1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------
For Quarter ended June 30, 2001 Commission file number: 1-3285
MINNESOTA MINING AND MANUFACTURING COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification No. 41-0417775
Executive offices: 3M Center, St. Paul, Minnesota 55144
Telephone number: (651) 733-1110
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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
----- -----
On June 30, 2001, there were 394,125,397 shares of the Registrant's
common stock outstanding.
This document contains 35 pages.
The exhibit index is set forth on page 32.
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2
Minnesota Mining and Manufacturing Company and Subsidiaries
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF INCOME
(Amounts in millions, except per-share amounts)
(Unaudited)
Three months ended Six months ended
June 30 June 30
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
Net sales $4,079 $4,243 $8,249 $8,318
------- ------- ------- -------
Operating expenses
Cost of sales 2,266 2,181 4,462 4,272
Selling, general and
administrative expenses 1,196 998 2,155 1,954
Research, development and
related expenses 283 287 561 550
Other expense (income) -- -- -- (50)
------- ------- ------- -------
Total 3,745 3,466 7,178 6,726
------- ------- ------- -------
Operating income 334 777 1,071 1,592
------- ------- ------- -------
Other income and expense
Interest expense 33 26 71 52
Interest and other income (9) (6) (21) (12)
------- ------- ------- -------
Total 24 20 50 40
------- ------- ------- -------
Income before income taxes
and minority interest 310 757 1,021 1,552
Provision for income taxes 94 265 332 547
Minority interest 14 22 34 48
------- ------- ------- -------
Net income $ 202 $ 470 $ 655 $ 957
======= ======= ======= =======
Weighted average common
shares outstanding - basic 395.9 395.6 396.1 396.6
Earnings per share - basic $ .51 $ 1.19 $ 1.65 $ 2.41
======= ======= ======= =======
Weighted average common
shares outstanding - diluted 402.2 399.2 402.3 400.5
Earnings per share - diluted $ .50 $ 1.18 $ 1.63 $ 2.39
======= ======= ======= =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
3
Minnesota Mining and Manufacturing Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions, except per-share amounts) June 30, December 31,
2001 2000
---------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 566 $ 302
Accounts receivable - net 2,951 2,891
Inventories
Finished goods 1,199 1,231
Work in process 684 663
Raw materials and supplies 416 418
-------- --------
Total inventories 2,299 2,312
Other current assets 975 874
-------- --------
Total current assets 6,791 6,379
Investments 284 310
Property, plant and equipment 14,269 14,170
Less accumulated depreciation (8,450) (8,347)
-------- --------
Property, plant and equipment - net 5,819 5,823
Other assets 2,423 2,010
-------- --------
Total assets $15,317 $14,522
======== ========
LIABILITIES
Current liabilities
Short-term debt $ 2,086 $ 1,866
Accounts payable 1,154 1,081
Payroll 588 382
Income taxes 561 462
Other current liabilities 1,131 963
-------- --------
Total current liabilities 5,520 4,754
Long-term debt 1,240 971
Other liabilities 2,436 2,266
-------- --------
Total liabilities 9,196 7,991
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 472,016,528 shares issued 5 5
Capital in excess of par value 291 291
Retained earnings 11,639 11,517
Treasury stock, at cost; 77,891,131 shares at
June 30, 2001; 75,931,180 shares at Dec. 31, 2000 (4,346) (4,065)
Unearned compensation (299) (303)
Accumulated other comprehensive income (loss) (1,169) (914)
-------- --------
Total stockholders' equity 6,121 6,531
-------- --------
Total liabilities and stockholders' equity $15,317 $14,522
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
4
Minnesota Mining and Manufacturing Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Six months ended
June 30
------------------
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 655 $ 957
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 503 457
Deferred income tax provision 23 22
Implant litigation - net 10 31
Changes in assets and liabilities
Accounts receivable (114) (206)
Inventories (5) (155)
Other current assets (79) (306)
Other assets - net of amortization 36 (11)
Income tax payable 112 247
Accounts payable and other current liabilities 309 132
Other liabilities (73) (1)
Other - net 63 5
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Net cash provided by operating activities 1,440 1,172
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (547) (528)
Proceeds from sale of property, plant and equipment 22 42
Acquisitions of businesses (208) (297)
Proceeds from sale of businesses 9 1
Purchase of investments (7) (21)
Proceeds from sale of investments 19 20
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Net cash used in investing activities (712) (783)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt - net 516 454
Repayment of other short-term and long-term debt (667) (15)
Proceeds from other short-term and long-term debt 674 3
Purchases of treasury stock (852) (498)
Reissuances of treasury stock 326 110
Dividends paid to stockholders (477) (460)
Distributions to minority interests (17) (26)
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Net cash used in financing activities (497) (432)
Effect of exchange rate changes on cash 33 76
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Net increase in cash and cash equivalents 264 33
Cash and cash equivalents at beginning of year 302 387
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Cash and cash equivalents at end of period $ 566 $ 420
========================================================================
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
5
Minnesota Mining and Manufacturing Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The interim consolidated financial statements are unaudited but, in the
opinion of management, reflect all adjustments necessary for a fair
presentation of consolidated financial position, results of operations and
cash flows for the periods presented. These adjustments consist of normal,
recurring items, except for the non-recurring items referred to below. The
results of operations for any interim period are not necessarily indicative
of results for the full year. The interim consolidated financial statements
and notes are presented as permitted by the requirements for Quarterly
Reports on Form 10-Q and do not contain certain information included in the
company's annual consolidated financial statements and notes. This
Quarterly Report on Form 10-Q should be read in conjunction with the
company's consolidated financial statements and notes included in its 2000
Annual Report on Form 10-K.
Discussion of non-recurring items is contained in the Notes to Consolidated
Financial Statements and in Management's Discussion and Analysis. This
includes non-recurring items principally related to employee separation
costs in the second quarter of 2001, costs relating to acquisitions in the
first quarter of 2001, and the termination of a product distribution
agreement in the first quarter of 2000.
SECOND QUARTER 2001 RESTRUCTURING AND OTHER NON-RECURRING ITEMS
During the first half of 2001, the company developed and announced a
restructuring plan that will consolidate certain operations and streamline
the organization to increase speed and productivity. In June 2001, the
company completed the identification of all significant actions to be taken
and obtained final approvals from the appropriate level of management. The
company recorded a charge of $397 million ($249 million after tax and
minority interest), principally related to this plan. This charge has been
classified as a component of cost of sales ($141 million); selling, general
and administrative expenses ($242 million); and research, development and
related expenses ($14 million). Of the total charge, $386 million related
to employee severance and benefits and $11 million related to other exit
activities. The restructuring includes actions in 17 locations in the
United States, 27 locations in Europe, 8 locations in the Asia Pacific
area, 13 locations in Latin America, and 4 locations in Canada. All
actions required by the plan are expected to be completed by June 30, 2002.
The company expects to terminate approximately 5,000 employees,
representing a wide range of employee groups. About half of the employment
reductions will occur in the United States, 40 percent in Europe, and the
balance in other international areas. All business segments will be
impacted to some extent both directly and through reduced allocations from
corporate staff services, with the Industrial business segment impacted the
most.
Under the plan, the company terminated approximately 1,200 employees in the
second quarter of 2001. Because certain employees can defer receipt of
termination benefits, cash payments can lag job eliminations. After
subtracting payments of $53 million made through June 30, 2001, the company
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had a remaining current liability of $318 million and a non-current
liability of $15 million related to employee severance and benefits at June
30, 2001. This will be funded through cash provided by operating
activities.
