1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------
For Quarter ended September 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
------------------------------
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 September 30, 2001, there were 392,085,285 shares of the
Registrant's common stock outstanding.
This document contains 39 pages.
The exhibit index is set forth on page 36.
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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 Nine months ended
September 30 September 30
------------------ -------------------
2001 2000 2001 2000
------- ------- -------- --------
Net sales $3,967 $4,270 $12,216 $12,588
------- ------- -------- --------
Operating expenses
Cost of sales 2,156 2,295 6,618 6,567
Selling, general and
administrative expenses 930 1,000 3,085 2,954
Research, development and
related expenses 261 275 822 825
Other expense (income) -- (119) -- (169)
------- ------- -------- --------
Total 3,347 3,451 10,525 10,177
------- ------- -------- --------
Operating income 620 819 1,691 2,411
------- ------- -------- --------
Other income and expense
Interest expense 27 29 98 81
Interest and other income (6) (4) (27) (16)
------- ------- -------- --------
Total 21 25 71 65
------- ------- -------- --------
Income before income taxes
and minority interest 599 794 1,620 2,346
Provision for income taxes 195 274 527 821
Minority interest 10 21 44 69
------- ------- -------- --------
Net income $ 394 $ 499 $ 1,049 $ 1,456
======= ======= ======== ========
Weighted average common
shares outstanding - basic 393.5 395.1 395.3 396.1
Earnings per share - basic $ 1.00 $ 1.26 $ 2.65 $ 3.67
======= ======= ======== ========
Weighted average common
shares outstanding - diluted 398.4 399.0 401.0 400.0
Earnings per share - diluted $ .99 $ 1.25 $ 2.62 $ 3.64
======= ======= ======== ========
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) September 30, December 31,
2001 2000
---------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 439 $ 302
Accounts receivable - net 2,851 2,891
Inventories
Finished goods 1,165 1,231
Work in process 660 663
Raw materials and supplies 417 418
-------- --------
Total inventories 2,242 2,312
Other current assets 1,024 874
-------- --------
Total current assets 6,556 6,379
Investments 281 310
Property, plant and equipment 14,532 14,170
Less accumulated depreciation (8,719) (8,347)
-------- --------
Property, plant and equipment - net 5,813 5,823
Other assets 2,555 2,010
-------- --------
Total assets $15,205 $14,522
======== ========
LIABILITIES
Current liabilities
Short-term debt $ 1,588 $ 1,866
Accounts payable 1,189 1,081
Payroll 466 382
Income taxes 620 462
Other current liabilities 1,143 963
-------- --------
Total current liabilities 5,006 4,754
Long-term debt 1,425 971
Other liabilities 2,608 2,266
-------- --------
Total liabilities 9,039 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 11,785 11,517
Treasury stock, at cost; 79,931,243 shares at
Sep. 30, 2001; 75,931,180 shares at Dec. 31, 2000 (4,541) (4,065)
Unearned compensation (283) (303)
Accumulated other comprehensive income (loss) (1,091) (914)
-------- --------
Total stockholders' equity 6,166 6,531
-------- --------
Total liabilities and stockholders' equity $15,205 $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)
Nine months ended
September 30
------------------
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,049 $ 1,456
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 798 737
Asset impairment charges -- 48
Deferred income tax provision 31 9
Implant litigation - net 28 51
Changes in assets and liabilities
Accounts receivable 39 (329)
Inventories 85 (205)
Other current assets (122) (279)
Other assets - net of amortization (82) (127)
Income tax payable 168 296
Accounts payable and other current liabilities 251 234
Other liabilities 25 (12)
Other - net (10) (111)
------------------------------------------------------------------------
Net cash provided by operating activities 2,260 1,768
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (766) (751)
Proceeds from sale of property, plant and equipment 46 82
Acquisitions of businesses (208) (307)
Proceeds from sale of businesses 11 1
Purchase of investments (8) (24)
Proceeds from sale of investments 19 115
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Net cash used in investing activities (906) (884)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt - net (26) 75
Repayment of other short-term and long-term debt (989) (22)
Proceeds from other short-term and long-term debt 1,298 152
Purchases of treasury stock (1,112) (675)
Reissuances of treasury stock 373 202
Dividends paid to stockholders (713) (689)
Distributions to minority interests (57) (70)
------------------------------------------------------------------------
Net cash used in financing activities (1,226) (1,027)
Effect of exchange rate changes on cash 9 79
------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 137 (64)
Cash and cash equivalents at beginning of year 302 387
------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 439 $ 323
========================================================================
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
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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 charges in connection
with 3M's restructuring plan in the second and third quarters of 2001,
costs relating to acquisitions in the first quarter of 2001, costs to phase
out perfluorooctanyl chemistry production and gains related to asset
dispositions in the third quarter of 2000, and the termination of a product
distribution agreement in the first quarter of 2000.
2001 NON-RECURRING ITEMS
During the first half of 2001, the company developed and announced a
restructuring plan to 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. In 2001,
the company recorded a charge of $397 million in the second quarter ($249
million after tax and minority interest) and $69 million in the third
quarter ($43 million after tax and minority interest), principally related
to this plan.
In the third quarter of 2001, the restructuring charges were classified as
a component of cost of sales ($47 million); selling, general and
administrative expenses ($16 million); and research, development and
related expenses ($6 million). Of the total third quarter charge, $39
million related to accelerated depreciation (incremental charges resulting
from shortened depreciable lives, primarily related to downsizing or
consolidating manufacturing operations), $27 million related to employee
severance and benefits, and $3 million related to other exit activities.
