The objective of accelerating top line growth while maintaining superior financial performance paid out in the first quarter as the firm posted record sales, operating income and earnings per share for any quarter since 3M’s history.

Earnings per share increased 16 cents or 14.3% on sales growth of almost 10%.
- Operating income was up 10.6% to $1.4 billion with operating margins of 24.4%, up 20 basis points year-on-year on an excluding basis.

Gross margins were 49.3%, down 2.1 percentage points from last year’s first quarter.

Approximately half of the decline is the impact of the sale of the pharma business which is a very high gross margin business. The remaining decline was largely due to weaker US dollar and higher raw material cost.

SG&A expense remained at $1.2 billion, down 2.6% versus last year.

Excluding pharma, sales and marketing expenses were up in line with local currency growth year-on-year, as the firm invested in sales and marketing resources to drive accelerated growth while the aggressive focus on managing the distractive expenses continues to pay off.

R&D and related expenditures were 5.5% of sales in the first quarter versus 5.8% last year.

But keep in mind that pharma required very heavy investment in R&D in the range of 15% to 20% to sales. Therefore the company expects that its percent of sales to decline. Excluding the divestiture, R&D and related costs were up 12% year-on-year as the firm continues to aggressively invest in growth opportunities.

- Consistent with the expectations, the tax rate increased in the first quarter to 33.2% or up 50 basis points.
- Capital expenditures totaled $304 million, an increase of $114 million year-on-year and the decline of $100 million sequentially. Total capital expenditures for 2007 continues to be expected to be in the $1.4 billion to $1.5 billion, as the firm invested in number of growing and highly profitable businesses.
- Free cash flow excluding special items in the quarter was $670 million.
- Dividend payments to shareholders were $350 million and the firm aggressively bought back stock during the quarter for the gross share purchases of $1.2, over 4.5 times the amount purchased in last year’s first quarter. In February, the board authorized a two-year 7 billion share repurchase program from the period from February of 2007 to February 2009. As of the end of the first quarter, the company had 6.1 billion remaining of the total authorization.
- Weighted average shares outstanding were down 3.6% year-on-year and 1% sequentially.
- The debt-to-capital ratio was 31% at the end of the first quarter.

Performance Analysis of Business Segments

Consumer and Office Business

The segment delivered outstanding results in the first quarter, with sales up almost 10% to $814 million. Local currency sales increased 8.2% including 1.2% of growth from the Nylonge acquisition, a global provider of household and cleaning products including cellulose sponges, scrub sponges and household wipes. The acquisition has two primary benefits. It expands the firm’s leading line of home cleaning and scrubbing products and two, it quickly adds manufacturing capacity in a growing core 3M businesses. Year-on-year growth was led by the construction and home improvement business serving the Do-It-Yourself retail channel with products such as Scotch Blue masking tape for the professional paint trade along with expansion of distribution of the firm’s Filtrete furnace filter were it has recently added capacity to drive added growth. Also leading growth in the quarter was the firm’s business supplying the Consumer and Office mass retail segment. In fact, 3M office supply’s business was recently recognized by Staples as their global supplier of the year. In geographic terms, the firm generated substantial sales growth in every major region of the world. The company now reached the top line performance to drive year-on-year operating income growth of 18.1% to $177 million. Profit margins increased 150 basis points year-on-year to 21.7%.

Safety Securities and Protection Services

The segment had an outstanding quarter. Sales rose 19% to $758 million. Local currency sales growth was 15% with two-thirds of that growth coming via the acquisition of Security Printing Systems Limited, a leading provider are finished personalized passports and secured cards based in the UK. For many years, 3M has had a niche position in the passport market with securities laminate that prevent counterfeiting. This acquisition allows 3M to deliver a full range of border and civil securities solution products. Organic revenue growth continues to be driven by the strong global demand for personal safety products especially in the areas of protection.

The company’s plans for a new respiratory plant in Korea supplied disposal respirators in the Asia Pacific market. The new plat is a testament of overall strategy of simplifying and shortening supply chain by placing manufacturing closer to the customers. Things are progressing very well. The company is on track for a complete plant launch mid-year.

The firm also posted outstanding growth in two other businesses. Sales were up more than 50% in corrosion and protection where the firm is aggressively penetrating the oil and gas market with the unique pipe coating solutions for its customers. During the quarter, the firm announced the acquisition of E Wood Holding Plc. a UK based manufacturer of high performance protective coatings. E Wood’s expertise and liquid technologies for new pipes and rehabilitation coatings for existing pipes in the oil, gas and water market complements 3M’s core corrosion and protection product offering of external powder coatings for new oil and gas pipelines.

The firm drove double-digit growth in its building and commercial services business as well. Operating income was $181 million, above almost 15% versus last year’s comparable quarter and margins were a solid 23.9%. The firm’s market leading roofing granules business posted a strong sequential improvement as industrywide inventories are now in better balance with demand. However, the firm’s business was still down year-on-year was negatively impacted first quarter sales and operating income growth by almost 3% and 6% respectively.

Industrial and Transportation

The segment continued its strong performance in the first quarter. Sales grew 6.7% to $1.8 billion. In local currency terms, sales increased 4% including a point from complementary acquisitions that have helped to fill gaps in the product lines. Most of the traditional industrial businesses such as abrasives, industrial adhesives and tapes, automotive after-market and liquid filtration grew sales at mid-single digit rate in local currency while the automotive OEM related businesses grew at a low-single digit rate. Industrial products for the oil and gas and aerospace industries showed strong double-digit growth and are expected to continue at that rate. The firm believes that there is a clear line of sight to more growth in this business and the firm is investing accordingly. The firm is strengthening its core businesses like tapes, abrasives and adhesives by increased R&D expenditures and making complementary acquisitions. This business has a strong pipeline in new products, such as the next generation acrylic foam tapes for automotive OEM applications. In this quarter, the business made three bolt-on acquisitions in the adhesives tape and abrasives areas. Geographically the company’s industrial business is making significant investments in China, India, Holland and Brazil to better serve customers in areas of the world where growth is exploring.

In the second quarter, the firm will open a new laboratory and customer center in Huston Eastern Texas to bring 3M’s wider array of technologies and research capabilities to customers in the energy extraction industry. Throughout 3M’s history this level of customer intimacy has sparked both innovation and growth. First quarter group operating income was 411 million in industrial and transportation.