The charges related to other exit activities include incremental costs and
contractual obligations for items such as lease termination payments and
other facility exit costs incurred as a direct result of this plan. The
company had a remaining balance in other current liabilities of $11 million
for these exit costs at June 30, 2001.
The company plans to consolidate or downsize certain manufacturing
operations in the next 12 months, primarily in the United States and
Europe. This consolidation will result in accelerated depreciation for
those facilities that will cease operations. The company has not
discontinued any major product lines as a result of the restructuring. The
restructuring charge does not include any write-down of goodwill or other
intangible assets.
The company expects the restructuring and other non-recurring charges to
total about $600 million pre-tax upon completion, including the $397
million recorded in the second quarter of 2001. The remaining charges will
include accelerated depreciation, additional employee severance and benefit
costs, and other incremental restructuring-related exit costs.
Selected information relating to the charge follows.
Employee
Severance
and
(Millions) Benefits Other Total
2001 charge
Second quarter $386 $11 $397
Less:
Cash payments (53) -- (53)
Long-term portion of liability (15) -- (15)
Current liability as of
June 30, 2001 $318 $11 $329
BUSINESS COMBINATIONS
During the first quarter ended March 31, 2001, 3M completed three notable
business combinations. 3M acquired MicroTouch Systems Inc., a touch screen
manufacturer, for $158 million in cash, net of cash acquired. 3M also
acquired Robinson Nugent, a telecommunications supplier, in exchange for
1,124,135 shares of 3M common stock that had a fair market value of $127
million as of the acquisition date. 3M also combined its German dental
business (3M Inter-Unitek GmbH, an existing 3M subsidiary) with ESPE Dental
AG, a dental products manufacturer. 3M Inter-Unitek GmbH acquired 100
percent of the outstanding shares of ESPE Dental AG (ESPE) in exchange for
43 percent ownership in 3M Inter-Unitek and $25 million, net of cash
acquired. Upon completion of the ESPE transaction, 3M holds a 57 percent
controlling interest in Inter-Unitek GmbH and consolidates it with a
7
provision for the minority interest that does not have participating
rights. Each transaction was accounted for using the purchase method of
accounting.
The preliminary estimated fair values of assets acquired and liabilities
assumed relating to all 2001 business combinations, including several small
acquisitions not discussed previously, are summarized in the table below:
(Millions) Asset (Liability)
Accounts receivable $63
Inventories 69
Other working capital - net (116)
Property, plant and equipment 120
Purchased intangible assets 496
Interest bearing debt (15)
Minority interest liability (244)
Other long-term liabilities (38)
-----
Net assets acquired $335
=====
The $496 million of purchased intangible assets, including goodwill, is
being amortized on a straight-line basis over the periods benefited,
ranging from 4 to 40 years. In-process research and development charges
associated with these acquisitions were not material. 3M entered into
put/call option agreements with certain former shareholders of ESPE Dental
AG. Under these agreements, 3M may either be required or, if not required,
may choose to purchase the 43 percent minority interest in Inter-Unitek
GmbH from certain former shareholders in ESPE. These option agreements
expire on June 30, 2004. Pro forma information related to these
acquisitions is not provided because the impact of these acquisitions on
the company's results of operations is not considered to be material.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS
Effective January 1, 2001, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 138. This new accounting
standard requires that all derivative instruments be recorded on the
balance sheet at fair value and establishes criteria for designation and
effectiveness of hedging relationships. The effect of adopting this
standard was not material to the company's consolidated financial
statements.
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.
8
The company uses interest rate swaps, currency swaps, and forward and
option contracts to manage risks generally associated with foreign
exchange rate, interest rate and commodity market volatility. All
hedging instruments are designated and effective as hedges, in accordance
with U.S. generally accepted accounting principles. Instruments that do
not qualify for hedge accounting are marked to market with changes
recognized in current earnings. The company does not hold or issue
derivative financial instruments for trading purposes and is not a party
to leveraged derivatives.
Foreign Currency Forward and Option Contracts: The company enters into
forward contracts and swaps to hedge certain inter-company financing
transactions, and purchases options to hedge against the effect of
exchange rate fluctuations on cash flows denominated in foreign
currencies. These transactions are designated as cash flow hedges. At
June 30, 2001, the company had various open foreign exchange forward and
option contracts, the majority of which have maturities of one year or
less. The amounts at risk are not material because the company has the
ability to generate offsetting foreign currency cash flows. The company
also uses multiple forward and option contracts designated as cash flow
hedges to hedge intercompany receivables/payables.
For cash flow hedges, the net gain recognized in cost of sales during the
second quarter and six months ended June 30, 2001, was $23 million and
$29 million, respectively, with the impact largely offset by underlying
hedged items. The settlement or extension of these derivatives will
result in reclassifications to earnings in the period during which the
hedged transactions affect earnings (from other comprehensive income).
Within the next 12 months, the company expects to reclassify to earnings
a majority of the amount of cash flow hedging instruments shown in other
comprehensive income at June 30, 2001, with the impact largely offset by
underlying hedged items. The maximum length of time over which 3M is
hedging its exposure to the variability in future cash flows for a
majority of the forecasted transactions, excluding those forecasted
transactions related to the payment of variable interest on existing
financial instruments, is 12 months. No cash-flow hedges were
discontinued during the first six months of 2001.
Interest Rate & Currency Swaps: The company manages interest expense
using a mix of fixed, floating and variable 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 uses interest rate and currency swaps to manage interest rate
risk related to borrowings. These instruments generally mature in
relationship to their underlying debt. The current outstanding
instruments have various maturities. The maturity will normally match
the term of the debt when issued, which is generally greater than one
year. Unrealized gains and losses and exposure to changes in market
conditions were not material at June 30, 2001, for interest rate and
currency swaps.
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The company uses interest rate swaps (fixed to floating rate) designated
as fair value hedges. The company also uses cross currency interest rate
swaps (fixed to floating) to hedge foreign currency and interest rates
designated as fair value hedges. For these hedges, the net gain/loss
relating to any hedge ineffectiveness is reported in the income statement
as a decrease or increase in interest expense. Hedge ineffectiveness was
not material in the first six months of 2001. No interest rate swap
hedges were discontinued or became disqualified during the six months
ended June 30, 2001.
Net Investment Hedging: The company uses foreign currency debt and
forwards to hedge the company's net investments in foreign operations.
For hedges that meet the effectiveness requirements, the net gains/losses
are recorded in cumulative translation within other comprehensive income,
with any ineffectiveness recorded in cost of sales. In the second quarter
and first six months of 2001, an after-tax loss of $2 million and gain of
$18 million, respectively, was recorded in cumulative translation. Hedge
ineffectiveness was not material in the first six months of 2001.
Commodity Price Management: The company manages commodity price risks
through negotiated supply contracts, price protection swaps and forward
physical contracts. The company uses commodity price swaps as cash flow
hedges of forecasted transactions to manage price volatility. The
related mark-to-market gain or loss on qualifying hedges is included in
other comprehensive income to the extent effective (100 percent
effective), and reclassified into cost of sales in the period during
which the hedged transaction affects earnings. 3M has hedged its exposure
to the variability of future cash flows for certain forecasted
transactions through 2005. No cash flow commodity hedges were
discontinued during the six months ending June 30, 2001. Commodity
hedging activity is not material to the company's consolidated financial
statements.
RECLASSIFICATIONS
Due to reclassifications at year-end 2000, certain prior period amounts
have been reclassified to conform with the current-year presentation, with
no effect on previously reported net income.
10
BUSINESS SEGMENTS
3M's net sales and operating income by segment for the second quarter and
first six months of 2001 and 2000 follow.