In the first nine months of 2001, non-recurring items, principally related
to the restructuring plan, were classified as a component of cost of sales
($188 million); selling, general and administrative expenses ($258
million); and research, development and related expenses ($20 million). Of
this $466 million, $413 million related to employee severance and benefits,
$39 million related to accelerated depreciation, and $14 million related to
other exit activities. In addition, other non-recurring costs included
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acquisition-related charges of $23 million (recorded in cost of sales) in
the first quarter of 2001.
The restructuring includes actions in 17 locations in the United States, 27
in Europe, 8 in the Asia Pacific area, 13 in Latin America, and 4 in
Canada. Substantially 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 both directly and also indirectly through reduced allocations of
corporate staff service costs.
Under the plan, the company terminated approximately 2,600 employees in the
second and third quarters of 2001. Because certain employees can defer
receipt of termination benefits, cash payments can lag job eliminations.
Cash payments totaled approximately $97 million through September 30, 2001.
The company had a remaining current liability of $249 million and a non-
current liability of $78 million at September 30, 2001, principally related
to employee severance and benefits. The current liabilities and a portion
of the non-current liability will be funded through cash provided by
operations. About half of the non-current portion relates to various
employee retirement benefits and will be paid out of the company's pension
and post-retirement health care benefit plans. 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 expects to substantially complete the process of
consolidating or downsizing certain manufacturing operations in the next
9 months, primarily in the United States and Europe. This consolidation
results in accelerated depreciation for those facilities that will cease
operations during this period. 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 incremental costs associated with this
restructuring plan to total about $600 million pre-tax upon completion,
including the $466 million recorded in the second and third quarters of
2001. The remaining charges will include additional employee severance and
benefit costs, additional accelerated depreciation, and other incremental
restructuring-related exit costs.
7
Selected information relating to the charge follows.
Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
-------- ------------ ------- -------
2001 charge
Second quarter $386 $-- $11 $397
Third quarter 27 39 3 69
----- ----- ----- -----
Total charges $413 $39 $14 $466
Non-cash -- (39) (3) (42)
Cash payments (97) -- (97)
----- ----- -----
Total liability as of
September 30, 2001 $316 11 $327
Long-term portion of liability (78) -- (78)
----- ----- -----
Current liability as of
September 30, 2001 $238 $11 $249
===== ===== =====
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
provision for the minority interest that does not have participating
rights.
In 2001, all business combinations completed by the company have used 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 that follows:
8
(Millions) Asset (Liability)
Accounts receivable $63
Inventories 69
Other current assets 19
Property, plant and equipment 104
Purchased intangible assets 499
Other assets 13
Accounts payable and
other current liabilities (135)
Interest bearing debt (15)
Minority interest liability (243)
Other long-term liabilities (39)
-----
Net assets acquired $335
=====
The $499 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.
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
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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
September 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 foreign currency cash flow hedges, the net amount recorded in cost of
sales during the third quarter of 2001 was minimal, and for the nine
months ended September 30, 2001, the net realized gain totaled $29
million, 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 $1 million unrealized gain included in cash flow hedges
within other comprehensive income at September 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 foreign currency cash-
flow hedges were discontinued during the first nine 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 September 30, 2001, for interest rate and
currency swaps.
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. In the third quarter and first nine
months of 2001, interest rate swaps had a realized gain of $10 million
and a realized loss of $47 million, respectively, with underlying debt
instruments largely offsetting these amounts. For these hedges, the net
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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 nine months of 2001. No
interest rate swap hedges were discontinued or became disqualified during
the nine months ended September 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
were recorded in cumulative translation within other comprehensive
income, with any ineffectiveness recorded in cost of sales. In the third
quarter and first nine months of 2001, an unrealized after-tax loss of
$17 million and unrealized after-tax gain of $1 million, respectively,
was recorded in cumulative translation. Hedge ineffectiveness realized
gains totaled $4 million in the first nine 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. In the third quarter and
first nine months of 2001, an unrealized after-tax loss of $4 million and
$12 million, respectively, were recorded within other comprehensive
income, with the majority expected to be reclassified to earnings beyond
12 months. 3M has hedged its exposure to the variability of future cash
flows for certain forecasted transactions through 2005. No commodity cash
flow hedges were discontinued during the nine months ended September 30,
2001.
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.
11
BUSINESS SEGMENTS
3M's net sales and operating income by segment for the third quarter and
first nine months of 2001 and 2000 follow.
----------------------------------------------------------
BUSINESS
SEGMENT Three months ended Nine months ended
INFORMATION September 30 September 30
(Millions) 2001 2000 2001 2000
----------------------------------------------------------
NET SALES
Industrial $ 781 $ 887 $ 2,438 $ 2,678
Transportation,
Graphics and Safety 881 892 2,681 2,678
Health Care 849 776 2,532 2,343
Consumer and Office 682 753 2,049 2,139
Electro and
Communications 514 654 1,702 1,803
Specialty Material 251 299 802 923
Corporate and
Unallocated 9 9 12 24
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Total Company $3,967 $4,270 $12,216 $12,588
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OPERATING INCOME
Industrial $ 126 $ 166 $ 419 $ 504
Transportation,
Graphics and Safety 170 194 545 616
Health Care 192 165 547 516
Consumer and Office 129 132 348 339
Electro and
Communications 44 111 189 305
Specialty Material 33 (43) 119 65
Corporate and
Unallocated (74) 94 (476) 66
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Total Company $ 620 $ 819 $ 1,691 $ 2,411
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The company had numerous non-recurring items that impacted the first nine
months of 2001. Third quarter 2001 non-recurring charges of $69 million
(included in Corporate and Unallocated) principally related to employee
separation costs and accelerated depreciation charges under the company's
previously announced restructuring plan. Second quarter 2001 non-recurring
charges of $397 million (included in Corporate and Unallocated) principally
related to employee separation costs under the restructuring plan. First
quarter 2001 operating income includes non-recurring costs of $23 million
recorded in cost of sales. These first quarter 2001 non-recurring costs
(primarily related to acquisitions of inventory that must be recorded at
fair market value instead of manufactured cost and the subsequent sale of
these acquired inventories) totaled $10 million in Health Care; $7 million
in Transportation, Graphics and Safety; and $6 million in the Electro and
Communications segment.
