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 March 31, 2002
Commission file number: 1-3285
3M 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 March 31, 2002, there were 389,347,924 shares of the Registrant's
common stock outstanding.
This document contains 36 pages.
The exhibit index is set forth on page 33.
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3M Company and Subsidiaries
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF INCOME
(Amounts in millions, except per-share amounts)
(Unaudited)
Three months ended
March 31
------------------
2002 2001
------- -------
Net sales $3,890 $4,164
------- -------
Operating expenses
Cost of sales 2,036 2,196
Selling, general and
administrative expenses 877 953
Research, development and
related expenses 264 278
------- -------
Total 3,177 3,427
------- -------
Operating income 713 737
------- -------
Interest expense and income
Interest expense 19 38
Interest income (9) (12)
------- -------
Total 10 26
------- -------
Income before income taxes
and minority interest 703 711
Provision for income taxes 227 238
Minority interest 24 20
------- -------
Net income $ 452 $ 453
======= =======
Weighted average common
shares outstanding - basic 389.9 396.3
Earnings per share - basic $ 1.16 $ 1.14
======= =======
Weighted average common
shares outstanding - diluted 395.2 402.4
Earnings per share - diluted $ 1.14 $ 1.13
======= =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
3
3M Company and Subsidiaries - CONSOLIDATED BALANCE SHEET
(Dollars in millions, except per-share amounts) (Unaudited) Dec. 31,
Mar. 31, 2002 2001
---------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 590 $ 616
Accounts receivable - net 2,610 2,482
Inventories
Finished goods 1,046 1,103
Work in process 590 611
Raw materials and supplies 364 377
-------- --------
Total inventories 2,000 2,091
Other current assets 1,073 1,107
-------- --------
Total current assets 6,273 6,296
Investments 262 275
Property, plant and equipment 14,324 14,365
Less accumulated depreciation (8,836) (8,750)
-------- --------
Property, plant and equipment - net 5,488 5,615
Goodwill 1,012 1,012
Intangible assets 229 238
Other assets 1,167 1,170
-------- --------
Total assets $14,431 $14,606
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LIABILITIES
Current liabilities
Short-term debt $ 984 $ 1,373
Accounts payable 781 753
Payroll 531 539
Income taxes 595 596
Other current liabilities 1,121 1,248
-------- --------
Total current liabilities 4,012 4,509
Long-term debt 1,891 1,520
Other liabilities 2,526 2,491
-------- --------
Total liabilities 8,429 8,520
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 472,016,528 shares issued 5 5
Capital in excess of par value 291 291
Retained earnings 12,078 11,914
Treasury stock, at cost; 82,668,604 shares at
Mar. 31, 2002; 80,712,892 shares at Dec. 31, 2001 (4,856) (4,633)
Unearned compensation (292) (286)
Accumulated other comprehensive income (loss) (1,224) (1,205)
-------- --------
Total stockholders' equity 6,002 6,086
-------- --------
Total liabilities and stockholders' equity $14,431 $14,606
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
4
3M Company and Subsidiaries - CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three months ended
(Dollars in millions) March 31
------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 452 $ 453
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 250 247
Deferred income tax provision 10 21
Changes in assets and liabilities
Accounts receivable (140) (77)
Inventories 82 (21)
Other current assets 24 (35)
Other assets - net of amortization (2) 47
Income taxes payable 1 139
Accounts payable and other current liabilities (87) (43)
Other liabilities 51 (23)
Other - net 30 7
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Net cash provided by operating activities 671 715
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (161) (281)
Proceeds from sale of property, plant and equipment 16 9
Acquisitions of businesses -- (191)
Proceeds from sale of businesses -- 8
Purchase of investments (3) (3)
Proceeds from sale of investments 5 18
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Net cash used in investing activities (143) (440)
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CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt - net (255) 415
Repayment of debt (maturities greater than 90 days) (259) (179)
Proceeds from debt (maturities greater than 90 days) 525 208
Purchases of treasury stock (420) (342)
Reissuances of treasury stock 124 123
Dividends paid to stockholders (242) (239)
Distributions to minority interests (40) --
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Net cash used in financing activities (567) (14)
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Effect of exchange rate changes on cash 13 12
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Net increase (decrease) in cash and cash equivalents (26) 273
Cash and cash equivalents at beginning of year 616 302
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Cash and cash equivalents at end of period $ 590 $ 575
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The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
5
3M 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 the company's consolidated financial position, results of
operations and cash flows for the periods presented. These adjustments
consist of normal, recurring items. 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 2001 Annual Report on Form
10-K.
Accounting Pronouncements
Effective January 1, 2002, the company adopted Emerging Issues Task Force
Issue No. 00-25 (EITF 00-25), "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products". This
statement addressed 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 did not have any effect on the company's net income
or its financial position. This adoption resulted in a reclassification
of approximately $25 million of advertising expenses from selling, general
and administrative expenses to net sales for each of the years 1999
through 2001, and approximately $6 million for the first quarter ended
March 31, 2001. These adjustments were recorded in the company's Consumer
and Office segment.
Effective January 1, 2002, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". This standard primarily addresses the accounting for acquired
goodwill and intangible assets (i.e., the post-acquisition accounting).
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 (a preliminary assessment of any potential
impairment indicated that no impairment existed at January 1, 2002); and
3) the amortization period of intangible assets with finite lives will no
longer be limited to forty years.
Effective January 1, 2002, the company also adopted SFAS No. 144. This
standard broadens the presentation of discontinued operations to include
more disposal transactions, thus the recognition of discontinued
operations is expected to become more common under this standard. This
statement retains the requirements of SFAS No. 121 (Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of) to recognize impairments on Property, Plant and Equipment, but
removes goodwill from its scope. The adoption of SFAS No. 144 did not
have a material impact on the company's consolidated financial
statements.
