Notes to Consolidated Financial Statements
NOTE 4. Restructuring Actions and Exit Activities
Restructuring actions and exit activities generally include significant actions involving employee-related severance charges, contract termination costs, and impairment of assets associated with such actions.
Employee-related severance charges are largely based upon distributed employment policies and substantive severance plans and are reflected in the quarter in which management approves the associated actions. Severance amounts for which affected employees were required to render service in order to receive benefits at their termination dates were measured at the date such benefits were communicated to the applicable employees and recognized as expense over the employees’ remaining service periods.
Contract termination and other charges primarily reflect costs to terminate a contract before the end of its term (measured at fair value at the time the Company provided notice to the counterparty) or costs that will continue to be
incurred under the contract for its remaining term without economic benefit to the Company. As discussed in accounting policies in Note 1, asset impairment charges related to intangible assets and property, plant and equipment reflect the excess of the assets’ carrying values over their fair values.
The following provides information, respectively, concerning the Company’s fourth-quarter 2008 restructuring actions, its 2006/2007 restructuring actions, and its exit activities during 2008 and 2007.
2008 Restructuring Actions:
During the fourth quarter of 2008, management approved and committed to undertake certain restructuring actions.
Due to the rapid decline in global business activity in the fourth quarter of 2008, 3M aggressively reduced its cost structure and rationalized several facilities, including manufacturing, technical and office facilities. 3M announced the elimination of more than 2,400 positions across all geographic areas, with particular attention in the developed areas of the world that have and are experiencing large declines in business activity. These reductions included both corporate staff overhead reductions and business-specific reduction actions, as all business segments were impacted. Of these employment reductions, about 31 percent are in the United States, 29 percent in Europe, 24 percent in Latin America and Canada, and 16 percent in the Asia Pacific area. These restructuring actions resulted in a fourth-quarter pre-tax charge of $229 million, with $186 million for employee-related items/benefits and other, and
$43 million related to fixed asset impairments. The majority of the employee related items and benefits are expected to be paid out in cash in the first six months of 2009. Cash payments in 2008 related to this fourth-quarter
restructuring were not material.
Components of these restructuring actions are summarized by business segment as follows:
Restructuring Actions
Employee-
Related Items/ Asset
(Millions) Benefits and Other Impairments Total
Expense incurred in 2008:
Industrial and Transportation... $ 33 $ 7 $ 40
Health Care... 37 14 51
Safety, Security and Protection Services ... 12 — 12
Consumer and Office... 17 1 18
Display and Graphics ... 15 9 24
Electro and Communications... 7 — 7
Corporate and Unallocated... 65 12 77
Total 2008 expense ... $ 186 $ 43 $ 229 The preceding charges were recorded in cost of sales ($84 million), selling, general and administrative expenses ($135 million), and research, development and related expenses ($10 million).
2006/2007 Restructuring Actions:
During the fourth quarter of 2006 and the first six months of 2007, management approved and committed to undertake the following restructuring actions:
• Pharmaceuticals business actions — employee-related, asset impairment and other costs pertaining to the Company’s exit of its branded pharmaceuticals operations. These costs included severance and benefits for pharmaceuticals business employees who are not obtaining employment with the buyers as well as impairment charges associated with certain assets not transferred to the buyers.
• Overhead reduction actions — employee-related costs for severance and benefits, costs associated with actions to reduce the Company’s cost structure.
• Business-specific actions — employee-related costs for severance and benefits, fixed and intangible asset impairments, certain contractual obligations, and expenses from the exit of certain product lines.
Actions with respect to the 2006/2007 restructuring plan were substantially completed in 2007. Components of these restructuring actions include:
Restructuring Actions
Employee- Contract Related Items Terminations Asset
(Millions) and Benefits and Other Impairments Total
Expense incurred in 2006:
Pharmaceuticals business actions ... $ 97 $ 8 $ 61 $ 166
Overhead reduction actions... 112 — — 112
Business-specific actions ... 34 8 83 125
Total 2006 expense ... $ 243 $ 16 $ 144 $ 403
Non-cash changes in 2006:
Pharmaceuticals business actions ... $ (19 ) $ — $ (61 ) $ (80 )
Overhead reduction actions... (12 ) — — (12 )
Business-specific actions ... (4 ) — (83 ) (87 ) Total 2006 non-cash ... $ (35 ) $ — $ (144 ) $ (179 )
Cash payments in 2006:
Pharmaceuticals business actions ... $ — $ (2 ) $ — $ (2 )
Overhead reduction actions... — — — —
Business-specific actions ... — — — —
Total 2006 cash payments... $ — $ (2 ) $ — $ (2 )
Accrued liability balances as of Dec. 31, 2006:
Pharmaceuticals business actions ... $ 78 $ 6 $ — $ 84
Overhead reduction actions... 100 — — 100
Business-specific actions ... 30 8 — 38
Total accrued balance... $ 208 $ 14 $ — $ 222
Expenses (credits) incurred in 2007:
Pharmaceuticals business actions ... $ (12 ) $ (4 ) $ — $ (16 )
Overhead reduction actions... 2 — — 2
Business-specific actions ... 13 4 35 52
2007 expense... $ 3 $ — $ 35 $ 38
Non-cash changes in 2007:
Pharmaceuticals business actions ... $ (21 ) $ 4 $ — $ (17 )