12
BUSINESS SEGMENTS (continued)
Non-recurring items also impacted the first nine months of 2000. Third
quarter 2000 operating income includes non-recurring costs of $118 million
(included in cost of sales) and non-recurring gains of $119 million. Non-
recurring items in the third quarter of 2000 include $106 million of costs
in the Specialty Material segment relating to the company's phase out of
perfluorooctanyl chemistry production. Of the $106 million in costs, $48
million represents an asset impairment charge (determined by discounting
estimated future cash flows), as certain affected equipment was not
expected to be utilized after the phase out. Remaining non-recurring items
in the third quarter of 2000 were largely gains related to asset
dispositions, principally the sale of available-for-sale equity securities,
and are primarily recorded in Corporate and Unallocated. First quarter
2000 operating income includes a $50 million benefit relating to the
termination of a product distribution agreement in the Health Care segment.
DEBT ISSUANCES
The company issued the following long-term debt under its $1.5 billion
shelf registration filed with the Securities and Exchange Commission in
October 2000. In September 2001, the company issued a three-year, $200
million, fixed rate note. The coupon was swapped to a rate based on a
floating LIBOR index (2.93 percent at September 30, 2001). 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 (3.51 percent at
September 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.
In February 2001, the company issued a 40-year, $56 million, floating rate
note with a coupon rate based on a floating LIBOR index (2.43 percent at
September 30, 2001).
These increases in long-term debt were partially offset by decreases in
short-term debt, resulting in total debt increasing by only $176 million
from year-end 2000.
EARNINGS PER SHARE
The difference in the weighted average common shares outstanding for
calculating basic and diluted earnings per share amounts is attributable to
the assumed exercise of the Management Stock Ownership Program (MSOP) stock
options for the three-month and nine-month periods ended September 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 (6.7 million and 14.8 million average options for the three
months ended September 30, 2001 and 2000, respectively; 3.3 million and
15.1 million average options for the nine months ended September 30, 2001
and 2000, respectively).
13
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) INFORMATION
The components of the ending balances of accumulated other comprehensive
income (loss) are shown as follows.
----------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Sep. 30, Dec. 31,
(Millions) 2001 2000
----------------------------------------------------------------------
Cumulative translation - net $(1,033) $(885)
Minimum pension liability adjustments (58) (58)
Debt and equity securities, unrealized gain - net 11 29
Cash flow hedging instruments, unrealized loss - net (11) --
----------------------------------------------------------------------
Accumulated other comprehensive income (loss) $(1,091) $(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 in net income for cash flow hedging instruments that settled in
the third quarter and first nine months of 2001 totaled a $7 million
after tax loss and a $11 million after tax gain, respectively, with the
impact largely offset by underlying hedged items. Reclassification
adjustments in the third quarter and first nine months of 2000 for
realized gains included in income totaled $85 million ($52 million after
tax). These gains related to the sale of available-for-sale marketable
equity securities. Other reclassification adjustments were not material.
-------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME Three months ended
September 30
(Millions) 2001 2000
-------------------------------------------------------------------
Net income $ 394 $ 499
Other comprehensive income (loss)
Cumulative translation - net 100 (157)
Debt and equity securities,
unrealized loss - net of $2 million
tax benefit and $18 million tax benefit (5) (30)
Cash flow hedging instruments, unrealized
loss - net of $10 million tax benefit (17) --
-------------------------------------------------------------------
Total comprehensive income $ 472 $ 312
===================================================================
14
-------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME Nine months ended
September 30
(Millions) 2001 2000
-------------------------------------------------------------------
Net income $1,049 $1,456
Other comprehensive income (loss)
Cumulative translation - net (148) (216)
Debt and equity securities,
unrealized gain (loss) - net of $11 million
tax benefit and $7 million tax provision (18) 12
Cash flow hedging instruments, unrealized
loss - net of $7 million tax benefit (11) --
-------------------------------------------------------------------
Total comprehensive income $ 872 $1,252
===================================================================
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations", which must be adopted no later than January 1,
2003. This statement establishes accounting standards for recognition
and measurement of a liability for an asset retirement obligation and the
associated asset retirement cost. The company is reviewing the
requirements of this standard. Although the company expects that this
standard will not materially affect its financial position or results of
operations, it has not yet finalized its determination of the impact of
this standard on its consolidated financial statements.
In June 2001, the Financial Accounting Standards Board also issued 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.
3M adopted SFAS No. 141 effective July 1, 2001, and SFAS No. 142 will be
adopted effective January 1, 2002. Goodwill and intangible assets
acquired after June 30, 2001, are 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
15
reported 3M financial information. The principal effect of SFAS No. 142
will be the elimination of goodwill amortization. The company is
currently reviewing the requirements of this new standard, but estimates
that goodwill amortization will be in the range of 10 to 12 cents per
diluted share for the year 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.
16
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 September 30, 2001,
and the related consolidated statements of income for each of the three-
month and nine-month periods ended September 30, 2001 and 2000, and of cash
flows for the nine-month periods ended September 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
October 26, 2001
17
Minnesota Mining and Manufacturing Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Third Quarter
--------------
The company faced a number of challenges during the third quarter that
impacted sales and earnings. The most significant were lower growth in the
Asia Pacific area and the continuation of weak economic growth in the
United States.