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Significant Accounting Policies
The accounting policies for "Property, plant and equipment", "Other
assets" and "Impairment of long-lived assets" in the Annual Report on
Form 10-K for the year ended December 31, 2001, have been superseded by
the new policies that follow. These policies were impacted by the
January 1, 2002, adoption of SFAS No. 142 and SFAS No. 144 (discussed
previously). The "Property, plant and equipment" policy did not change
significantly, but has been updated to include impairment policy
information that was previously disclosed under the separate "Impairment
of long-lived assets" policy.
Property, plant and equipment: Property, plant and equipment are recorded
at cost, including capitalized interest and internal engineering costs.
Depreciation of property, plant and equipment generally is computed using
the straight-line method based on estimated useful lives of the assets.
Buildings and improvements estimated useful lives primarily range from 10
to 40 years, with the majority in the 20- to 40-year range. Machinery and
equipment estimated useful lives primarily range from 3 to 15 years, with
the majority in the 5- to 10-year range. Fully depreciated assets are
retained in property and accumulated depreciation accounts until disposal.
Upon disposal, assets and related accumulated depreciation are removed
from the accounts and the net amount, less proceeds from disposal, is
charged or credited to operations. Property, plant, and equipment amounts
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset (asset group) may not be
recoverable. An impairment loss would be recognized when the carrying
amount of an asset exceeds the estimated undiscounted future cash flows
expected to result from the use of the asset and its eventual disposition.
The amount of the impairment loss to be recorded is calculated by the
excess of the assets carrying value over its fair value. Fair value is
generally determined using a discounted cash flow analysis.
Goodwill: Goodwill is the excess of cost of an acquired entity over the
amounts assigned to assets acquired and liabilities assumed in a purchase
business combination. Effective January 1, 2002, with the adoption of
SFAS No. 142, goodwill is not amortized. Prior to January 1, 2002
goodwill was amortized on a straight-line basis, ranging from 5 to 40
years. Beginning January 1, 2002, goodwill will be tested for impairment
annually, and will be tested for impairment between annual tests if an
event occurs or circumstances change that would indicate the carrying
amount may be impaired. Impairment testing for goodwill is done at a
reporting unit level. Currently, 3M has identified 20 reporting units
under the criteria set forth by SFAS No. 142. An impairment loss would
generally be recognized when the carrying amount of the reporting unit's
net assets exceeds the estimated fair value of the reporting unit. The
estimated fair value of a reporting unit is determined using earnings for
the reporting unit multiplied by a price/earnings ratio for comparable
industry groups. Prior to January 1, 2002, goodwill was tested for
impairment in a manner consistent with property, plant and equipment and
intangible assets with a definite life.
Intangible Assets: Intangible assets include patents, tradenames, and
other intangible assets acquired from an independent party. Effective
January 1, 2002, with the adoption of SFAS No. 142, intangible assets
7
with an indefinite life, namely certain tradenames, are not amortized.
Intangible assets with a definite life are amortized on a straight-line
basis with estimated useful lives ranging from 3 to 15 years.
Indefinite-lived intangible assets will be tested for impairment
annually, and will be tested for impairment between annual tests if an
event occurs or circumstances change that would indicate that the
carrying amount may be impaired. Intangible assets with a definite life
are tested for impairment whenever events or circumstances indicate that
a carrying amount of an asset (asset group) may not be recoverable. An
impairment loss would be recognized when the carrying amount of an asset
exceeds the estimated undiscounted cash flows used in determining the
fair value of the asset. The amount of the impairment loss to be
recorded is calculated by the excess of the assets carrying value over
its fair value. Fair value is generally determined using a discounted
cash flow method. Costs related to internally developed intangible
assets are expensed as incurred.
Goodwill and Indefinite Lived Intangible Assets - Adoption of SFAS No. 142
The goodwill balance by market segment as of January 1, 2002 and March 31,
2002, follows.
(Millions) Goodwill
Transportation, Graphics and Safety $ 171
Health Care 330
Industrial 20
Consumer and Office 19
Electro and Communications 366
Specialty Material 106
Total Company $1,012
Goodwill and Indefinite-Lived Tradenames
Supplemental Business Segment Information
Three-month period ending
Amortization expense Mar. 31 Jun. 30 Sep. 30 Dec. 30
(Millions) 2001 2001 2001 2001
Transportation,
Graphics, and Safety $ 2 $ 3 $ 4 $ 4
Health Care 4 6 6 6
Industrial 1 - - -
Consumer and Office 1 - 1 -
Electro and Communications 5 6 6 6
Specialty Material 1 2 1 2
Total Company $14 $17 $18 $18
Income taxes (3) (3) (3) (3)
Minority interest - (1) (1) (2)
Amortization - net of income
taxes and minority interest $11 $13 $14 $13
8
The impact of Statement No. 142 on previously reported results follows.
Goodwill and Indefinite-Lived Tradenames
Supplemental Consolidated Statement of Income Information
Twelve-month period ended December 31
(Millions, except per-share amounts) 2001 2000
Reported net income $1,430 $1,782
Add back: Goodwill amortization, net 48 30
Indefinite-lived tradename
amortization, net 3 2
Adjusted net income $1,481 $1,814
Earnings per share - basic
Reported net income $ 3.63 $ 4.50
Goodwill amortization, net 0.12 0.08
Indefinite-lived tradename amortization, net 0.01 --
Adjusted net income $ 3.76 $ 4.58
Earnings per share - diluted
Reported net income $ 3.58 $ 4.45
Goodwill amortization, net 0.11 0.09
Indefinite-lived tradename amortization, net 0.01 --
Adjusted net income $ 3.70 $ 4.54
Goodwill and Indefinite-Lived Tradenames
Supplemental Consolidated Statement of Income Information
Three-month period ended
(Millions except, Mar. 31 Jun. 30 Sep. 30 Dec. 30
per-share amounts) 2001 2001 2001 2001
Reported net income $ 453 $ 202 $ 394 $ 381
Add back:
Goodwill and indefinite-lived
tradename amortization, net 11 13 14 13
Adjusted net income $ 464 $ 215 $ 408 $ 394
Earnings per share - basic
Reported net income $1.14 $0.51 $1.00 $0.97
Goodwill and indefinite-lived
tradename amortization, net 0.03 0.03 0.04 0.04
Adjusted net income $1.17 $0.54 $1.04 $1.01
Earnings per share - diluted
Reported net income $1.13 $0.50 $0.99 $0.96
Goodwill and indefinite-lived
tradename amortization, net 0.02 0.04 0.03 0.03
Adjusted net income $1.15 $0.54 $1.02 $0.99
9
Acquired Intangible Assets
The carrying amount and accumulated amortization of acquired intangible
assets follows.