Overhead reduction actions... (5 ) — — (5 )
Business-specific actions ... (12 ) (4 ) (35 ) (51 ) 2007 non-cash ... $ (38 ) $ — $ (35 ) $ (73 )
Cash payments in 2007:
Pharmaceuticals business actions ... $ (40 ) $ (6 ) $ — $ (46 )
Overhead reduction actions... (87 ) — — (87 )
Business-specific actions ... (26 ) (8 ) — (34 ) 2007 cash payments... $ (153 ) $ (14 ) $ — $ (167 )
Employee- Contract
Related Items Terminations Asset
(Millions) and Benefits and Other Impairments Total
Accrued liability balances as of Dec. 31, 2007:
Pharmaceuticals business actions ... $ 5 $ — $ — $ 5
Overhead reduction actions... 10 — — 10
Business-specific actions ... 5 — — 5
Total accrued liability balance... $ 20 $ — $ — $ 20
Cash payments in 2008:
Pharmaceuticals business actions ... $ (5 ) $ — $ — $ (5 ) Overhead reduction actions... (10 ) — — (10 ) Business-specific actions ... (4 ) — — (4 )
2008 cash payments... $ (19 ) $ — $ — $ (19 )
Accrued liability balances as of Dec. 31, 2008:
Pharmaceuticals business actions ... $ — $ — $ — $ —
Overhead reduction actions... — — — —
Business-specific actions ... 1 — — 1
Total accrued liability balance... $ 1 $ — $ — $ 1 Income statement line in which the preceding 2007 and 2006 expenses (credits) are reflected:
(Millions) 2007 2006
Cost of sales ... $ 40 $ 130
Selling, general and administrative expenses 5 198
Research, development and related expenses (7 ) 75
Total ... $ 38 $ 403 The amount of expenses (credits) incurred in 2007 and 2006 associated with the preceding are reflected in the Company’s business segments as follows:
(Millions) 2007 2006
Industrial and Transportation... $ 2 $ 15
Health Care... (11 ) 293
Safety, Security and Protection Services ... 28 10
Display and Graphics ... 3 31
Electro and Communications... 18 54
Corporate and Unallocated... (2 ) —
Total ... $ 38 $ 403 In connection with this targeted 2006/2007 restructuring plan, the Company eliminated a total of approximately 1,900 positions from various functions within the Company. Approximately 390 positions were pharmaceuticals business employees, approximately 960 positions related primarily to corporate staff overhead reductions, and approximately 550 positions were business-specific reduction actions. Of the 1,900 employment reductions, about 58 percent are in the United States, 21 percent in Europe, 12 percent in Latin America and Canada, and 9 percent in the Asia Pacific area. As a result of the second-quarter 2007 phaseout of operations at a New Jersey roofing granule facility and the sale of the Company’s Opticom Priority Control Systems and Canoga Traffic Detection businesses, the Company eliminated approximately 100 additional positions.
Non-cash employee-related changes in 2007 and 2006 primarily relate to special termination pension and medical benefits granted to certain U.S. eligible employees. These pension and medical benefits were reflected as a component of the benefit obligation of the Company’s pension and medical plans as of December 31, 2007 and 2006. In addition, these changes also reflect non-cash stock option expense due to the reclassification of certain employees age 50 and older to retiree status, resulting in a modification of their original stock option awards for accounting purposes.
Business-specific asset impairment charges for 2007 totaled $35 million. This included charges of $24 million related to property, plant and equipment associated with the Company’s decision to phaseout operations at a New Jersey roofing granule facility (Safety, Security and Protection Services segment) and charges of $11 million ($10 million related to property, plant and equipment and $1 million related to intangible assets) related to the Company’s decision to close an Electro and Communications facility in Wisconsin.
Asset impairment charges in 2006 associated with the pharmaceuticals business and business-specific actions include $109 million relative to property, plant and equipment; $30 million relative to intangible assets; and $5 million relative to other assets. The pharmaceuticals business asset impairment charges are for certain assets not
transferred to the buyers and primarily relate to the write-down of the assets to salvage value. The business-specific asset impairment charges primarily relate to decisions the Company made in the fourth quarter of 2006 to exit certain marginal product lines in the Display and Graphics segment and Electro and Communications segment.
Exit Activities:
During the second and third quarters of 2008, management approved and committed to undertake certain exit activities, which resulted in a pre-tax charge of $68 million. These charges primarily related to employee-related liabilities and fixed asset impairments. During the fourth quarter 2008, a pre-tax benefit of $10 million was recorded, which primarily related to adjustments to employee-related liabilities for second and third-quarter 2008 exit activities.
In total for 2008, these actions resulted in pre-tax charges for Industrial and Transportation ($26 million); Display and Graphics ($18 million); Health Care ($9 million); Safety, Security and Protection Services ($3 million); and Corporate and Unallocated ($2 million). These charges were recorded in cost of sales ($38 million), selling, general and administrative expenses ($17 million), and research, development and related expenses ($3 million).
During the second half of 2007, the Company recorded net pre-tax charges of $45 million related to exit activities.
These charges related to employee reductions and fixed asset impairments, including the consolidation of certain flexible circuit manufacturing operations ($23 million recorded in the Electro and Communications segment) and other actions, primarily in the Display and Graphics segment and Industrial and Transportation segment. These charges were recorded in cost of sales and selling, general and administrative expenses and research, development and related expenses.