The terrorist attacks of September 11, 2001, intensified these challenges,
as growth in several businesses slowed after these events. No material
problems were experienced at any of the company's facilities or operations.
Worldwide sales for the third quarter totaled $3.967 billion, down 7.1
percent from the same quarter last year. Volume decreased 4.8 percent from
the third quarter last year on a reported basis and was down about 6.5
percent excluding acquisitions. Selling prices were up four-tenths of a
percent. The stronger U.S dollar reduced worldwide sales by 2.7 percent.
In the United States, sales totaled $1.919 billion, with sales down 6.7
percent on a reported basis and down about 8.5 percent excluding
acquisitions.
Internationally, sales totaled $2.048 billion, down 7.5 percent in dollars
Volume decreased 2.3 percent on a reported basis and about 4 percent
excluding acquisitions, impacted by significant slowing in most major
economies. In the Asia Pacific area, volume decreased 3.4 percent, with
volume down 4.7 percent in Japan and 2.6 percent in the rest of Asia. In
Europe, volume decreased 2 percent on a reported basis and was down about 5
percent excluding acquisitions. In Latin America, volume increased eight-
tenths of a percent. Volume in Canada decreased 3.1 percent. Currency
reduced international sales by 5.2 percent, driven by negative translation
of 8.5 percent in the Asia Pacific area and 11.1 percent in Latin America.
Translation impacts in Europe were minimal.
The third quarter of 2001 includes additional restructuring charges of $69
million, principally related to accelerated depreciation charges and
employee separation costs under the company's previously announced
restructuring plan. These charges have been classified as a component of
cost of sales ($47 million); selling, general and administrative expenses
($16 million); and research, development and related expenses ($6 million).
Of the total third quarter charge, $39 million related to accelerated
depreciation (incremental charges resulting from shortened depreciable
lives, primarily related to downsizing or consolidating manufacturing
operations), $27 million related to employee severance and benefits and $3
million related to other exit activities. Additional information concerning
the 2001 non-recurring items is provided in the Notes to Consolidated
Financial Statements and elsewhere herein.
18
The third quarter of 2000 includes non-recurring costs of $118 million
(recorded in cost of sales) primarily related to the company's decision to
phase out its perfluorooctanyl chemistry. These costs included asset
impairment charges, accelerated depreciation, and other incremental costs
directly related to this phase out. Other operating income in the third
quarter of 2000 includes non-recurring gains of $119 million related to
asset dispositions, principally the sale of available-for-sale equity
securities.
Supplemental Unaudited Consolidated Statement of Income Information
(Dollars in millions, except per-share amounts)
Three months ended Three months ended
September 30, 2001 September 30, 2000
---------------------------- ----------------------------
Excluding Excluding
non- Non- non- Non-
recurring recurring Reported recurring recurring Reported
items items total items items total
--------- ------- -------- --------- -------- -------
Net sales $3,967 $ -- $3,967 $4,270 $ -- $4,270
Cost of sales 2,109 47 2,156 2,177 118 2,295
Selling, general and
administrative
expenses 914 16 930 1,000 -- 1,000
Research, develop-
ment and related
expenses 255 6 261 275 -- 275
Other expense (income) -- -- -- -- (119) (119)
Operating
income (loss) $ 689 $ (69) $ 620 $ 818 1 $ 819
Other (income)
and expense, net 21 -- 21 25 -- 25
Income (loss) before
income taxes and
minority interest $ 668 $ (69) $ 599 $ 793 1 $ 794
Provision (benefit)
for income taxes 220 (25) 195 273 1 274
Effective tax rate 32.9% 35.9% 32.5% 34.4% 34.5%
Minority interest 11 (1) 10 21 -- 21
Net income (loss) $ 437 $ (43) $ 394 $ 499 -- $ 499
Per share-diluted $1.10 $(.11) $ .99 $1.25 -- $ 1.25
The following discussion excludes the impact of non-recurring items in all
periods.
Cost of sales was 53.2 percent of sales, up 2.2 percentage points from the
same quarter last year. Gross margins were negatively impacted by slowing
worldwide market demand and negative currency impacts, partially offset by
good indirect cost control in our factories and slightly lower raw material
costs. Cost of sales includes manufacturing, engineering, and freight
costs.
19
Selling, general and administrative (SG&A) expenses were 23.0 percent of
sales, down four-tenths of a percentage point from the third quarter of
2000, benefiting from aggressive indirect cost control. SG&A expenses were
$86 million lower than in the third quarter of 2000, a reduction of almost
9 percent, and $40 million lower versus last quarter, a reduction of about
4 percent.
Operating income was 17.4 percent of sales, compared with 19.2 percent in
the third quarter last year. Worldwide operating income was impacted by
continued difficult worldwide economic conditions and by the strong U.S.
dollar, partially offset by aggressive control of expenses. The company
faced accelerating economic weakness internationally, while the U.S.
economy remained soft. Operating income margins by area in the third
quarter of 2001 were 15.3 percent in the United States; 13.8 percent in
Europe; 25.4 percent in Asia Pacific; and 23.8 percent on a combined basis
in Latin America, Africa and Canada.
Third-quarter interest expense of $27 million was $2 million lower than in
the same quarter last year. Higher average debt levels were more than
offset by lower interest rates. Investment and other income was $6 million,
compared with $4 million in the same quarter last year, reflecting higher
interest income due to larger cash balances.