----------------------------------------------------------
BUSINESS
SEGMENT Three months ended Six months ended
INFORMATION June 30 June 30
(Millions) 2001 2000 2001 2000
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NET SALES
Industrial $ 792 $ 876 $1,657 $1,791
Transportation,
Graphics and Safety 907 912 1,800 1,786
Health Care 854 798 1,683 1,567
Consumer and Office 672 696 1,367 1,386
Electro and
Communications 582 642 1,188 1,149
Specialty Material 270 310 551 624
Corporate and
Unallocated 2 9 3 15
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Total Company $4,079 $4,243 $8,249 $8,318
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OPERATING INCOME
Industrial $ 123 $ 153 $ 293 $ 338
Transportation,
Graphics and Safety 198 213 375 422
Health Care 190 158 355 351
Consumer and Office 106 102 219 207
Electro and
Communications 77 105 145 194
Specialty Material 38 57 86 108
Corporate and
Unallocated (398) (11) (402) (28)
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Total Company $ 334 $ 777 $1,071 $1,592
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Second quarter 2001 non-recurring charges of $397 million (included in
Corporate and Unallocated above) principally related to employee separation
costs. First quarter 2001 operating income includes non-recurring costs of
$23 million recorded in cost of sales. These non-recurring costs
(primarily increased valuation and subsequent sale of acquired inventories)
totaled $10 million in Health Care; $7 million in Transportation, Graphics
and Safety; and $6 million in the Electro and Communications segment. First
quarter 2000 operating income includes a $50 million benefit relating to
the termination of a product distribution agreement in the Health Care
segment.
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DEBT ISSUANCES
In May 2001, the company issued a three-year, $150 million, fixed rate
note. The coupon was swapped to a rate based on a floating LIBOR index
(3.97 percent at June 30, 2001). In May 2001, the company also issued a
two-year, $100 million, fixed rate note with a coupon rate of 4.57 percent.
Both of these notes were issued under the $1.5 billion shelf registration
filed with the Securities and Exchange Commission in October 2000.
In February 2001, the company issued a 40-year, $56 million, floating rate
note with a coupon rate based on a floating LIBOR index (3.41 percent at
June 30, 2001).
EARNINGS PER SHARE
The difference in the weighted average common shares outstanding for
calculating basic and diluted earnings per share is attributable to the
assumed exercise of the Management Stock Ownership Program (MSOP) stock
options for the three-month and six-month periods ended June 30, 2001 and
2000. Certain MSOP options outstanding were not included in the computation
of diluted earnings per share because they would not have had a dilutive
effect (3.3 million and 15.6 million average options for the three months
ended June 30, 2001 and 2000, respectively; 1.6 million and 15.3 million
average options for the six months ended June 30, 2001 and 2000,
respectively).
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) INFORMATION
The components of the ending balances of accumulated other comprehensive
income (loss) are shown as follows.
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
June 30, Dec. 31,
(Millions) 2001 2000
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Cumulative translation - net $(1,133) $(885)
Minimum pension liability adjustments (58) (58)
Debt and equity securities, unrealized gain - net 16 29
Cash flow hedging instruments, unrealized gain - net 6 --
----------------------------------------------------------------------
Accumulated other comprehensive income (loss) $(1,169) $(914)
======================================================================
The components of total comprehensive income (loss) are shown as follows.
Income tax effects for cumulative translation are not material because no
tax provision has been made for the translation of foreign currency
financial statements into U.S. dollars. Reclassification adjustments
included as gains in net income for cash flow hedging instruments that
have settled in the second quarter and first six months of 2001 totaled
$6 million and $18 million, respectively, with the impact largely offset
by underlying hedged items. Other reclassification adjustments were not
material.
12
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TOTAL COMPREHENSIVE INCOME Three months ended
June 30
(Millions) 2001 2000
-------------------------------------------------------------------
Net income $ 202 $ 470
Other comprehensive income (loss)
Cumulative translation - net (62) (4)
Debt and equity securities,
unrealized gain - net of $4 million
tax provision and $8 million tax provision 7 13
Cash flow hedging instruments, unrealized
loss - net of $5 million tax benefit (7) --
-------------------------------------------------------------------
Total comprehensive income $ 140 $ 479
===================================================================
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TOTAL COMPREHENSIVE INCOME Six months ended
June 30
(Millions) 2001 2000
-------------------------------------------------------------------
Net income $ 655 $ 957
Other comprehensive income (loss)
Cumulative translation - net (248) (59)
Debt and equity securities,
unrealized gain (loss) - net of $9 million
tax benefit and $25 million tax provision (13) 42
Cash flow hedging instruments, unrealized
gain - net of $3 million tax provision 6 --
-------------------------------------------------------------------
Total comprehensive income $ 400 $ 940
===================================================================
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations", and No. 142, "Goodwill and Other Intangible Assets."
The most significant changes made by SFAS No. 141 are: 1) requiring that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, and 2) establishing specific criteria for
the recognition of intangible assets separately from goodwill.
SFAS No. 142 primarily addresses the accounting for acquired goodwill and
intangible assets (i.e., the post-acquisition accounting). The provisions
of SFAS No. 142 will be effective for fiscal years beginning after
December 15, 2001. The most significant changes made by SFAS No. 142
are: 1) goodwill and indefinite-lived intangible assets will no longer be
amortized; 2) goodwill and indefinite-lived intangible assets will be
tested for impairment at least annually; and 3) the amortization period
of intangible assets with finite lives will no longer be limited to forty
years.
13
3M will adopt SFAS No. 141 effective July 1, 2001, and SFAS No. 142
effective January 1, 2002. Goodwill and intangible assets acquired after
June 30, 2001, will be subject immediately to the nonamortization and
amortization provisions of this statement. These standards only permit
prospective application of the new accounting; accordingly, adoption of
these standards will not affect previously reported 3M financial
information. The principal effect of SFAS No. 142 will be 3M ceasing the
amortization of goodwill. Goodwill amortization, after tax, is
approximately $21 million for total year 2000, and approximately $20
million for the first six months ended June 30, 2001.
The company is currently reviewing the requirements of Emerging Issues
Task Force Issue No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products". This
statement addresses whether certain consideration from a vendor to a
reseller of the vendor's products is an adjustment to selling prices or a
cost. This statement would have no effect on the company's net income or
its financial position.
OTHER
Discussion of legal matters is cross-referenced to this Quarterly Report on
Form 10-Q, Part II, Item 1, Legal Proceedings, and should be considered an
integral part of the interim consolidated financial statements.
PricewaterhouseCoopers LLP, the company's independent auditors, have
performed reviews of the unaudited interim consolidated financial
statements included herein, and their review report thereon accompanies
this filing. Pursuant to Rule 436(c) of the Securities Act of 1933 ("Act")
their report on these reviews should not be considered a "report" within
the meaning of Sections 7 and 11 of the Act and the independent auditor
liability under Section 11 does not extend to it.
14
REVIEW REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Minnesota Mining and
Manufacturing Company:
We have reviewed the accompanying consolidated balance sheet of Minnesota
Mining and Manufacturing Company and Subsidiaries as of June 30, 2001, and
the related consolidated statements of income for each of the three-month
and six-month periods ended June 30, 2001 and 2000, and of cash flows for
the six-month periods ended June 30, 2001 and 2000. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States of America, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying interim consolidated financial
statements for them to be in conformity with accounting principles
generally accepted in the United States of America.
We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as
of December 31, 2000, and the related consolidated statements of income, of
changes in stockholders' equity and comprehensive income, and of cash flows
for the year then ended (not presented herein); and in our report dated
February 12, 2001, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31,
2000, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
July 23, 2001
15
Minnesota Mining and Manufacturing Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Second Quarter
--------------
Worldwide sales for the second quarter totaled $4.079 billion, down 3.9
percent from the same quarter last year. Volume increased about five-
tenths of a percent from the second quarter last year. Selling prices were
basically flat. The stronger U.S dollar reduced worldwide sales by about
4.5 percent. Acquisitions provided about 2.5 percentage points of growth on
a global basis.