(Millions) Jan. 1 Mar. 31
2002 2002
Patents $241 $243
Other amortizable intangible assets 85 84
Non-amortizable intangible assets (tradenames) 52 51
Total gross carrying amount 378 378
Accumulated amortization - patents (91) (97)
Accumulated amortization - other (49) (52)
Less total accumulated amortization (140) (149)
Total intangible assets, net $238 $229
The table below shows expected amortization expense for acquired
intangible assets recorded as of January 1, 2002.
After
(Millions) 2002 2003 2004 2005 2006 2006
Amortization
Expense $31 $28 $25 $20 $19 $63
The above amortization expense forecast is an estimate. Actual amounts of
amortization expense may differ from estimated amounts due to additional
intangible asset acquisitions, changes in foreign currency exchange rates,
impairment of intangible assets, accelerated amortization of intangible
assets, and other events.
RESTRUCTURING CHARGES AND NON-RECURRING ITEMS
During the second quarter of 2001, the company announced a restructuring
plan, which is discussed in the company's 2001 Annual Report on Form 10-K.
Under the restructuring plan the company eliminated about 1,000 positions
during the quarter ended March 31, 2002, and since inception has
eliminated about 4,500 positions. Because certain employees can defer
receipt of termination benefits, cash payments can lag job eliminations.
The restructuring current liability as of March 31, 2002, totaled $164
million.
In the first quarter of 2002, the company recorded charges related to this
restructuring plan that reduced operating income by $54 million and net
income by $35 million. These 2002 charges were classified as a component
of cost of sales ($30 million); selling, general and administrative
expenses ($21 million); and research, development and related expenses ($3
million). Of these charges, $26 million related to accelerated
depreciation (incremental charges resulting from shortened depreciable
lives, primarily related to downsizing or consolidating manufacturing
operations), $24 million related to employee severance and benefits, and
$4 million related to other exit activities. The non-cash and long-term
portion of the liability recorded in the first quarter of 2002 includes
$12 million of special termination pension and medical benefits,
10
$2 million of non-cash stock option expense, and $47 million of deferred
separation pay that was reclassified to short-term. Special termination
pension and medical benefits offered to eligible employees will generally
be paid out over their life expectancies. The non-cash stock option
expense resulted from the reclassification of certain employees age 50 and
older to retiree status, resulting in a modification of their original
stock option awards for accounting purposes.
The company expects the costs associated with this restructuring plan to
total about $750 million pre-tax upon completion, including the $623
million recorded in 2001 and the first quarter of 2002. The remaining
charges will include additional employee severance and benefit costs,
additional accelerated depreciation, and other incremental restructuring-
related exit costs. Remaining employee severance and benefit costs
primarily include international voluntary separation packages that are
expected to be substantially completed in the second quarter of 2002. The
company also expects to substantially complete the process of
consolidating or downsizing certain manufacturing operations by June 30,
2002, primarily in the United States and Europe. This consolidation
results in accelerated depreciation for those facilities that will cease
operations during this period.
Selected information relating to the charges follows.
Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
-------- ------------ ------- -------
Charges
Year 2001 $472 $ 80 $17 $569
First quarter 2002 24 26 4 54
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Total charges $496 $106 $21 $623
Restructuring liability
Current liability at
December 31, 2001 $185 $13 $198
First quarter 2002 activity
Charges 24 26 4 54
Reclass from long-term
portion of liability 47 - 47
Non-cash and long-term
portion of liability (14) (26) - (40)
Cash payments (91) (4) (95)
----- ----- -----
Current liability as of
March 31, 2002 $151 13 $164
===== ===== =====
In the first quarter of 2001, non-recurring costs included acquisition-
related charges of $23 million (recorded in cost of sales).
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ACCOUNTING FOR DERIVATIVE INSTRUMENTS
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.
For a more detailed discussion of derivative instruments, refer to the
company's 2001 Annual Report on Form 10-K. The impact of hedge
ineffectiveness, gains and losses excluded from the assessment of hedge
effectiveness, and gains and losses resulting from the discontinuance of
hedge accounting, were not significant for the quarter. Additional
disclosures follow.
Three months ended
March 31,
2002 2001
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Foreign Currency Cash Flow Hedges
Net realized gain (loss) recorded in cost of sales $ 8 $ 19
Net unrealized after-tax gain (loss) recorded
in Other Comprehensive Income $ 8 $ 11
Net investment hedging
Unrealized after-tax gain (loss) recorded in
cumulative translation $ 2 $ 20
Commodity Cash Flow Hedges
Net unrealized after-tax gain (loss) recorded
in Other Comprehensive Income $ (3) $ 2
RECLASSIFICATIONS
Due to the adoption of EITF 00-25 (discussed previously under "Accounting
Pronouncements"), certain prior period statement of income amounts have
been reclassified to conform to the current-year presentation, with no
effect on previously reported net income. Certain prior period balance
sheet amounts have been reclassified to conform to the current year
presentation.
12
BUSINESS SEGMENTS
3M's net sales and operating income by segment for the first quarter of
2002 and 2001 follow. The company adopted EITF No. 00-25 effective
January 1, 2002. This adoption resulted in a reclassification of
approximately $25 million of advertising expenses from selling, general
and administrative expenses to net sales for each of the years 1999
through 2001, with no impact on operating income. These adjustments were
reflected in the company's Consumer and Office segment.
