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 September 30, 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 September 30, 2002, there were 390,196,644 shares of the
Registrant's common stock outstanding.
This document contains 56 pages.
The exhibit index is set forth on page 49.
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3M Company and Subsidiaries
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3M Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(Amounts in millions, except per-share amounts)
(Unaudited)
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Net sales $4,143 $3,961 $12,194 $12,198
------- ------- ------- -------
Operating expenses
Cost of sales 2,115 2,156 6,382 6,618
Selling, general and
administrative expenses 913 924 2,765 3,067
Research, development and
related expenses 264 261 797 822
------- ------- ------- -------
Total 3,292 3,341 9,944 10,507
------- ------- ------- -------
Operating income 851 620 2,250 1,691
------- ------- ------- -------
Interest expense and income
Interest expense 19 27 58 98
Interest income (9) (6) (27) (27)
------- ------- ------- -------
Total 10 21 31 71
------- ------- ------- -------
Income before income taxes
and minority interest 841 599 2,219 1,620
Provision for income taxes 274 195 711 527
Minority interest 22 10 45 44
------- ------- ------- -------
Net income $ 545 $ 394 $ 1,463 $ 1,049
======= ======= ======= =======
Weighted average common
shares outstanding - basic 389.8 393.5 389.9 395.3
Earnings per share - basic $ 1.40 $ 1.00 $ 3.75 $ 2.65
======= ======= ======= =======
Weighted average common
shares outstanding - diluted 395.0 398.4 395.4 401.0
Earnings per share - diluted $ 1.38 $ 0.99 $ 3.70 $ 2.62
======= ======= ======= =======
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,
Sep. 30, 2002 2001
---------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 821 $ 616
Accounts receivable - net 2,585 2,482
Inventories
Finished goods 1,019 1,103
Work in process 594 611
Raw materials and supplies 332 377
-------- --------
Total inventories 1,945 2,091
Other current assets 1,205 1,107
-------- --------
Total current assets 6,556 6,296
Investments 247 275
Property, plant and equipment 14,709 14,365
Less accumulated depreciation (9,258) (8,750)
-------- --------
Property, plant and equipment - net 5,451 5,615
Goodwill 1,173 1,012
Intangible assets 239 238
Other assets 2,053 1,170
-------- --------
Total assets $15,719 $14,606
======== ========
LIABILITIES
Current liabilities
Short-term debt $ 1,261 $ 1,373
Accounts payable 867 753
Payroll 443 539
Income taxes 580 596
Other current liabilities 1,360 1,248
-------- --------
Total current liabilities 4,511 4,509
Long-term debt 1,678 1,520
Other liabilities 2,887 2,491
-------- --------
Total liabilities 9,076 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 12,510 11,914
Treasury stock, at cost; 81,819,884 shares at
Sep. 30, 2002; 80,712,892 shares at Dec. 31, 2001 (4,767) (4,633)
Unearned compensation (257) (286)
Accumulated other comprehensive income(loss) (1,139) (1,205)
-------- --------
Total stockholders' equity 6,643 6,086
-------- --------
Total liabilities and stockholders' equity $15,719 $14,606
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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)
Nine months ended
(Dollars in millions) September 30
------------------
2002 2001
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,463 $ 1,049
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 728 798
Changes in assets and liabilities
Accounts receivable (18) 39
Inventories 195 85
Other current assets (10) (64)
Other assets - net of amortization (870) (82)
Income taxes payable (21) 168
Deferred income tax assets and liabilities 247 31
Accounts payable and other current liabilities 63 221
Other liabilities 111 25
Other - net 105 (10)
------------------------------------------------------------------------
Net cash provided by operating activities 1,993 2,260
------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (530) (766)
Proceeds from sale of property, plant and equipment 44 46
Acquisitions of businesses (88) (208)
Proceeds from sale of businesses 1 11
Purchase of investments (4) (8)
Proceeds from sale of investments 11 19
------------------------------------------------------------------------
Net cash used in investing activities (566) (906)
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CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt - net (25) (26)
Repayment of debt (maturities greater than 90 days) (482) (989)
Proceeds from debt (maturities greater than 90 days) 525 1,298
Purchases of treasury stock (813) (1,112)
Reissuances of treasury stock 426 373
Dividends paid to stockholders (725) (713)
Distributions to minority interests (78) (57)
------------------------------------------------------------------------
Net cash used in financing activities (1,172) (1,226)
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Effect of exchange rate changes on cash (50) 9
------------------------------------------------------------------------
Net increase in cash and cash equivalents 205 137
Cash and cash equivalents at beginning of year 616 302
------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 821 $ 439
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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
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard reviews the accounting
for certain exit costs and disposal activities currently set forth in
Emerging Issues Task Force issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal
change relates to the requirements necessary for recognition of a
liability for a cost associated with an exit or disposal activity. The
new statement requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred versus
the date of commitment to an exit plan. This statement is effective for
exit and disposal activities initiated after December 31, 2002. The
company expects the new standard to principally impact the ultimate timing
of when charges are recorded as opposed to the amount of the ultimate
charge.