In the United States, sales totaled $1.929 billion, with sales down 2.3
percent on a reported basis and down about 5 percent excluding
acquisitions. The weak U.S. economy negatively impacted sales.
Internationally, sales totaled $2.150 billion, down about 5 percent in
dollars. Volume increased over 3 percent on a reported basis and was up
about 1 percent excluding acquisitions, despite significant slowing in most
major economies. In the Asia Pacific area, volume increased 5 percent,
with volume up 5.5 percent in Japan and 4.5 percent in the rest of Asia.
In Europe, volume increased nearly 1.5 percent on a reported basis and was
down about 3 percent excluding acquisitions. In Latin America, volume
increased about 3 percent. Volume in Canada increased about 6 percent.
Currency reduced international sales by over 8 percent, driven by negative
translation of 12 percent in the Asia Pacific area, 6 percent in Europe and
8 percent in Latin America.
The second quarter of 2001 includes non-recurring costs of $397 million,
principally related to employee separation costs under the company's
restructuring plan. These non-recurring costs were included in cost of
sales ($141 million); selling, general and administrative expenses ($242
million); and research, development and related expenses ($14 million).
Additional information concerning the second quarter 2001 restructuring and
other non-recurring items is provided in the Notes to Consolidated
Financial Statements and elsewhere herein.
16
Supplemental Unaudited Consolidated Statement of Income Information
(Dollars in millions, except per-share amounts)
Three months ended
June 30, 2001
----------------------------
Excluding Restruc-
restructuring turing Three
and other and other months
non- non- ended
recurring recurring Reported June 30,
items items total 2000
--------- ------- -------- --------
Net sales $4,079 $ -- $4,079 $4,243
Cost of sales 2,125 141 2,266 2,181
Selling, general and
administrative
expenses 954 242 1,196 998
Research, develop-
ment and related
expenses 269 14 283 287
Operating
income (loss) $ 731 $(397) $ 334 $ 777
Other (income)
and expense, net 24 -- 24 20
Income (loss) before
income taxes and
minority interest $ 707 $(397) $ 310 $ 757
Provision (benefit)
for income taxes 237 (143) 94 265
Effective tax rate 33.5% 35.9% 30.4% 35.0%
Minority interest 19 (5) 14 22
Net income (loss) $ 451 $(249) $ 202 $ 470
Per share-diluted $1.12 $(.62) $ .50 $1.18
The following discussion of the second quarter of 2001 and 2000 excludes
non-recurring items.
Cost of sales was 52.1 percent of sales, up seven-tenths of a percentage
point from the second quarter last year, but equal to the first quarter of
2001. Gross margins were negatively impacted by slowing worldwide market
demand, slightly higher energy and raw material costs, and negative
currency impacts. This area benefited from good indirect cost control in
our factories. Cost of sales includes manufacturing, engineering expenses,
and freight costs.
Selling, general and administrative (SG&A) expenses were 23.4 percent of
sales, down one-tenth of a percentage point from the second quarter of
2000, benefiting from aggressive cost-control actions. SG&A spending was
$44 million lower than in the second quarter of 2000, despite absorbing
SG&A added as a result of several acquisitions and a joint venture in the
past few quarters. Compared to the first quarter of 2001, SG&A was down $5
million, but as a percent to sales SG&A was up four-tenths of a percentage
point due to overall weak sales.
17
Operating income was 17.9 percent of sales, compared with 18.3 percent in
the second quarter last year. Worldwide operating income was impacted by
extremely difficult worldwide economic conditions and by the continued
strong U.S. dollar, partially offset by aggressive control of discretionary
expenses. The company faced accelerating economic weakness
internationally, while the U.S. economy remained soft. Operating income
margins by area in the second quarter of 2001 were 14.6 percent in the
U.S.; 15.0 percent in Europe; 26.9 percent in Asia Pacific; and 24.4
percent on a combined basis in Latin America, Africa and Canada.
Second-quarter interest expense of $33 million was $7 million higher than
in the same quarter last year, reflecting higher average debt levels in
2001. Investment and other income was $9 million, compared with $6 million
in the same quarter last year, reflecting higher interest income.
The worldwide effective income tax rate for the quarter was 33.5 percent,
down from 35.0 percent in the second quarter last year and 34.5 percent for
total year 2000. 3M's tax rate continues to benefit from lower overall
international tax rates.
Minority interest in the quarter was $19 million, compared with $22
million in the second quarter of 2000. The decrease was primarily due to
lower profits reported by Sumitomo 3M Limited, the company's 50 percent-
owned subsidiary in Japan.
Net income for the second quarter of 2001 totaled $451 million, or $1.12
per diluted share, compared with $470 million, or $1.18 per diluted
share, in the second quarter of 2000. The company estimates that changes
in the value of the U.S. dollar decreased earnings for the quarter by about
7 cents per share compared with the second quarter of 2000. 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
exchange rate risks.
First Six Months
----------------
Worldwide sales for the first six months totaled $8.249 billion, down
eight-tenths of a percent from the same period last year. Volume increased
3.5 percent from the same period last year. Selling prices were unchanged,
versus a decline of about 1.5 percent for total year 2000. Currency,
driven by a stronger U.S dollar, reduced worldwide sales by about 4.5
percent. Acquisitions provided about 3.5 percentage points of growth on a
global basis.
In the United States, sales totaled $3.814 billion, with sales down 1.9
percent on a reported basis and down about 4.5 percent excluding
acquisitions, impacted by the effects of the weak economy.
Internationally, sales totaled $4.435 billion, basically flat versus the
same period last year. Volume increased about 8.5 percent on a reported
basis and about 4.5 percent excluding acquisitions. In the Asia Pacific
area, volume increased 9 percent, with volume up nearly 8.5 percent in
18
Japan and over 10 percent in the rest of Asia. In Europe, volume increased
more than 9 percent on a reported basis and 1.5 percent excluding
acquisitions. In Latin America, volume increased 5.5 percent. Volume
increased about 7 percent in Canada. Currency reduced international sales
by over 8 percent, driven by negative translation of 11 percent in the Asia
Pacific area, 6.5 percent in Europe and 7.5 percent in Latin America.
The first six months of 2001 includes non-recurring costs of $420 million
principally related to employee separation costs and acquisition-related
costs (primarily the increased valuation and subsequent sale of inventory
acquired in two acquisitions and a joint venture). These non-recurring
costs are included in cost of sales ($164 million); selling, general and
administrative expenses ($242 million); and in research, development and
related expenses ($14 million). The first six months of 2000 includes a
pre-tax benefit of $50 million, or 8 cents per share, associated with the
termination of a product marketing and distribution agreement in the Health
Care segment.