----------------------------------------
BUSINESS
SEGMENT Three months ended
INFORMATION March 31
(Millions) 2002 2001
----------------------------------------
NET SALES
Transportation,
Graphics and Safety $ 894 $ 893
Health Care 871 829
Industrial 793 865
Consumer and Office 625 689
Electro and
Communications 463 606
Specialty Material 232 281
Corporate and
Unallocated 12 1
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Total Company $3,890 $4,164
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OPERATING INCOME
Transportation,
Graphics and Safety $ 212 $ 177
Health Care 222 165
Industrial 139 170
Consumer and Office 117 113
Electro and
Communications 55 68
Specialty Material 31 48
Corporate and
Unallocated (63) (4)
----------------------------------------
Total Company $ 713 $ 737
----------------------------------------
First quarter 2002 non-recurring charges of $54 million (included in
Corporate and Unallocated) principally related to employee separation
costs and accelerated depreciation charges under the company's previously
announced restructuring plan. The restructuring costs are not recorded in
the individual business segments for internal management reporting. This
enhances comparability and reflects management focus on ongoing results.
13
BUSINESS SEGMENTS (continued)
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.
The reclassified prior period net sales (due to the adoption of EITF No.
00-25) are summarized as follows. The offset to the $25 million annual
reduction in net sales was reduced selling, general and administrative
expenses.
Fourth Third Second First
(Millions) Year Qtr Qtr Qtr Qtr
------------------------------------------------------------------
Consumer and Office
2001 $ 2,699 $ 668 $ 676 $ 666 $ 689
2000 2,823 702 747 690 684
1999 2,680 698 710 636 636
Total Company
2001 $16,054 $3,856 $3,961 $4,073 $4,164
2000 16,699 4,129 4,264 4,237 4,069
1999 15,723 4,040 4,015 3,879 3,789
DEBT ISSUANCES
In October 2000, the company filed a shelf registration with the
Securities and Exchange Commission relating to the potential offering of
debt securities of up to $1.5 billion. After the shelf registration
became effective, the company in May 2001 established under the shelf a
medium-term notes program through which up to $1.4 billion of medium-term
notes may be offered. In March 2002, the company issued a three-year,
$400 million, fixed rate note. The debt was swapped to a rate based on a
floating LIBOR index (1.83 percent at March 31, 2002). As of March 31,
2002, $950 million of medium-term notes had been issued under the medium-
term notes program and another $56 million of debt securities were issued
in 2001 directly from the shelf, aggregating $1.006 billion of debt
securities offered under the shelf.
EARNINGS PER SHARE and DIVIDENDS 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 periods ended March 31, 2002 and 2001.
Certain MSOP options outstanding were not included in the computation of
diluted earnings per share because they would not have had a dilutive
effect (6.4 million average options for the three months ended March 31,
2002, and 25 thousand average options for the three months ended March 31,
2001). Dividends paid to shareholders were 62 cents per common share in
the first quarter of 2002, compared to 60 cents per common share in the
first quarter of 2001.
14
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)
Mar. 31, Dec. 31,
(Millions) 2002 2001
----------------------------------------------------------------------
Cumulative translation - net $(1,161) $(1,152)
Minimum pension liability adjustments (74) (74)
Debt and equity securities, unrealized gain - net 6 12
Cash flow hedging instruments, unrealized gain - net 5 9
----------------------------------------------------------------------
Accumulated other comprehensive income (loss) $(1,224) $(1,205)
======================================================================
The components of total comprehensive income (loss) are shown as follows.
Income tax effects for cumulative translation are not significant 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 first quarter of 2002 and 2001 totaled a $6 million after tax gain and
a $12 million after tax gain, respectively, with the impact largely offset
by underlying hedged items. Other reclassification adjustments were not
material.
-------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME Three months ended
March 31
(Millions) 2002 2001
-------------------------------------------------------------------
Net income $ 452 $ 453
Other comprehensive income (loss)
Cumulative translation - net of $1 million
tax provision in 2002 (9) (186)
Debt and equity securities,
unrealized loss - net of $4 million
tax benefit and $13 million tax benefit (6) (20)
Cash flow hedging instruments, unrealized
loss - net of $2 million tax benefit
and $8 million tax provision (4) 13
-------------------------------------------------------------------
Total comprehensive income $ 433 $ 260
===================================================================
15
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 accountants, 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
accountant liability under Section 11 does not extend to it.
16
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of 3M Company:
We have reviewed the accompanying consolidated balance sheet of 3M Company
and Subsidiaries as of March 31, 2002, and the related consolidated
statements of income and of cash flows for the three-month periods ended
March 31, 2002 and 2001. 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, 2001, 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 11, 2002, 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, 2001, 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
April 22, 2002
17
3M Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Quarter
--------------
Overview:
The company reported net income of $452 million, or $1.14 per share, in
the first quarter of 2002, versus $453 million, or $1.13 per share, in the
first quarter of 2001. Earnings were impacted by non-recurring pre-tax
charges of $54 million related to the company's current restructuring
program in 2002, and were also impacted by non-recurring acquisition-
related pre-tax costs of $23 million in 2001. Excluding these non-
recurring items, earnings per share were $1.23 in the first quarter of
2002, compared with $1.16 in the first quarter last year, an increase of 6
percent. Currency impacts reduced first-quarter earnings by 3 cents per
share, while the adoption of a new accounting standard resulting in the
cessation of goodwill amortization boosted earnings by 2 cents per share.
The company delivered positive earnings per share growth despite on-going
challenges in the world economies.