The worldwide effective income tax rate for the quarter was 32.9 percent,
down from 34.4 percent in the third quarter last year and 34.5 percent for
total year 2000. 3M's tax rate benefited from lower overall international
tax rates and the impact of recurring tax credits on lower than expected
profit levels.
Minority interest in the quarter was $11 million, compared with $21
million in the third 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 third quarter of 2001 totaled $437 million, or $1.10
per diluted share, compared with $499 million, or $1.25 per diluted
share, in the third quarter of 2000. The company estimates that changes
in the value of the U.S. dollar decreased earnings for the quarter by about
6 cents per share compared with the third 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 Nine Months
-----------------
Worldwide sales for the first nine months totaled $12.216 billion, down 3
percent from the same period last year. Volume increased six-tenths of a
percent from the same period last year on a reported basis and was down
about 2.3 percent excluding acquisitions. Selling prices were up two-tenths
of a percent, versus a decline of about 1.5 percent for total year 2000.
Currency, driven by a stronger U.S dollar, reduced worldwide sales by 3.8
percent.
20
In the United States, sales totaled $5.733 billion, with sales down 3.6
percent on a reported basis and down 5.8 percent excluding acquisitions,
impacted by the effects of the weak economy.
Internationally, sales totaled $6.483 billion, down 2.4 percent versus the
same period last year. Volume increased 5 percent on a reported basis and
increased about 1.5 percent excluding acquisitions. In the Asia Pacific
area, volume increased 4.8 percent, with volume up 4.1 percent in Japan and
5.8 percent in the rest of Asia. In Europe, volume increased 5.6 percent
on a reported basis and declined about one-half of a percent excluding
acquisitions. In Latin America, volume increased 3.9 percent. Volume
increased 3.5 percent in Canada. Currency reduced international sales by
7.2 percent, driven by negative translation of 10.1 percent in the Asia
Pacific area, 4.4 percent in Europe and 8.7 percent in Latin America.
The first nine months of 2001 includes non-recurring costs of $489 million
principally related to the company's previously announced restructuring
plan (primarily employee separation costs and accelerated depreciation
charges), and acquisition-related costs (primarily related to acquisitions
of inventory that must be recorded at fair market value instead of
manufactured cost and the subsequent sale of these acquired inventories).
These non-recurring costs are included in cost of sales ($211 million);
selling, general and administrative expenses ($258 million); and in
research, development and related expenses ($20 million).
The first nine months of 2000 includes non-recurring costs of $118 million
(recorded in cost of sales) primarily related to the company's decision to
phase out its perfluorooctanyl chemistry. These costs included asset
impairment charges, accelerated depreciation, and other incremental costs
directly related to this phase out. Other operating income in the first
nine months of 2000 includes non-recurring gains of $169 million. These
gains include $119 million relating to asset dispositions, principally the
sale of available-for-sale equity securities, and also reflect a pre-tax
benefit of $50 million associated with the termination of a product
marketing and distribution agreement in the health care segment.
21
Supplemental Unaudited Consolidated Statement of Income Information
(Dollars in millions, except per-share amounts)
Nine months ended Nine months ended
September 30, 2001 September 30, 2000
---------------------------- ----------------------------
Excluding Excluding
non- Non- non- Non-
recurring recurring Reported recurring recurring Reported
items items total items items total
--------- ------- -------- -------- -------- --------
Net sales $12,216 $ -- $12,216 $12,588 $ -- $12,588
Cost of sales 6,407 211 6,618 6,449 118 6,567
Selling, general and
administrative
expenses 2,827 258 3,085 2,954 -- 2,954
Research, develop-
ment and related
expenses 802 20 822 825 -- 825
Other expense (income) -- -- -- -- (169) (169)
Operating
income (loss) $ 2,180 $(489) $ 1,691 $ 2,360 $ 51 $ 2,411
Other (income)
and expense, net 71 -- 71 65 -- 65
Income (loss) before
income taxes and
minority interest $ 2,109 $(489) $ 1,620 $ 2,295 $ 51 $ 2,346
Provision (benefit)
for income taxes 702 (175) 527 801 20 821
Effective tax rate 33.3% 35.7% 32.5% 34.9% 39.7% 35.0%
Minority interest 52 (8) 44 69 -- 69
Net income (loss) $ 1,355 $(306) $ 1,049 $ 1,425 $ 31 $ 1,456
Per share-diluted $ 3.38 $(.76) $ 2.62 $ 3.56 $ .08 $ 3.64
The following discussion excludes the impact of non-recurring items.
Cost of sales was 52.5 percent of sales, up 1.3 percentage points 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, partially
offset by good indirect cost control in our factories. Cost of sales
includes manufacturing, engineering, and freight costs.
Selling, general and administrative (SG&A) expenses were 23.1 percent of
sales, down four-tenths of a percentage point from the same period last
year, benefiting from aggressive cost-control actions. SG&A expenses
decreased by $127 million compared with the same period last year. SG&A
also includes amortization of intangibles, which has been increasing due to
recent 3M acquisitions.
Goodwill amortization, after tax, is expected to total about 10 to 12 cents
per diluted share for the year 2001. The Financial Accounting Standards
Board (FASB) recently issued Statement No. 142, "Goodwill and Other
Intangible Assets," which will be adopted by the company effective
22
January 1, 2002. Goodwill and intangible assets acquired after June 30,
2001, are 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 17.8 percent of sales, compared with 18.7 percent in
the same period last year. Worldwide operating income benefited from the
company's aggressive actions to reduce expenses, but was negatively
affected by soft U.S. market demand, slowing international economic growth,
slightly higher energy and raw material costs, and negative currency
impacts.
