased investments in geographies with great potential. In addition, the quality of our international team is second to none. In fact, at our top leadership level, more than 65 percent have extended hands-on international experience.

Overall, I remain optimistic about our prospects for sustained success. We significantly strengthened our company strategically in 2008 and we intend to continue in that direction in 2009 and well beyond. We will do so by planning conservatively, acting decisively and innovating aggressively, and then by leveraging our innovations in every corner of the world. In challenging times like these, you can be assured that we will continue to conduct business everywhere in the upright and honest manner for which 3M is well and rightly known.

Thank you for your interest and for your confidence in 3M.
George W. Buckley
Chairman of the Board, President and Chief Executive Officer
February 10, 2009

Download 3M Company 2008 Annual Report

PDF format, 3.9MB, 112Pages

3M Corporate Headquarters
3M Center
St. Paul, MN 55144-1000
U.S.A.
(651) 733-1110
www.3M.com

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.

3M is a diversified technology company with a global presence in the following businesses: Industrial and Transportation; Health Care; Safety, Security and Protection Services; Consumer and Office; Display and Graphics; 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, 2008, the Company employed 79,183 people (full-time equivalents), with 33,662 employed in the United States and 45,521 employed internationally.

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