Goodwill and other intangible assets:
Statement on Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets," was adopted effective January 1, 2002. Goodwill
and indefinite lived intangible assets are no longer amortized. Goodwill
and indefinite lived intangible assets are subject to an impairment test
at least annually. A preliminary assessment of any potential impairment
indicated that no impairment existed at January 1, 2002. Additional
information regarding SFAS No. 142 is included in the Notes to the
Consolidated Financial Statements.
Sales:
Components of Sales Change
First Quarter 2002
U.S. Intl. W.W.
Volume - core (6.3)% (4.0)% (5.0)%
Volume - acquisitions and divestitures 0.4 0.7 0.5
Price 0.8 0.8 0.8
Translation -- (5.3) (2.9)
----- ----- -----
Total (5.1)% (7.8)% (6.6)%
===== ===== =====
Worldwide sales for the first quarter totaled $3.890 billion, down 6.6
percent from the same quarter last year. Core volume (which excludes
acquisition and divestiture impacts) decreased 5 percent from the first
quarter last year. Selling prices were up eight-tenths of a percent. The
stronger U.S dollar reduced worldwide sales by 2.9 percent.
18
In the United States, sales totaled $1.783 billion, with core volume down
6.3 percent. International sales totaled $2.107 billion (down 7.8 percent
in dollars), with core volume down 4 percent. Core volume was impacted by
significant slowing in most major economies. In Europe, core volume
decreased 7.9 percent, with reported volume down 6.4 percent. In the Asia
Pacific area, volume increased 2.2 percent. Volume decreased 3.0 percent
in Japan, while volume increased 9.8 percent in the rest of Asia. In Latin
America, volume decreased 9.5 percent. Volume in Canada decreased 3.0
percent. Currency reduced international sales by 5.3 percent, driven by
negative translation of about 7 percent in both Asia Pacific and Latin
America, and 3 percent in Europe.
Non-recurring items:
The first quarter of 2002 includes additional restructuring charges of $54
million, principally related to accelerated depreciation charges and
employee severance and benefit costs under the company's previously
announced restructuring plan. These charges have been classified as a
component of cost of sales ($30 million); selling, general and
administrative expenses ($21 million); and research, development and
related expenses ($3 million). Of the total first quarter charge, $26
million related to accelerated depreciation (incremental charges resulting
from shortened depreciable lives, primarily related to downsizing or
consolidating manufacturing operations), $24 million related to employee
severance and benefits, and $4 million related to other exit activities.
Additional information concerning non-recurring items is provided in the
Notes to Consolidated Financial Statements and elsewhere herein.
The first quarter of 2001 includes non-recurring costs of $23 million
recorded in cost of sales. This charge primarily relates to acquisitions
of inventory that must be recorded at fair market value instead of
manufactured cost and the subsequent sale of these acquired inventories.
19
Supplemental Unaudited Consolidated Statement of Income Information
(Dollars in millions, except per-share amounts)
Three months ended Three months ended
March 31, 2002 March 31, 2001
---------------------------- ----------------------------
Excluding Excluding
non- Non- non- Non-
recurring recurring Reported recurring recurring Reported
items items total items items total
--------- ------- -------- --------- -------- -------
Net sales $3,890 $ -- $3,890 $4,164 $ -- $4,164
Operating expenses
Cost of sales 2,006 30 2,036 2,173 23 2,196
Selling, general and
administrative
expenses 856 21 877 953 -- 953
Research, develop-
ment and related
expenses 261 3 264 278 -- 278
Total 3,123 54 3,177 3,404 23 3,427
Operating
income (loss) 767 (54) 713 760 (23) 737
Interest expense
and (income), net 10 -- 10 26 -- 26
Income (loss) before
income taxes and
minority interest 757 (54) 703 734 (23) 711
Provision (benefit)
for income taxes 246 (19) 227 245 (7) 238
Effective tax rate 32.5% 32.2% 33.5% 33.5%
Minority interest 24 -- 24 22 (2) 20
Net income (loss) $ 487 $ (35) $ 452 $ 467 (14) $ 453
Per share-diluted $ 1.23 $(.09) $1.14 $1.16 $(.03) $ 1.13
The following discussion excludes the impact of non-recurring items in all
periods.
Costs:
Cost of sales was 51.6 percent of sales, down five-tenths of a percentage
point from the same quarter last year. Gross margins were positively
impacted by accelerated implementation of Six Sigma, indirect cost
control, and head count reductions under the current restructuring plan.
Positive sales mix impacts and lower raw material costs also positively
impacted the gross margin. Cost of sales includes manufacturing,
engineering, and freight costs.
20
Selling, general and administrative (SG&A) expenses were 22.0 percent of
sales, down nine-tenths of a percentage point from the first quarter of
2001. SG&A expenses were $97 million lower than in the first quarter of
2001, a reduction of 10.1 percent. This improvement in SG&A costs was the
result of Six Sigma implementation, indirect cost control and headcount
reductions under the current restructuring plan. SG&A also benefited by
$14 million due to the cessation of goodwill and other indefinite-lived
asset amortization effective January 1, 2002.
Operating income:
Operating income was 19.7 percent of sales, compared with 18.3 percent in
the first quarter last year. Although the company faced continued economic
weakness, operating income grew by $7 million, or eight-tenths of a
percent, in the first quarter of 2002 as compared to the first quarter of
2001. The cessation of goodwill amortization benefited operating income
by $14 million, while currency impacts reduced operating income by an
estimated $32 million. Operating income margins in the first quarter of
2002 were 13.3 percent in the United States and 25.1 percent
internationally.
Interest expense and income:
First-quarter interest expense of $19 million was $19 million lower than
in the same quarter last year. Declining rates on floating-rate debt
drove the reduction in expense, with some benefit also related to lower
overall average debt balances. Interest income was $9 million, compared
with $12 million in the same quarter last year, driven by lower interest
rates.
Provision for income taxes:
The worldwide effective income tax rate for the quarter was 32.5 percent,
down from 33.5 percent in the first quarter last year and 32.9 percent for
total year 2001. The tax rate decrease compared to total year 2001 is
principally due to the cessation of goodwill amortization.