Supplemental Unaudited Consolidated Statement of Income Information
(Dollars in millions, except per-share amounts)
Six months ended Six months ended
June 30, 2001 June 30, 2000
---------------------------- ----------------------------
Excluding Restruc-
restructuring turing
and other and other Excluding
non- non- non- Non-
recurring recurring Reported recurring recurring Reported
items items total items items total
--------- ------- -------- -------- -------- --------
Net sales $8,249 $ -- $8,249 $8,318 $ -- $8,318
Cost of sales 4,298 164 4,462 4,272 -- 4,272
Selling, general and
administrative
expenses 1,913 242 2,155 1,954 -- 1,954
Research, develop-
ment and related
expenses 547 14 561 550 -- 550
Other expense (income) -- -- -- -- (50) (50)
Operating
income (loss) $1,491 $(420) $1,071 $1,542 $ 50 $1,592
Other (income)
and expense, net 50 -- 50 40 -- 40
Income (loss) before
income taxes and
minority interest $1,441 $(420) $1,021 $1,502 $ 50 $1,552
Provision (benefit)
for income taxes 482 (150) 332 528 19 547
Effective tax rate 33.5% 35.7% 32.5% 35.2% 35.3%
Minority interest 41 (7) 34 48 -- 48
Net income (loss) $ 918 $(263) $ 655 $ 926 $ 31 $ 957
Per share-diluted $2.28 $(.65) $1.63 $2.31 $ .08 $2.39
19
The following discussion of the first six months of 2001 and 2000 excludes
non-recurring items.
Cost of sales was 52.1 percent of sales, up seven-tenths of a percentage
point from the same period last year. Gross margins were negatively
impacted by soft U.S. market demand, slowing economic growth
internationally, slightly higher energy and raw material costs, and
negative currency impacts. This area benefited from good indirect cost
control in our factories. Cost of sales includes manufacturing, engineering
expenses, and freight costs.
Selling, general and administrative (SG&A) expenses were 23.2 percent of
sales, down three-tenths of a percentage point from the same period last
year, benefiting from aggressive cost-control actions. 3M reduced SG&A
spending by $41 million compared to the same period last year, even after
absorbing SG&A added as a result of several acquisitions and a joint
venture over the past few quarters.
SG&A also includes amortization of intangibles, which has been increasing
due to recent 3M acquisitions. Goodwill amortization, which is a component
of intangible amortization, is approximately $23 million for the first six
months of 2001 and is expected to total about $48 million for total year
2001, compared with approximately $26 million for the year 2000.
Goodwill amortization, after tax, is approximately $20 million, or 5 cents
per share, in the first six months of 2001, and is expected to total about
$42 million, or 10 to 11 cents per share, for the year 2001, compared with
approximately $21 million, or 5 cents per share, in the year 2000. The
Financial Accounting Standards Board (FASB) recently issued Statement No.
142, "Goodwill and Other Intangible Assets," which will be adopted by the
company effective January 1, 2002. Goodwill and intangible assets acquired
after June 30, 2001, will be subject immediately to the nonamortization and
amortization provisions of this statement, while existing goodwill will no
longer be amortized beginning January 1, 2002. Goodwill will be subject to
an impairment test at least annually. Additional information regarding
recent accounting pronouncements of the FASB, including Statement No. 142,
is included in the Notes to Consolidated Financial Statements.
Operating income was 18.1 percent of sales, compared with 18.5 percent in
the same period last year. Worldwide operating income benefited from the
company's aggressive actions to reduce discretionary expenses, but was
negatively affected by soft U.S. market demand, slowing international
economic growth, and by higher energy and raw material costs.
The first six months interest expense of $71 million was $19 million higher
than in the same period last year, reflecting higher average debt levels.
Investment and other income was $21 million, compared with $12 million in
the first six months last year, reflecting higher interest income.
The worldwide effective income tax rate for the first six months was 33.5
percent, down from 35.2 percent in the first six months last year and 34.5
percent for total year 2000. 3M's tax rate continues to benefit from lower
overall international tax rates.
20
Minority interest was $41 million, compared with $48 million in the first
six months of 2000. The decrease is primarily due to lower profits
reported by Sumitomo 3M Limited, the company's 50 percent-owned
subsidiary in Japan.
Net income for the first six months of 2001 totaled $918 million, or
$2.28 per diluted share, compared with $926 million, or $2.31 per diluted
share, in the first six months of 2000. The company estimates that
changes in the value of the U.S. dollar decreased earnings for the first
six months of 2001 by about 14 cents per share compared with the first six
months of 2000. 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 exchange rate risks.
PERFORMANCE BY BUSINESS SEGMENT
Following is a discussion of the global operating results of the company's
six business segments in the second quarter and first six months of 2001.
With the exception of Health Care, most of 3M's business segments were
impacted by the global economic slowing during the second quarter. In
addition, U.S. dollar strength continued to negatively impact results.
In the Industrial Markets segment, volume declined 6.5 percent in the
second quarter and 3 percent in the first quarter, reflecting ongoing
weakness in most manufacturing sectors of the economy. Operating income
margins declined, reflecting the impact of lower volumes.
In the Transportation, Graphics and Safety segment, excluding acquisitions,
volume grew 3 percent in the second quarter of 2001 and 4 percent in the
first quarter of 2001. Optical films for flat-panel displays continued to
register strong growth. Overall growth in this product line was further
boosted by two recent acquisitions. Operating income margins were down due
to soft overall sales and due to lower margins in recently acquired
businesses.
In the Health Care segment, after adjusting for acquisitions, volume grew
nearly 5 percent in the second quarter of 2001 and nearly 7 percent in the
first quarter of 2001. This segment showed strong growth in health
information systems and medical products. 3M's recent dental joint venture
with ESPE added over 5 points of growth in the second quarter and nearly 4
points of growth in the first quarter, bringing this segment's total volume
growth in both the first and second quarters to around 10 percent. 3M's
Health care profits, excluding a $50 million pre-tax benefit in 2000 and
$10 million of one-time acquisition costs in 2001, were up more than 20
percent for the first six months of 2001 from the same period last year.
In the Consumer and Office segment, volume decreased about 1 percent in the
second quarter after increasing about 3 percent in the first quarter. This
segment saw good growth in stationery and office products and in the home
improvement area, but overall growth was held back by softness in visual
systems. Operating income margins were up about 1 percentage point for the
first six months of 2001.
21
In the Electro and Communications segment, after adjusting for
acquisitions, volume declined about 7.5 percent in the second quarter of
2001 after increasing about 7 percent in the first quarter of 2001. This
market experienced continued slowing in electronics manufacturing,
semiconductor manufacturing and in high-tech parts of the telecom industry.
The Telecom Access Products division, which sells a variety of products
that boost performance of existing copper lines, saw good growth. Operating
margins of the segment were negatively impacted by slowing sales,
acquisition impacts and a less favorable product mix.
In the Specialty Material Markets segment, volume declined 12.5 percent in
the second quarter and nearly 7 percent in the first quarter, impacted by
the product line phase out of perfluorooctanyl chemistry announced in May
2000.
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong. Working
capital totaled $1.271 billion at June 30, 2001, down from $1.625 billion
at year-end 2000. The accounts receivable average days' sales outstanding
was 61 days, up from 60 days at year-end. The company's inventory index was
3.2 months, down from 3.4 months at year-end. 3M's current ratio was 1.2,
down from 1.3 at year-end.
Total debt increased $489 million from year-end 2000 to $3.326 billion,
primarily reflecting short-term borrowings relating to acquisitions and
treasury stock repurchases. As of June 30, 2001, total debt was 35 percent
of total capital, up from 30 percent at year-end.
The company's strong credit rating provides ready and ample access to funds
in global capital markets. At June 30, 2001, the company had available
short-term lines of credit totaling about $734 million.
Net cash provided by operating activities totaled $1.440 billion in the
first six months of the year, up $268 million from the same period last
year. Most of the company's implant liabilities have been paid;
accordingly, receipt of related insurance recoveries will increase future
cash flows. For a more detailed discussion, refer to Part II, Item 1,
Legal Proceedings, of this Quarterly Report on Form 10-Q.