The first nine months interest expense of $98 million was $17 million
higher than in the same period last year, reflecting higher average debt
levels. Investment and other income was $27 million, compared with $16
million in the first nine months last year, reflecting higher interest
income due to larger cash balances.
The worldwide effective income tax rate for the first nine months was 33.3
percent, down from 34.9 percent in the first nine months last year and 34.5
percent for total year 2000. 3M's tax rate benefited from lower overall
international tax rates and the impact of recurring tax credits on lower
than expected profit levels.
Minority interest was $52 million, compared with $69 million in the first
nine 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 nine months of 2001 totaled $1.355 billion, or
$3.38 per diluted share, compared with $1.425 billion, or $3.56 per
diluted share, in the first nine months of 2000. The company estimates
that changes in the value of the U.S. dollar decreased earnings for the
first nine months of 2001 by about 20 cents per share compared with the
first nine 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 third quarter and first nine 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 and third
quarters of 2001. In addition, U.S. dollar strength continued to
negatively impact results.
In the Industrial Markets segment, volume declined 10.5 percent in the
third quarter and 6.5 percent for the first nine months of 2001, reflecting
ongoing weakness in most manufacturing sectors of the economy. End-markets
23
such as electronics, transportation and furniture weakened further in the
third quarter of 2001. Operating income margins declined, reflecting the
impact of lower volumes.
In the Transportation, Graphics and Safety segment, including acquisitions,
volume grew 5 percent in the third quarter of 2001 and 7 percent for the
first nine months of 2001. In the third quarter and first nine months of
2001, occupational health and environmental business led growth, boosted by
a significant increase in sales of protective respirators in the third
quarter. Safety and security systems and traffic control materials also
showed volume increases in the third quarter and first nine months.
Acquisitions in the optical films area added about 3 percentage points of
growth in the third quarter and about 4 percentage points of growth for the
first nine months. Operating income margins were down due to soft overall
sales and due to lower margins in recently acquired businesses.
In the Health Care segment, including acquisitions, volume grew about 10
percent in the third quarter and first nine months of 2001. In the third
quarter and first nine months of 2001, growth was led by pharmaceuticals,
dental and orthodontic products, and medical products. 3M's dental joint
venture with ESPE, which closed in the first quarter of 2001, added about 5
percentage points of growth in both the third quarter and first nine months
of 2001. 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 19.5
percent for the first nine months of 2001 compared with the same period
last year.
In September, the pharmaceutical division signed an agreement with Eli
Lilly and Company to collaborate on resiquimod, a potential breakthrough
treatment for genital herpes. Resiquimod is currently in Phase 3 clinical
trials, and moving toward an anticipated 2004 submission date to the FDA.
3M expects to receive $100 million in the fourth quarter of 2001 from Eli
Lilly in consideration for research and development effort. The majority
of the $100 million is expected to be recognized as revenue in 2002 through
2004, as the majority of the future research and development is expected to
be performed during this period.
In the Consumer and Office segment, volume decreased about 9 percent in the
third quarter and decreased about 2.5 percent for the first nine months of
2001. In the third quarter and first nine months of 2001, this segment saw
excellent growth in the home improvement area, but overall segment growth
was held back by softness in most other areas. Operating income margins
were up about 1 percentage point for the first nine months of 2001.
In the Electro and Communications segment, including acquisitions, volume
declined about 17.5 percent in the third quarter of 2001 and was flat for
the first nine months of 2001. This market experienced continued slowing in
electronics manufacturing, semiconductor manufacturing and electronic
products. The Telecom Access Products division, which sells a variety of
products that boost performance of existing copper lines, saw good growth
in the first six months of 2001, but sales declined in the third quarter.
Operating margins of the segment were negatively impacted by slowing sales,
acquisition impacts and a less favorable product mix.
24
In the Specialty Material Markets segment, volume declined about 17 percent
in the third quarter and about 12 percent in the first nine months of 2001,
impacted by the product line phase out of perfluorooctanyl chemistry
production announced in May 2000. Excluding the impact of this phase out,
it is estimated that volumes declined about 4 percent in the third quarter
of 2001.
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong. Working
capital (defined as current assets minus current liabilities) totaled
$1.550 billion at September 30, 2001, down $75 million from year-end 2000.
The accounts receivable average days' sales outstanding was 59 days, down
from 60 days at year-end. The company's inventory index was 3.3 months,
down from 3.4 months at year-end. 3M's current ratio was 1.3, the same as
year-end.
Total debt increased $176 million from year-end 2000. As of September 30,
2001, total debt was 33 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 September 30, 2001, the
company had available short-term lines of credit totaling about $734
million.
Net cash provided by operating activities totaled $2.260 billion in the
first nine months of the year, up $492 million from the same period last
year. Lower net income was more than offset by reduced investments in
working capital. The current portion of the restructuring liability will
be funded through cash provided by operations. It is estimated that
restructuring related cash outflows could total $100 million per quarter
over the next several quarters. As discussed in the "Performance by
Business Segment" section of this 10-Q, 3M expects to receive $100 million
from Eli Lilly and Company in the fourth quarter of 2001 relating to a
pharmaceutical agreement.
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 $906 million in the first nine
months of the year, compared with $884 million in the same period last
year. Capital expenditures for the first nine months of 2001 were $766
million, an increase of $15 million from the same period last year. Cash
used for acquisitions of businesses totaled $208 million in the first nine
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 nine months of
2000, 3M acquired a majority of Quante AG and several smaller businesses
25
for a total purchase price of $307 million in cash plus 128,994 shares of
3M common stock. In the third quarter of 2000, the company sold an
available-for-sale equity security with net cash proceeds of $93 million.