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. This reclassification totaled approximately $6 million for
the third quarter ended September 30, 2001, and $18 million for the nine-
month period ended September 30, 2001. These adjustments were recorded in
the company's Consumer and Office Markets segment.
6
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; and 3) the amortization period of intangible
assets with finite lives will no longer be limited to 40 years.
Effective January 1, 2002, the company adopted SFAS No. 144. This
standard broadens the presentation of discontinued operations to include
more disposal transactions. 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.
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 the 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.
7
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, or by using a discounted cash flow analysis. The
company completed its assessment of any potential impairment upon
adoption of this standard and determined that no impairment existed at
January 1, 2002. 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
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 2 to 17 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 analysis. Costs related to internally developed intangible
assets are expensed as incurred.
Business Combinations
During the quarter ended September 30, 2002, 3M entered into six small
business combinations for a total cost of $123 million, which was paid
with $88 million in cash, net of cash acquired, and $35 million of 3M
common stock (277,792 common shares). A summary of the six purchase
business combinations follows:
* 3M (Industrial segment) purchased certain assets and specified
liabilities of Emtech Emulsion Technologies, Inc. and Emtech Manufacturing
Corporation. These companies are involved in the manufacture and sale of
durable film label materials.
8
* 3M (Industrial segment) purchased certain assets and specified
liabilities of Polymer Manufacturing, Inc. This company, based in Oxnard,
California, is a manufacturer of two-part polyurethane adhesives, plastic
repair materials, sealants and related accessories.
* 3M (Transportation, Graphics and Safety segment) purchased the shares
of AiT Corporation. AiT Corporation, based in Ottawa, Ontario, Canada, is
a manufacturer of travel ID security systems.
* 3M (Health Care segment) purchased the shares of Ruffing IT. This
company, based in Germany, develops quality assurance software for medical
records.
* 3M (Health Care segment) purchased from GlaxoSmithKline the right to
manufacture and distribute the Migril product line in certain African
nations. Migril is an over-the-counter treatment for migraine attacks.
* 3M (Industrial segment) purchased an 80 percent interest in certain
assets of Shanghai Grinding Wheel Works, a Chinese company. These assets
will be used to manufacture and sell coated abrasive products.
Goodwill recognized in these transactions totaled $107 million, with $48
million expected to be fully deductible for tax purposes. Goodwill was
assigned to market as follows: Industrial, $78 million; Transportation,
Graphics and Safety, $25 million; and Health Care, $4 million.
The preliminary purchase price allocations and the resulting impact on the
Consolidated Balance Sheet for these six purchase business combinations
are summarized in the following table.
(Millions) Asset(Liability)
Accounts receivable $ 7
Inventory 4
Other current assets 2
Property, plant, and equipment 5
Purchased indefinite lived intangible assets 2
Purchased identifiable intangible assets 7
Purchased goodwill 107
Accounts Payable and (5)
other current liabilities
Interest bearing debt (4)
Minority interest liability (2)
-----
Net assets acquired $123
The purchase price allocations will be finalized as internal valuations
are completed. The above purchased identifiable intangible assets of $7
million will be amortized on a straight-line basis over lives ranging from
2 to 17 years (weighted-average life of 6.9 years). There were no in-
process research and development charges associated with these
acquisitions. Pro forma information related to these acquisitions is not
included because the impact of these acquisitions on the company's
consolidated results of operations is not considered to be significant.