Minority interest:
Minority interest in the quarter was $24 million, compared with $22
million in the first quarter of 2001, and $10 million in the fourth
quarter of 2001. The increase compared to the first quarter of 2001 was
primarily due to income generated by InterUnitek GmbH, a joint venture
with the former shareholders of Espe AG, partially offset by a decrease in
income generated at Sumitomo 3M Limited. The increase compared to the
fourth quarter of 2001 was primarily due to higher profits at Sumitomo 3M.
Net income:
Net income for the first quarter of 2002 totaled $487 million, or $1.23
per diluted share, compared with $467 million, or $1.16 per diluted share,
in the first quarter of 2001. The cessation of goodwill and other
indefinite-lived asset amortization effective January 1, 2002 boosted
earnings per share by 2 cents. The company estimates that currency
effects reduced net income for the quarter by about $13 million, or 3
cents per share, compared with the first quarter of 2001. 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
21
gains and losses, including derivative instruments designed to reduce
exchange rate risks. These derivative instruments and other transaction
impacts increased net income by an estimated $7 million in the first
quarter of 2002.
PERFORMANCE BY BUSINESS SEGMENT
Following is a discussion of the global operating results of the company's
six business segments in the first quarter of 2002. With the exception of
Health Care and Transportation, Graphics and Safety, most of 3M's business
segments were impacted by the continuing poor global economic conditions.
In addition, U.S. dollar strength continued to negatively impact results,
driven by negative translation of about 7 percent in both Asia Pacific and
Latin America, and 3 percent in Europe.
In the Industrial Markets segment, volume declined 7.0 percent in the
first quarter of 2002 as compared to the first quarter of 2001. This
decrease is caused by the ongoing weakness in most sectors of the global
manufacturing economy.
In the Transportation, Graphics and Safety segment volume grew 5.3 percent
in the first quarter of 2002 as compared to the same period in 2001. This
increase was caused by stronger demand for automotive and respiratory
products, as well as improved volumes of optical films for flat panel
displays.
In the Health Care segment, including acquisitions, volume grew 6.9
percent in the first quarter of 2002. This growth includes approximately 2
percent due to acquisitions. All of the health care businesses posted
positive volume growth, as well as substantial operating income
improvement.
In September 2001, 3M 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 received $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. For 2002, revenue of about $10 million per quarter is
expected related to this agreement.
In the Consumer and Office segment, volume decreased 8.1 percent in the
first quarter of 2002. This decrease is due mainly to ongoing weakness in
the office supply chain. Companies have curtailed spending in many areas,
including office supplies. This reduction in spending has negatively
impacted the company's volume growth. The company was able to improve
operating income by 3.3 percent in the first quarter of 2002. This
improved margin is mainly due to the company's five corporate initiatives.
In the Electro and Communications segment volume declined 23 percent in
the first quarter of 2002, which also resulted in a significant decrease
in operating income. These decreases reflect continued weaknesses in the
telecom and electronics manufacturing industries.
22
In the Specialty Material Markets segment, volume declined 16.8 percent in
the first quarter of 2002, coupled with a decrease in operating income of
34.2 percent. These decreases are primarily driven by the product related
phase out discussed in previous Annual Reports on Form 10-K and Quarterly
Reports on Form 10-Q filings.
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong. Working
capital (defined as current assets minus current liabilities) totaled
$2.261 billion at March 31, 2002, increasing $474 million from year-end
2001. This increase was largely driven by a shift in debt from short-term
to long-term when compared to year-end 2001.
The accounts receivable turnover index (defined as quarterly net sales
divided by ending accounts receivable, multiplied by 4) totaled 5.96 at
March 31, 2002, compared with 6.22 at year-end 2001 and 5.65 at March 31,
2001. Receivables increased $128 million compared to year-end, but
decreased $338 million, or 11.5 percent, versus the comparable period last
year. The inventory turnover index (defined as quarterly factory cost
divided by ending inventory, multiplied by 4) was 3.87 at March 31, 2002,
virtually unchanged from 3.88 at year-end 2001, but improved from 3.57 at
March 31, 2001. Inventories declined $91 million versus year-end, and
declined by $341 million compared to ending March 2001.
Total debt decreased $18 million from year-end 2001. As of March 31, 2002,
total debt was 32 percent of total capital, the same as year-end 2001.
The company's believes its strong credit rating provides ready and ample
access to funds in the global capital markets. The company's credit
facilities have not materially changed since year-end 2001.
Net cash provided by operating activities totaled $671 million in the
first three months of the year, down $44 million from the same period last
year. Restructuring-related cash payments totaled $95 million in the
first quarter of 2002, with approximately $200 million in additional cash
outflows expected for the remainder of 2002.
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. 3M's insurance
recoveries, net of claims paid, related to the mammary implant matter
resulted in $15 million of net cash inflows in the first quarter of 2002,
compared to $3 million of net cash outflows in the first quarter of 2001.
Cash used in investing activities totaled $143 million in the first three
months of the year, compared with $440 million in the same period last
year. Capital expenditures for the first three months of 2002 were $161
million, a decrease of $120 million from the same period last year. Cash
used for acquisitions of businesses totaled $191 million in the first
three months of 2001. This cash outflow principally related to the
acquisition of MicroTouch Systems Inc., a touch screen manufacturer, for
$158 million in cash, net of cash acquired.
23
Financing activities in the first three months of 2002 for both short-term
and long-term debt included net cash inflows of $11 million, compared with
net cash inflows of $444 million in the same period last year. The
decrease in net short-term debt of $255 million includes the portion of
short-term debt with original maturities of 3 months or less. Repayment of
other debt of $259 million includes $256 million of commercial paper
having original maturities greater than 3 months. Proceeds from other
debt of $525 million includes $126 million of commercial paper having
original maturities greater than 3 months.