Financing activities in the first nine months of 2001 for both short-term
and long-term debt included net cash inflows of $283 million, compared with
net cash inflows of $205 million in the same period last year. The
decrease in net short-term debt of $26 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 $989 million includes $552 million
of commercial paper having original maturities greater than 3 months.
Proceeds from other short-term and long-term debt of $1.298 billion include
$788 million of commercial paper having original maturities greater than 3
months.
Treasury stock repurchases for the first nine months of 2001 were $1.112
billion, compared with $675 million in the same period last year. The
company repurchased about 10.1 million shares of common stock in the first
nine months of 2001, compared with about 7.6 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. In September 2001, the Board of Directors authorized the
repurchase of an additional 3 million shares in 2001, increasing the total
authorization for the year to 13 million shares. As of September 30, 2001,
2.9 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 $713 million in the first nine
months of this year, compared with $689 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.
Relating principally to these actions, the company recorded a pre-tax
charge of $397 million in the second quarter of 2001, and $69 million in
the third quarter of 2001. This charge is discussed in the Notes to
Consolidated Financial Statements.
The company expects to terminate approximately 5,000 employees by June 30,
2002, in connection with its restructuring plan. 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 directly and also indirectly through reduced allocations
of corporate staff service costs. The impact of the total restructuring,
including the allocated portion of restructured staff services, is
estimated by segment as follows: Industrial, 35 percent; Electro and
Communications, 20 percent; Transportation, Graphics and Safety, 20
percent; Health Care, 10 percent; Consumer and Office, 10 percent; and
26
Specialty Material, 5 percent. These estimates are provided only as a
frame of reference as to the order of magnitude by segment.
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 pre-tax charges
to about $600 million (including the $466 million charge taken in the
second and third quarters of 2001). 3M expects to save approximately $300
million from this restructuring plan on an annualized basis, about $75
million of which will impact second half 2001 results, with the benefit
weighted more heavily towards the fourth 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. Numerous factors may create offsets to these savings, such as the
potential for continued weakness in sales volumes, normal increases in
compensation and benefits, and other inflationary pressures. The company
has not discontinued any major product lines as a result of this
restructuring.
Selected information relating to the restructuring charges follows.
Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
-------- ------------ ------ ------
2001 charge
Second quarter $386 $-- $11 $397
Third quarter 27 39 3 69
---- ---- ---- ----
Total charges $413 $39 $14 $466
Non-cash -- (39) (3) (42)
Cash payments (97) -- (97)
----- ----- -----
Total liability as of
September 30, 2001 $316 11 $327
Long-term portion of liability (78) -- (78)
----- ----- -----
Current liability as of
September 30, 2001 $238 $11 $249
===== ===== =====
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 fourth quarter of 2001. At
this juncture, the company expects that earnings for the fourth quarter
27
of 2001 will be in the range of $.95 to $1.05 per share, excluding non-
recurring items. The high end of this range assumes volume declines of
around 3 percent, while the low end assumes reductions closer to 7
percent. In either scenario, 3M expects to carry forward the positive
cost control momentum that it has built in the first nine months of 2001.
Both scenarios assume that exchange rates will remain at September 30,
2001 levels. The company earned $1.12 per share in the fourth quarter of
2000, excluding non-recurring items.
The company estimates, based on currency rates as of September 30, 2001,
that currency would reduce earnings for the fourth quarter of 2001 by 3
to 4 cents per share.
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.
Raw material costs were down an estimated one-half percent in the third
quarter of 2001, and 3M expects continuing improvement into the fourth
quarter of 2001 and into 2002 due both to falling prices for many key
feedstocks and to 3M's continued global sourcing and cost-reduction
efforts. For the fourth quarter of 2001, raw material costs are expected
to be down 3 to 4 percent. The company expects a tax rate in the 33
percent range for the fourth quarter of 2001. Capital expenditures are
expected to total $1 billion or less for total year 2001.
3M's longer-term prospects remain bright. The company is on track in
implementing several initiatives (Six Sigma, Global Sourcing
Effectiveness, 3M Acceleration, Indirect Costs Reduction, 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.
28
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,
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.
29
* 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.
30
Minnesota Mining and Manufacturing Company and Subsidiaries
PART II. Other Information
Item 1. Legal Proceedings
General
---------
The company and some 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
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 believes that the ultimate outcome of all of these
proceedings and claims, individually and in the aggregate, will not have
a material adverse effect on its consolidated financial position, results
of operations, or cash flows, there can be no 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 believes that a material adverse impact on its
consolidated financial position, results of operations, or cash flows
from any such future charges is unlikely, given the inherent uncertainty
of litigation, a remote possibility exists 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, results of
operations and cash flows 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.
31
As of September 30, 2001, the company is named as a defendant, often with
multiple co-defendants, in 373 lawsuits and 12 claims in various courts,
all seeking damages for personal injuries from allegedly defective breast
implants. These lawsuits and claims purport to represent 1,078 individual
claimants.
3M has confirmed that approximately 23 of the 1,078 claimants have opted
out of the revised class action settlement program approved by the United
States District Court for the Northern District of Alabama (the "Revised
Settlement Program") 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 does not consider its remaining probable liability for these
confirmed cases to be material.
The company believes that most of the remaining 1,078 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.
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'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, thus concluding this matter in the trial court.
The company and several insurers appealed the judgment to the Minnesota
Court of Appeals. The company has also initiated an arbitration
32
proceeding in London, England to recover insurance coverage for breast
implant liability and costs from claims made insurance carriers. The
company expects this proceeding to take 12-18 months.
As of September 30, 2001, the company had receivables for insurance
recoveries related to the breast implant matter of $461 million,
representing settled but yet to be received amounts ($160 million) as
well as amounts contested by the insurance carriers ($301 million).