Cash used in investing activities totaled $712 million in the first six
months of the year, compared with $783 million in the same period last
year. Capital expenditures for the first six months of 2001 were $547
million, an increase of $19 million from the same period last year. Cash
used for acquisitions of businesses totaled $208 million in the first six
months of 2001, reflecting three notable business combinations. 3M acquired
MicroTouch Systems Inc., a touch screen manufacturer, for $158 million in
cash, net of cash acquired. 3M also acquired Robinson Nugent, a
telecommunications supplier, in exchange for 1,124,135 shares of 3M common
stock. 3M also combined its German dental business (3M Inter-Unitek GmbH,
an existing 3M subsidiary) with ESPE Dental AG, a dental products
manufacturer. 3M Inter-Unitek GmbH acquired 100 percent of the outstanding
shares of ESPE Dental AG in exchange for 43 percent ownership in 3M Inter-
Unitek and $25 million, net of cash acquired. In the first six months of
2000, 3M acquired a majority of Quante AG and four smaller businesses for a
22
total purchase price of $297 million in cash plus 128,994 shares of 3M
common stock.
Financing activities in the first six months of 2001 for both short-term
and long-term debt included net cash inflows of $523 million, compared with
net cash inflows of $442 million in the same period last year. The
increase in net short-term debt of $516 million includes the portion of
short-term debt with original maturities of 3 months or less. Repayment of
other short-term and long-term debt of $667 million includes $327 million
of commercial paper having original maturities greater than 3 months.
Proceeds from other short-term and long-term debt of $674 million include
$367 million of commercial paper having original maturities greater than 3
months.
Treasury stock repurchases for the first six months of 2001 were $852
million, compared with $498 million in the same period last year. The
company repurchased about 7.5 million shares of common stock in the first
six months of 2001, compared with about 5.7 million shares in the same
period last year. In November 2000, the Board of Directors authorized the
repurchase of up to 10 million shares of 3M common stock through December
31, 2001. As of June 30, 2001, 2.5 million shares remained authorized for
repurchase. Stock repurchases are made to support the company's stock-
based compensation plans, its employee stock purchase plans and for other
corporate purposes.
Cash dividends paid to shareholders totaled $477 million in the first six
months of this year, compared with $460 million in the same period last
year. In February 2001, the quarterly dividend was increased to 60 cents
per share.
FUTURE OUTLOOK
During the first half of 2001, the company developed and announced a
restructuring plan that will consolidate certain operations and streamline
the organization to increase speed and productivity. In June 2001, the
company completed the identification of all significant actions to be taken
and obtained final approvals from the appropriate level of management. The
company expects to terminate approximately 5,000 employees by June 30,
2002. About half of the employment reductions will occur in the United
States, 40 percent in Europe, and the balance in other international areas.
All business segments will be impacted to some extent both directly and
through reduced allocations from corporate staff services, with the
Industrial business segment impacted the most. Relating principally to
these actions, the company recorded a charge of $397 million in the
second quarter of 2001. This charge is discussed in the Notes to
Consolidated Financial Statements.
Over the next few quarters, 3M expects to take additional charges related
to consolidating or downsizing certain manufacturing operations,
additional employee severance and benefit costs, and other incremental
restructuring related exit costs. This will bring total charges to about
$600 million (including the $397 million charge taken in the second
quarter of 2001). 3M expects to save $300 million from this restructuring
plan on an annualized basis, $75 million of which will impact second half
2001 results, with the benefit weighted more heavily towards the fourth
23
quarter. The vast majority of the savings will be reduced employee costs.
The 2001 savings will be most prominent in SG&A, with cost of sales
benefits later in 2001 and into 2002. Cash payments relating to the
restructuring will be funded through cash provided by operating activities.
It is estimated that cash outflows could total $100 million per quarter
over the next several quarters. The company has not discontinued any
major product lines as a result of this restructuring.
Selected information relating to the charge follows.
Employee
Severance
and
(Millions) Benefits Other Total
2001 charge
Second quarter $386 $11 $397
Less:
Cash payments (53) -- (53)
Long-term portion of liability (15) -- (15)
Current liability as of
June 30, 2001 $318 $11 $329
Looking ahead, predicting the direction and trajectory of the worldwide
economy and its corresponding impact on 3M's businesses will remain a
challenge.
Slower growth outside the United States and the persistently strong U.S.
dollar will continue to impact results in the second half of 2001. At
this juncture, the company expects that earnings for 2001 in total will
be in the range of $4.50 to $4.75 per share, excluding non-recurring
items. The low end of this range assumes that the U.S. economy remains
at current levels for the remainder of 2001, and that there is a
continuing slowdown outside the United States. These assumptions would
result in second-half organic worldwide volume declines of about 4
percent. The top end of the range assumes some U.S. economic recovery in
the second half of 2001, and a leveling off of the slowdown abroad for
the remainder of the year. Both scenarios assume that exchange rates
will remain at current levels - approximately 85 cents per euro and 125
yen per U.S. dollar. The company earned $4.68 per share in 2000,
excluding non-recurring items.
Quarterly predictions are challenging in the current environment.
Historically, 3M results have been stronger in the third quarter than the
fourth quarter. This pattern is less predictable during periods of
economic weakness. Because benefits from 3M's restructuring plan should
be weighted more heavily towards the fourth quarter, a pattern in 2001 of
similar earnings for the third and fourth quarter is more likely.
The company estimates, based on currency rates as of June 30, 2001, that
currency would reduce earnings for the year by about 25 cents per share.
24
The company is increasingly striving to move costs outside the U.S. to
naturally protect 3M from currency fluctuations. The company has begun
to increase the amount and duration of its foreign currency hedges to
help dampen year-over-year impacts and to improve the predictability of
future earnings. The company has been phasing in this new policy and is
targeting to hedge 50 percent of its annual income statement foreign
currency risk by the time this program is fully implemented in the first
quarter of 2002. However, this hedging program will not make 3M immune to
currency impacts.
While raw material costs were up about 2 percent in the second quarter of
2001 from the same quarter last year, the company expects year-on-year
cost reductions for the remainder of the year due both to falling prices
for many key feedstocks and to 3M's continued global sourcing and cost-
reduction efforts. For 2001 in total, raw material costs are expected to
be close to flat. The company expects to maintain a 33.5 percent
worldwide tax rate throughout the year, helped by lower overall
international tax rates. Capital expenditures are expected to total less
than $1 billion for total year 2001.
3M's longer-term prospects remain bright. The company is on track in
implementing several initiatives (six sigma, sourcing, 3M acceleration,
indirect costs, e-productivity) that will strengthen 3M and enhance its
competitiveness. In addition, through the current restructuring plan, 3M
is making structural adjustments that will help ensure consistent future
earnings performance.
THE EURO CONVERSION
There have not been any significant new developments relating to the euro
conversion since year-end 2000. Refer to the 2000 Form 10-K for a
complete discussion of the euro conversion.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of
1995. These statements may be identified by the use of words like
"plan," "expect," "aim," "believe," "project," "anticipate," "intend,"
"estimate," "will," "should," "could" and other expressions that indicate
future events and trends. All statements that address expectations or
projections about the future, including statements about the company's
strategy for growth, product development, market position, expenditures
and financial results, are forward-looking statements.
Forward-looking statements are based on certain assumptions and
expectations of future events that are subject to risks and
uncertainties. Actual future results and trends may differ materially
from historical results or those projected in any such forward-looking
statements depending on a variety of factors, including but not limited
to the following:
* The effects of, and changes in, worldwide economic conditions. The
company operates in more than 60 countries and derives more than half of
its revenues from outside the United States. The company's business may
be affected by factors in other countries that are beyond its control,
25
such as downturns in economic activity in a specific country or region;
social, political or labor conditions in a specific country or region; or
potential adverse foreign tax consequences.