Treasury stock repurchases for the first three months of 2002 were $420
million, compared with $342 million in the same period last year. The
company repurchased about 3.7 million shares of common stock in the first
three months of 2002, compared with about 3.1 million shares in the same
period last year. In November 2001, the Board of Directors authorized the
repurchase of up to $2.5 billion of the company's stock between January 1,
2002 and December 31, 2003. As of March 31, 2002, about $2.1 billion
remained authorized for repurchase. Stock repurchases are made to support
the company's management stock option plan, its general employees' stock
purchase plan and for other corporate purposes.
A reduction in weighted average diluted shares outstanding (including the
effects of repurchases, issuances and dilution) resulted in a benefit of 2
cents per diluted compared to the first quarter of 2001.
Cash dividends paid to shareholders totaled $242 million in the first
three months of this year, compared with $239 million in the same period
last year. In February 2002, the quarterly dividend was increased to 62
cents per share.
FUTURE OUTLOOK
While the company is hopeful that the global economy will improve, its
spending plans reflect a continuing challenging economic backdrop for the
remainder of the year. The company will continue to press ahead with its
five corporate initiatives aimed at accelerating long-term top-line
growth, improving cash efficiency and lowering its total cost structure.
Through these actions, the company expects to be at a new competitive
level. Once the global economy begins to improve, the company expects to
be well positioned to leverage its strong, diverse and global business
portfolio into solid and sustainable earnings growth.
The company expects 2002 earnings to fall within a range of $4.80 to
$5.10 per share - excluding non-recurring items. This range assumes a
positive 12-cent impact due to cessation of goodwill amortization in
accordance with the adoption of a recent accounting standard. Earnings,
excluding non-recurring items, for the second quarter of 2002 are
expected to be at or above the first quarter of 2002 result of $1.23 per
share.
In the second quarter of 2001 the company announced a restructuring plan,
which is discussed in the company's 2001 Annual Report on Form 10-K.
Under the restructuring plan the company eliminated about 1,000 positions
during the quarter ended March 31, 2002, and since inception has
eliminated about 4,500 positions.
24
The company expects the costs associated with this restructuring plan to
total about $750 million pre-tax upon completion, including the $623
million recorded in 2001 and the first quarter of 2002. The remaining
charges will include additional employee severance and benefit costs,
additional accelerated depreciation, and other incremental restructuring-
related exit costs. Remaining employee severance and benefit costs
primarily include international voluntary separation packages that are
expected to be substantially completed in the second quarter of 2002. The
company also expects to substantially complete the process of
consolidating or downsizing certain manufacturing operations by June 30,
2002, primarily in the United States and Europe. This consolidation
results in accelerated depreciation for those facilities that will cease
operations during this period.
Selected information relating to the charges follows.
Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
-------- ------------ ------- -------
Charges
Year 2001 $472 $ 80 $17 $569
First quarter 2002 24 26 4 54
----- ----- ----- -----
Total charges $496 $106 $21 $623
Restructuring liability
Current liability at
December 31, 2001 $185 $13 $198
First quarter 2002 activity
Charges 24 26 4 54
Reclass from long-term
portion of liability 47 - 47
Non-cash and long-term
portion of liability (14) (26) - (40)
Cash payments (91) (4) (95)
----- ----- -----
Current liability as of
March 31, 2002 $151 13 $164
===== ===== =====
Related to this restructuring plan, the company estimates it saved $80
million in the second half of 2001. The company expects additional
savings of approximately $300 million in 2002, with a somewhat greater
rate of savings in the second half when compared to the first half of the
year. The vast majority of the savings will be reduced employee costs.
The 2001 savings were most prominent in SG&A, with cost of sales benefits
occurring in late 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.
25
The company is increasingly striving to move costs outside the U.S. to
naturally protect 3M from currency fluctuations. The company increased
the amount and duration of its foreign currency hedges throughout 2001 to
help dampen year-over-year effects and to improve the predictability of
future earnings. The company policy is to hedge an estimated 50 percent
of its annual income statement foreign currency risk. The company may
deviate from this 50 percent target based on uncertainty of future
exposures or market conditions. However, this hedging program will not
make 3M immune to currency impacts.
Raw material costs were down an estimated four percent in the first
quarter of 2002, and 3M expects continuing improvement for the remainder
of 2002, due both to falling prices for many key feedstocks and to 3M's
continued global sourcing and cost-reduction efforts. The company expects
a tax rate in the 32.5 percent range for the remainder of 2002. Capital
expenditures are expected to total $1 billion or less for total year 2002.
3M's longer-term prospects remain bright. The company is on track in
implementing several initiatives (Six Sigma, Global Sourcing
Effectiveness, 3M Acceleration, Indirect Cost Reduction and
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 2001. Refer to the 2001 Annual Report on 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 the United States and other countries that are
beyond its control, such as downturns in economic activity in a specific
26
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, including 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 the company. 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 the company.
* 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. The current
estimates of the potential impact on the company's consolidated financial
position, results of operations and cash flows for its legal proceedings
and claims are predictions made by the company about the future and
should be considered forward-looking statements. These estimates could
change in the future. 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.
27
3M 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.
While the company believes that the ultimate outcome of all of the
proceedings and claims described in "Legal Proceedings", 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 breast implant litigation, respirator/mask/asbestos
litigation, environmental matters, or other actions, in excess of
presently recorded liabilities.
The company cannot always definitively determine possible liabilities
that exceed recorded amounts related to the legal proceedings described
in the preceding paragraph. However, the company believes it unlikely,
based upon the nature of the legal proceedings and its current knowledge
of relevant facts and circumstances, that the possible liabilities
exceeding recorded amounts would be material to its consolidated
financial position, results of operations or cash flows. With respect to
products liability claims, such a conclusion about possible liabilities
considers insurance coverage available for such 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 unfavorable development could result in future charges that could have
a material adverse impact on the company. The current estimates of the
potential impact on the company's consolidated financial position,
results of operations and cash flows for the proceedings and claims
described in "Legal Proceedings" could change in the future.