During the third quarter of 2001, the company received payments of $23.8
million 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
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 believes that the ultimate outcome of these proceedings
and claims, individually and in the aggregate, will not have a material
adverse effect on its consolidated financial position, results of
operations, or cash flows, there can be no certainty that the company may
not ultimately incur charges for breast implant claims in excess of
presently recorded liabilities.
While the company believes that a material adverse impact on its
consolidated financial position, results of operations, or cash flows
from any such future charges is unlikely, given the inherent uncertainty
of litigation, a remote possibility exists that future adverse rulings or
developments 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, results of
operations and cash flows for breast implant litigation could change in
the future.
Respirator/Mask/Asbestos Litigation
-----------------------------------
During October 2001, the company defended a case in the Circuit Court of
Holmes County, Mississippi, against plaintiffs claiming that a 3M
respirator and mask did not protect them against contracting claimed
asbestos-related diseases allegedly caused by exposure to products
containing asbestos manufactured by other defendants. The case against
the company initially involved six plaintiffs whose claims were
consolidated for trial. The court dismissed one plaintiff's case just
before trial, and a second plaintiff abandoned his case before it was
submitted to the jury. On October 26, the jury returned a verdict against
all defendants in favor of the plaintiffs, four of whom had claims
against the company. The jury awarded the plaintiffs $25,000,000 each in
compensatory damages. Based on the jury's findings of percentage of fault
attributable to each defendant, the company's share of the total verdict
is $22,500,000. The company can provide no assurance at this time about
the ability of any co-defendant to pay its share of any ultimate judgment
33
or whether a co-defendant's inability to pay will cause reallocating
liability for damages among the remaining solvent defendants under state
law. Judgment has not yet been entered. The company will vigorously
challenge the verdict in post-trial motions, is planning to appeal if
necessary, and believes that the verdict ultimately will be overturned. A
substantial portion of the verdict is covered by the company's product
liability insurance.
For more than twenty years, the company has successfully defended and
resolved approximately 200,000 claims and lawsuits similar to the ones
brought in Holmes County. The company's vigorous defense of these claims
and lawsuits has resulted in jury verdicts for the company in the only
other two cases that have been tried by the company; frequent dismissals
of lawsuits without any payment by the company; and average settlement
values of less than $1,000 for the claims and lawsuits that the company
has resolved. The two cases mentioned above involved allegations
indistinguishable from those tried in the Holmes County case. In many of
these lawsuits and claims the company is a named defendant, with multiple
co-defendants, in circumstances where no product the company manufactured
is involved or the products identified by the plaintiffs are ultimately
determined not to have been manufactured by the company. As noted above,
many of these lawsuits and claims have been dismissed without payment. As
of September 30, 2001, the company is a named defendant, with multiple
co-defendants, in approximately 20,000 lawsuits and claims in various
courts. These lawsuits and claims purport to represent approximately
85,000 individual claimants. Many of these current claimants have not
identified specific products manufactured by the company.
Based on the company's experience, the vast majority of these lawsuits
and claims involve use of the company's masks and respirators and seek
damages from the company and other defendants for alleged personal injury
from occupational exposure to asbestos or, less frequently, silica in
products manufactured by other defendants. The rest of these cases allege
personal injury from occupational exposure to asbestos from generally
unspecified products claimed to have been manufactured by the company or
other defendants and from certain specified specialty products containing
asbestos manufactured by the company and other defendants many years ago.
Based on the company's experience in defending and resolving these
lawsuits and claims to date and the substantial product liability
insurance provided by the company's insurers, the company believes these
lawsuits and claims will not have a material adverse effect on its
consolidated financial position, results of operations, or cash flows.
As of September 30, 2001, the company had estimated accrued liabilities
of approximately $122 million for these claims and receivables for
expected insurance recoveries of approximately $184 million. The
difference between the accrued liability and insurance receivable
principally represents the time delay between payment of claims and
receipt of insurance reimbursement.
While the company believes that the ultimate outcome of these proceedings
and claims, individually and in the aggregate, will not have a material
adverse effect on its consolidated financial position, results of
operations, or cash flows, there can be no certainty that the company may
34
not ultimately incur charges for this litigation in excess of presently
recorded liabilities.
While the company believes that a material adverse impact on its
consolidated financial position, results of operations, or cash flows
from any such future charges is unlikely, given the inherent uncertainty
of litigation, a remote possibility exists that future adverse rulings or
developments 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, results of
operations and cash flows for this litigation could change in the future.
Environmental Matters
----------------------
The company's operations are subject to environmental laws and
regulations enforceable by foreign, federal, state, and 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 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
35
regulations, the extent of environmental contamination and the existence
of alternate cleanup methods. 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 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 certainty
that the company may not ultimately incur charges for capital
expenditures, litigation and other costs in excess of presently recorded
liabilities.
While the company believes that a material adverse impact on its
consolidated financial position, results of operations, or cash flows
from any such future charges is unlikely, given the inherent uncertainty
of environmental matters or were an unfavorable development to occur
(discussed above), a remote possibility exists that future adverse
rulings or developments 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,
results of operations and cash flows for the above environmental matters
could change in the future.
36
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 38.
(15) A letter from the company's independent auditors
regarding unaudited interim consolidated
financial statements. Page 39.
Reports on Form 8-K:
3M filed one Form 8-K for the quarter ended September 30, 2001.
The Form 8-K dated September 17, 2001, provided the opinion and consent of
general counsel in connection with the offering of certain debt securities
due in the year 2004.
None of the other item requirements of Part II of Form 10-Q are applicable
to the company for the quarter ended September 30, 2001.
37
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: November 13, 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.)