These six acquisitions are estimated to have combined annual worldwide net
sales of approximately $75 million, or 0.5 percent of 2001 worldwide net
sales.
9
Goodwill and Indefinite Lived Intangible Assets - Adoption of SFAS No. 142
The goodwill balance by market segment as of January 1, 2002, and
September 30, 2002, follows. The increase of the goodwill balance relates
primarily to the six business combinations previously discussed and
changes in foreign currency exchange rates during the period.
Goodwill Jan. 1 Sep. 30
(Millions) 2002 2002
Transportation, Graphics and Safety $ 171 $ 206
Health Care 330 355
Industrial 20 97
Consumer and Office 19 19
Electro and Communications 366 377
Specialty Material 106 119
Total Company $1,012 $1,173
Goodwill and Indefinite-Lived Tradenames
Supplemental Business Segment Information
Three-month period ended
Amortization expense Mar. 31 Jun. 30 Sep. 30 Dec. 31
(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
10
The impact of Statement No. 142 on reported results follows.
Goodwill and Indefinite-Lived Tradenames
Supplemental Consolidated Statement of Income Information
(Millions, except per-share amounts)
Three months Nine months
ended ended
Sep. 30 Sep. 30
2002 2001 2002 2001
Reported net income $ 545 $ 394 $1,463 $1,049
Add back:
Goodwill amortization, net -- 13 -- 36
Indefinite-lived tradename
amortization, net -- 1 -- 2
Adjusted net income $ 545 $ 408 $1,463 $1,087
Earnings per share - basic
Reported net income $1.40 $1.00 $ 3.75 $ 2.65
Goodwill amortization, net -- 0.04 -- 0.10
Indefinite-lived tradename
amortization, net -- -- -- --
Adjusted net income $1.40 $1.04 $ 3.75 $ 2.75
Earnings per share - diluted
Reported net income $1.38 $0.99 $ 3.70 $ 2.62
Goodwill amortization, net -- 0.03 -- 0.09
Indefinite-lived tradename
amortization, net -- -- -- --
Adjusted net income $1.38 $1.02 $ 3.70 $ 2.71
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The impact of Statement No. 142 on previously reported results follows.
Goodwill and Indefinite-Lived Tradenames
Supplemental Consolidated Statement of Income Information
Twelve months ended December 31
(Millions, except per-share amounts) 2001 2000 1999
Reported net income $1,430 $1,782 $1,763
Add back:
Goodwill amortization, net 48 30 16
Indefinite-lived tradename
amortization, net 3 2 --
Adjusted net income $1,481 $1,814 $1,779
Earnings per share - basic
Reported net income $ 3.63 $ 4.50 $ 4.39
Goodwill amortization, net 0.12 0.08 0.04
Indefinite-lived tradename
amortization, net 0.01 -- --
Adjusted net income $ 3.76 $ 4.58 $ 4.43
Earnings per share - diluted
Reported net income $ 3.58 $ 4.45 $ 4.34
Goodwill amortization, net 0.11 0.09 0.04
Indefinite-lived tradename
amortization, net 0.01 -- --
Adjusted net income $ 3.70 $ 4.54 $ 4.38
Goodwill and Indefinite-Lived Tradenames
Supplemental Consolidated Statement of Income Information
Three months ended
(Millions except, Mar. 31 Jun. 30 Sep. 30 Dec. 31
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
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Acquired Intangible Assets
The carrying amount and accumulated amortization of acquired intangible
assets follow.
(Millions) Jan. 1 Sep. 30
2002 2002
Patents $241 $259
Other amortizable intangible assets 85 96
Non-amortizable intangible assets (tradenames) 52 58
Total gross carrying amount 378 413
Accumulated amortization - patents (91) (114)
Accumulated amortization - other (49) (60)
Less total accumulated amortization (140) (174)
Total intangible assets, net $238 $239
The table below shows amortization expense for acquired intangible assets
(excluding amortization of goodwill in 2001) for all periods presented.