28
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.
As of March 31, 2002, the company is named as a defendant, often with
multiple co-defendants, in 154 lawsuits in various courts and 5 claims,
all seeking damages for personal injuries from allegedly defective breast
implants. These lawsuits and claims purport to represent 737 individual
claimants.
3M has confirmed that approximately 16 of the 737 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 721 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 company continues to work to
clarify the status of these lawsuits and claims.
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 substantially 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 proceeding in London, England to recover insurance coverage
for breast implant liability and costs from claims-made insurance
carriers. The arbitration hearing is currently scheduled for January
2003.
29
As of March 31, 2002, the company had receivables for insurance
recoveries related to the breast implant matter of $386 million,
representing settled but yet to be received amounts ($63 million) as well
as amounts contested by the insurance carriers ($323 million). During the
first quarter of 2002, the company received payments of $20 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); (iii) the outcome of the 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.
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 which were 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 million each in
compensatory damages. The jury denied plaintiffs' request for punitive
damages. Based on the jury's findings of percentage of fault attributable
to each defendant, the company's share of the total verdict is $22.5
million. The company can provide no assurance at this time about the
ability of any co-defendant to pay its share of any ultimate judgment or
whether a co-defendant's inability to pay will cause a reallocation of
liability for damages among the remaining solvent defendants under state
law. Judgment was entered on January 30, 2002. Because the company is
vigorously challenging the judgment in post-trial motions, will plan to
appeal if necessary, and believes that the judgment ultimately will be
overturned, no liability has been recorded related to this matter as of
March 31, 2002. If any damages are ultimately assessed against the
company, a substantial portion of such damages would be covered by the
company's product liability insurance.
For more than twenty years, the company has successfully defended and
resolved the claims of approximately 200,000 individual claimants similar
to the ones brought in Holmes County. The company's vigorous defense of
this litigation has resulted in: (i) jury verdicts for the company in the
only other two cases tried to verdict (these two successful verdicts
involved allegations about the 3M products which were virtually
indistinguishable from those of the Holmes County case); (ii) frequent
dismissals of lawsuits without any payment by the company; and (iii) an
average settlement value of less than $1,000 for the claims and lawsuits
that the company has resolved. In many of these lawsuits and claims, the
30
company is named as a defendant with multiple co-defendants where no
product the company manufactured is involved or where the company is
ultimately determined not to have manufactured the products the
plaintiffs identified. As noted above, many of these lawsuits and claims
have been dismissed without payment.
As of March 31, 2002, the company is a named defendant, with multiple co-
defendants, in approximately 21,400 lawsuits and claims in various
courts. (The number of lawsuits is not a good indicator of claims and
litigation activity because one lawsuit may represent the claims of one
plaintiff or many. The number of plaintiffs named in any one lawsuit
varies by plaintiffs' counsel and jurisdiction. For this reason, the
number of claimants is a better indicator of claims and litigation
activity.) These lawsuits and claims purport to represent approximately
77,000 individual claimants. A majority 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 purportedly relate to the alleged use of company's mask and
respirator products and seek damages from the company and other
defendants for alleged personal injury from occupational exposure to
asbestos or, less frequently, silica found in products manufactured by
other defendants. The remaining lawsuits and claims generally allege
personal injury from occupational exposure to asbestos from unspecified
products claimed to have been manufactured by the company or other
defendants and/or from specialty products containing asbestos
manufactured by the company and/or 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 March 31, 2002, the company had estimated accrued liabilities of
approximately $144 million for these claims. This amount represents the
company's best estimate of the amount to cover the cost and expense of
resolving current and probable future claims. The company also had
receivables for expected insurance recoveries of approximately $223
million. The difference between the accrued liability and insurance
receivable represents the time delay between payment of claims and
receipt of insurance reimbursements.
The company's current estimate of its probable liabilities and associated
expenses for respirator/mask/asbestos litigation is based on facts and
circumstances existing at this time and reasonably anticipated trends.
New developments may occur that could affect the company's estimate of
probable liabilities and associated expenses. These developments
include, but are not limited to, (i) significant changes in the number of
future claims, (ii) significant changes in the average cost of resolving
claims, (iii) changes in the nature of claims received, (iv) changes in
the law and procedure applicable to these claims, or (v) financial
viability of other co-defendants and insurers and other unknown
variables. The company cannot determine the impact of these potential
31
developments on the current estimate of its probable liabilities and
associated expenses.
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 a basis 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 satisfy 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. 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
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
32
techniques; (iv) success in allocating liability to other potentially
responsible parties; and (v) financial viability of other potentially
responsible parties and third-party indemnitors. The company cannot
determine the impact of these potential developments on the current
estimate of its probable liabilities and associated expenses.
33
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 35.
(15) A letter from the company's independent accountants
regarding unaudited interim consolidated
financial statements. Page 36.
Reports on Form 8-K:
3M filed one Form 8-K on April 9, 2002, and one Form 8-K for the quarter
ended March 31, 2002.
The Form 8-K dated April 9, 2002, indicated that the Board of "Minnesota
Mining and Manufacturing Company" approved changing the company's name to
"3M Company" effective 8 A.M. Eastern Time on April 8, 2002. The "MMM"
ticker symbol remains the same.
The Form 8-K dated March 5, 2002, provided the opinion and consent of
general counsel in connection with the offering of $400 million in medium-
term notes due in the year 2005.
None of the other item requirements of Part II of Form 10-Q are applicable
to the company for the quarter ended March 31, 2002.
34
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.
3M COMPANY
------------------------------------------
(Registrant)
Date: April 30, 2002
------------------------------
/s/ Patrick D. Campbell
------------------------------------------
Patrick D. Campbell, Senior Vice President
and Chief Financial Officer
(Mr. Campbell is the Principal Financial
and Accounting Officer and has been duly
authorized to sign on behalf of the
registrant.)