* Foreign currency exchange rates and fluctuations in those rates may
affect the company's ability to realize projected growth rates in its
sales and net earnings and its results of operations. Because the company
derives more than half its revenues from outside the United States, its
ability to realize projected growth rates in sales and net earnings and
results of operations could be adversely affected if the United States
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. The company's growth
objectives are largely dependent on its ability to 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; successfully complete
clinical trials and obtain regulatory approvals; obtain adequate
intellectual property protection; or gain market acceptance of new
products.
* The company's future results are subject to fluctuations in the costs
of purchased components and materials due to market demand, currency
exchange risks, shortages and other factors. The company depends on
various components and materials for the manufacturing of its products.
Although the company has not experienced any difficulty in obtaining
components and materials, it is possible that any of its supplier
relationships could be terminated in the future. Any sustained
interruption in the company's receipt of adequate supplies could have a
material adverse effect on it. 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 due to market demand, currency risks, or
shortages or that future price fluctuations will not have a material
adverse effect on it.
* The possibility that acquisitions, divestitures and strategic alliances
may not meet sales and/or profit expectations. As part of the company's
strategy for growth, the company has made and may continue to make
acquisitions, divestitures and strategic alliances. However, there can be
no assurance that these will be completed or beneficial to the company.
* The company is the subject of various legal proceedings. For a more
detailed discussion of the legal proceedings involving the company, see
the discussion of "Legal Proceedings" in Part II, Item 1 of this
Quarterly Report on Form 10-Q.
26
Minnesota Mining and Manufacturing Company and Subsidiaries
PART II. Other Information
Item 1. Legal Proceedings
General
---------
The company and certain of its subsidiaries are named as defendants in a
number of actions, governmental proceedings and claims, including
environmental proceedings and products liability claims involving
products now or formerly manufactured and sold by the company. In some
actions, the claimants seek damages as well as other relief, which, if
granted, would require substantial expenditures. The company has
recorded certain liabilities, which represent reasonable estimates of
its probable liabilities for these matters. The company also has
recorded receivables for the probable amount of insurance recoverable
with respect to these matters.
Some of these matters raise difficult and complex factual and legal
issues, and are subject to many uncertainties, including, but not
limited to, the facts and circumstances of each particular action, the
jurisdiction and forum in which each action is proceeding and
differences in applicable law. Accordingly, the company is not always
able to estimate the amount of its possible future liabilities with
respect to such matters.
While the company currently believes that the ultimate outcome of these
proceedings and claims, individually and in the aggregate, will not have
a material adverse effect on the consolidated financial position,
results of operations, or cash flows of the company, there can be no
absolute certainty that the company may not ultimately incur charges,
whether for governmental proceedings and claims, products liability
claims, or other actions, in excess of presently recorded liabilities.
While the company currently believes that a material adverse impact on
its consolidated financial position, results of operations, or cash
flows from any such future charges is remote, due to the inherent
uncertainty of litigation, there exists the remote possibility that a
future adverse ruling could result in future charges that could have a
material adverse impact on the company. The current estimate of the
potential impact on the company's consolidated financial position for
the above legal proceedings could change in the future.
Breast Implant Litigation
--------------------------
The company and certain other companies have been named as defendants in
a number of claims and lawsuits alleging damages for personal injuries
of various types resulting from breast implants formerly manufactured by
the company or a related company. The company entered the business of
manufacturing breast implants in 1977 by purchasing McGhan Medical
Corporation. In 1984, the company sold the business to a corporation
that also was named McGhan Medical Corporation.
27
As of June 30, 2001, the company is currently named as a defendant,
often with multiple co-defendants, in 691 lawsuits and 13 claims in
various courts, all seeking damages for personal injuries from allegedly
defective breast implants. These lawsuits and claims purport to
represent 1,678 individual claimants.
3M has confirmed that approximately 30 of the 1,678 claimants have opted
out of the Revised Settlement Program (discussed below) and have 3M
implants. Most of the claimants in these confirmed cases have alleged an
unspecified amount of damages above the jurisdictional limit of the
courts in which the cases were filed.
The company believes that most of the remaining 1,678 claimants will be
dismissed either because the claimants did not have 3M implants or the
claimants accepted benefits under the Revised Settlement Program. Most
of these claimants have filed lawsuits that either do not allege a
specific amount of damages or allege an unspecified amount of damages
above the jurisdictional limit of the court. The rest of these claimants
allege damages, including both actual and punitive damages, aggregating
approximately $100 million in their lawsuits. Approximately 150
claimants have filed lawsuits in state and federal courts in New York
alleging damages in excess of $20 million each. 3M expects that
virtually all of these New York cases will be dismissed without payment
for the reasons stated above. The company continues to work to clarify
the status of these lawsuits and claims.
Based on 3M's experience in resolving thousands of these lawsuits, 3M
believes that the amount of damages alleged in complaints is not a
reliable or meaningful measure of the potential liability that 3M may
incur in the breast implant litigation. Investors should place no
reliance on the amount of damages alleged in breast implant lawsuits
against 3M.
On December 22, 1995, the United States District Court for the Northern
District of Alabama approved a revised class action settlement program
for resolution of claims seeking damages for personal injuries from
allegedly defective breast implants (the "Revised Settlement Program").
The Court ordered that, beginning after November 30, 1995, members of
the plaintiff class may choose to participate in the Revised Settlement
Program or opt out, which would then allow them to proceed with separate
product liability actions.
The company believes that approximately 90 percent of the registrants,
including those claimants who filed current claims, have elected to
participate in the Revised Settlement Program. It is still unknown as to
what disease criteria all claimants have satisfied, and what options
they have chosen. As a result, the total amount and timing of the
company's prospective payments under the Revised Settlement Program
cannot be determined with precision at this time. As of June 30, 2001,
the company had paid $304 million into the court-administered fund as a
reserve against costs of claims payable by the company under the Revised
Settlement Program (including a $5 million administrative assessment).
Additional payments will be made as necessary. Payments to date have
28
been consistent with the company's estimates of the total liability for
claims under the Revised Settlement Program.
Under the Revised Settlement Program, additional opt outs are expected
to be minimal since the opt-out deadline has passed for virtually all
U.S. class members. The company's remaining obligations under the
Revised Settlement Program are limited since (i) most payments to
current claimants have already been made, (ii) no additional current
claims may be filed without court approval, and (iii) late registrants
are limited by the terms of the Revised Settlement Program.
The company's current best estimate of the amount to cover the cost and
expense of the Revised Settlement Program and the cost and expense of
resolving opt-out claims and recovering insurance proceeds (from
inception of the litigation through June 30, 2001) is $1.2 billion.
After subtracting cumulative payments of $1.192 billion as of June 30,
2001, for defense and other costs and settlements with litigants and
claimants, the company had remaining liabilities for the breast implant
litigation of $8 million.
The company's insurers initiated a declaratory judgment action in Ramsey
County Minnesota against the company seeking adjudication of certain
coverage and allocation issues. The jury trial phase of this action
finished on February 24, 2000. The jury returned a verdict favorable to
the company by rejecting all of the insurers' remaining defenses to
coverage for breast implant liabilities and costs. The court has
considered additional remedies requested by the company and the insurers
including eliminating, limiting or extending allocation among the
insurers providing occurrence-based coverage (before 1986), pre- and
post-judgment interest, attorneys' fees and further equitable relief.
The court's rulings in post verdict motions are considered to be
generally favorable to the company. The court awarded the company
prejudgment interest on amounts owing by insurers including reasonable
attorney fees. However, the court has yet to determine the amount of
attorneys' fees recoverable by the company. The court has indicated a
formula to be used for this calculation that would result in the company
being reimbursed for less than all of its fees. Exact amounts cannot yet
be determined. The court filed the judgment on April 16, 2001 and
entered judgment on May 16, 2001. Post judgment motions have been filed
and heard and the company expects rulings during the third quarter of
2001.
As of June 30, 2001, the company had receivables for insurance
recoveries of $485 million, representing settled but yet to be received
amounts as well as amounts contested by the insurance carriers. During
the second quarter of 2001, the company received payments from its
occurrence carriers. Various factors could affect the timing and amount
of proceeds to be received under the company's various insurance
policies, including (i) the timing of payments made in settlement of
claims; (ii) the outcome of occurrence insurance litigation in the
courts of Minnesota (as discussed above) and Texas; (iii) potential
arbitration with claims-made insurers; (iv) delays in payment by
insurers; and (v) the extent to which insurers may become insolvent in
29
the future. There can be no absolute assurance that the company will
collect all amounts recorded as being probable of recovery from its
insurers.
While the company currently believes that the ultimate outcome of these
proceedings and claims, individually and in the aggregate, will not have
a material adverse effect on the consolidated financial position,
results of operations, or cash flows of the company, there can be no
absolute certainty that the company may not ultimately incur charges for
breast implant claims in excess of presently recorded liabilities.
While the company currently believes that a material adverse impact on
its consolidated financial position, results of operations, or cash
flows from any such future charges is remote, due to the inherent
uncertainty of litigation, there exists the remote possibility that a
future adverse ruling could result in future charges that could have a
material adverse impact on the company. The current estimate of the
potential impact on the company's consolidated financial position for
breast implant litigation could change in the future.
Environmental Matters
----------------------
The company's operations are subject to environmental laws and
regulations enforceable by foreign, federal, state, local authorities
and private parties in the United States and abroad, including those
pertaining to air emissions, wastewater discharges, toxic substances,
and the handling and disposal of solid and hazardous wastes. These laws
and regulations provide under certain circumstances for the remediation
of contamination, as well as personal injury and property damage claims.
The company has incurred, and will continue to incur, costs and capital
expenditures in complying with these laws and regulations, defending
potential personal injury and property damage claims, and modifying its
business operations in light of its environmental responsibilities. In
its effort to carry out its environmental responsibilities and comply
with environmental laws and regulations, the company has established,
and periodically updates, policies relating to environmental standards
of performance for its operations worldwide.
Under certain environmental laws, including the United States
Comprehensive Environmental Response, Compensation and Liability Act of
1980 and similar state laws, the company may be jointly and severally
liable for the costs of environmental contamination at current or former
facilities and at off-site locations. The company has identified
numerous locations, most of which are in the United States, at which it
may have some liability for remediating contamination. Amounts expensed
for environmental remediation activities were not material at these
locations nor have there been material changes in the recorded
liabilities for environmental matters. Liabilities for estimated costs
of environmental remediation are, depending on the site, based primarily
upon internal or third-party environmental studies, and estimates as to
the number, participation level and financial viability of any other
potentially responsible parties, the extent of the contamination and the
nature of required remedial actions. Recorded liabilities are adjusted
as further information develops or circumstances change. The amounts
30
recorded in the company's consolidated financial statements for
environmental liabilities are the gross amount of such liabilities,
without deductions for insurance or third party indemnity claims. The
company expects that the amounts recorded will be paid out over the
periods of remediation for the applicable sites, currently ranging up to
30 years.
It is often difficult to estimate the cost of environmental compliance
and remediation and potential claims given the uncertainties regarding
the interpretation and enforcement of applicable environmental laws and
regulations, the extent of environmental contamination and the existence
of alternate cleanup methods. The company records an environmental
liability when it is probable that the company has incurred a liability
and the amount of the liability can be reasonably estimated. Where no
amount within a range of estimates is more likely, the minimum is
recorded. Otherwise, the most likely cost to be incurred is recorded.
The company's current assessment of the probable liabilities and
associated expenses related to environmental matters is based on the
facts and circumstances known at this time. New developments may occur
that could affect the company's assessment. These developments include,
but are not limited to, (i) changes in the information available
regarding the environmental impact of the company's operations and
products; (ii) changes in environmental regulations or enforcement
policies; (iii) new and evolving analytical and remediation techniques;
(iv) success in allocating liability to other potentially responsible
parties; and (v) financial viability of other potentially responsible
parties and third-party indemnitors.
While the company currently believes that the ultimate outcome of these
environmental matters, individually and in the aggregate, will not have
a material adverse effect on the consolidated financial position,
results of operations, or cash flows of the company, there can be no
absolute certainty that the company may not ultimately incur charges for
capital expenditures, litigation and other costs in excess of presently
established liabilities.
While the company currently believes that a material adverse impact on
its consolidated financial position, results of operations, or cash
flows from any such future charges is remote, due to the inherent
uncertainty of environmental matters or were an unfavorable development
to occur (discussed above), there exists the remote possibility that a
future adverse ruling or development could result in future charges that
could have a material adverse impact on the company. The current
estimate of the potential impact on the company's consolidated financial
position for the above environmental matters could change in the future.
31
Item 4. Submission of Matters to a Vote of Security Holders
(a) The registrant held its Annual Meeting of Stockholders on May 8, 2001.
(b) Proxies for the meeting were solicited pursuant to Regulation 14;
there was no solicitation in opposition to management's nominees as
listed in the Proxy Statement and all such nominees were elected.
Directors elected to the year 2004 Class were Edward A. Brennan, W. James
McNerney, Jr. and Kevin W. Sharer.
Directors whose terms continue after the meeting were Linda G. Alvarado,
Ronald O. Baukol, Edward M. Liddy, Aulana L. Peters, Rozanne L. Ridgway,
Frank Shrontz and Louis W. Sullivan.
(c) The ratification of the appointment of PricewaterhouseCoopers LLP,
independent auditors, to audit the consolidated financial statements of the
company and its subsidiaries for the year 2001.
For 315,096,113
Against 2,486,036
Abstain 3,101,468
(d) Stockholder proposal relating to election of directors.
For 24,998,702
Against 248,637,158
Abstain 5,466,311
Broker Non-Vote 41,581,446
(e) Proponents prior to the meeting voluntarily withdrew two additional
stockholder proposals regarding executive compensation.
32
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this Report.
(12) A statement setting forth the calculation of the
ratio of earnings to fixed charges. Page 34.
(15) A letter from the company's independent auditors
regarding unaudited interim consolidated
financial statements. Page 35.
Reports on Form 8-K:
3M filed four Form 8-K's for the quarter ended June 30, 2001.
The Form 8-K dated May 11, 2001, provided the opinion and consent of
general counsel in connection with the offering of certain debt securities
due in the year 2003.
The Form 8-K dated May 10, 2001, provided the opinion and consent of
general counsel in connection with the offering of certain debt securities
due in the year 2004.
The Form 8-K dated May 4, 2001, relates to 3M's distribution agreement to
issue and sell from time to time its Medium-Term Notes, Series C, in an
aggregate amount up to $1.4 billion.
The Form 8-K dated April 23, 2001, reported 3M's unaudited consolidated
financial results for the first quarter of 2001.
None of the other item requirements of Part II of Form 10-Q are applicable
to the company for the quarter ended June 30, 2001.
33
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MINNESOTA MINING AND MANUFACTURING COMPANY
------------------------------------------
(Registrant)
Date: July 31, 2001
------------------------------
/s/ Robert J. Burgstahler
------------------------------------------
Robert J. Burgstahler, Vice President and
Chief Financial Officer
(Mr. Burgstahler is the Principal Financial
and Accounting Officer and has been duly
authorized to sign on behalf of the
registrant.)