First First
Third Third Nine Nine
Quarter Quarter Months Months
(Millions) 2002 2001 2002 2001
Amortization expense $ 10 $ 8 $ 28 $ 23
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 3,000 positions
during the nine-month period ended September 30, 2002. Since the
inception of the program, the company has eliminated about 6,500
positions. These positions represent a wide range of functions throughout
the company. Certain employees may defer receipt of termination benefits,
thus cash payments can lag job eliminations. The restructuring current
liability at September 30, 2002, totaled $67 million. The majority of the
long-term portion of the restructuring liability, primarily special
termination pension and medical benefits, is reflected on the books of
3M's pension and medical trusts as part of the Accumulated Benefit
13
Obligation (ABO). It is estimated that 3M's trusts reflect approximately
$75 million of restructuring related long-term liabilities that have not
yet been paid out as of September 30, 2002. 3M's Consolidated Balance
Sheet reflects this remaining liability primarily as a reduction in
prepaid pension assets at September 30, 2002. In the fourth quarter of
2002, due to the expected shortfall between the pension trust ABO and
assets, the prepaid pension assets will be netted against the long-term
pension liability on 3M's Consolidated Balance Sheet.
No charges were incurred under this plan in the third quarter of 2002.
In the nine-month period ended September 30, 2002, the company recorded
charges related to this restructuring plan that reduced operating income
by $202 million and net income by $108 million. These 2002 charges were
classified as a component of cost of sales ($121 million); selling,
general and administrative expenses ($77 million); and research,
development and related expenses ($4 million). Of these charges, $111
million related to employee severance and benefits, $47 million related to
accelerated depreciation (incremental charges resulting from shortened
depreciable lives, primarily related to downsizing or consolidating
manufacturing operations), and $44 million related to other exit
activities. Other exit activities include incremental costs and
contractual obligations for items such as lease termination payments and
other facility exit costs (such as demolition of buildings, inventory
disposals, other) incurred as a direct result of this plan. The
reclassification of deferred separation pay from the long-term portion of
the liability to short-term totaled $47 million. The non-cash and long-
term portion of the employee severance and benefits liability totaled $35
million, primarily related to special termination pension and medical
benefits offered to eligible employees, which will generally be paid out
over their life expectancies. It also included $2 million of non-cash
stock option expense. 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 grants for
accounting purposes, which triggers earlier expense recognition.
The costs incurred by this plan, since inception in the second quarter of
2001, totaled $771 million. The severance and benefit charges were taken
in the quarter when management approved the plans and communicated
severance benefits to the employees. Communication of benefits to
international employees occurred in various countries during different
periods, resulting in the recognition of severance expense over multiple
periods of the restructuring plan.
14
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
Second quarter 2002 87 21 40 148
----- ----- ----- -----
Total charges $583 $127 $ 61 $771
===== ===== ===== =====
Restructuring liability
Current liability at
December 31, 2001 $185 $13 $198
First nine months 2002 activity
Charges 111 47 44 202
Reclassification from
long-term portion
of liability 47 - 47
Non-cash and long-term
portion of liability (35) (47) - (82)
Cash payments (275) (23) (298)
----- ----- -----
Current liability as of
September 30, 2002 $ 33 $34 $67
===== ===== =====
In the third quarter of 2001, the company recorded charges related to the
current restructuring plan that reduced operating income by $69 million
and net income by $43 million. These 2001 charges were included as a
component of cost of sales ($47 million); selling, general, and
administrative expenses ($16 million); and research and development
expense ($6 million).
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 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
acquisition-related charges of $23 million (recorded in cost of sales) in
the first quarter of 2001.
15
RECLASSIFICATIONS
Certain prior-period balance sheet amounts have been reclassified to
conform to the current year presentation.
Due to the adoption of EITF 00-25 effective January 1, 2002 (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.
Effective July 1, 2002, the company also reclassified certain net sales
and operating income amounts for all periods presented. This related to
the realignment of certain businesses from Health Care to Consumer and
Office (discussed next under "Business Segments").
16
BUSINESS SEGMENTS
3M's net sales and operating income by segment for the third quarter and
the nine-month periods ended September 30, 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 Markets segment.
Effective July 1, 2002, the company also reclassified net sales and
operating income for the realignment of certain businesses from Health
Care to Consumer and Office. These businesses had net sales of $118
million and operating income of $7 million for total year 2001. This
realignment had no impact on total company net sales or operating income.
-------------------------------------------------------------
BUSINESS
SEGMENT Three months ended Nine months ended
INFORMATION September 30 September 30
(Millions) 2002 2001 2002 2001
-------------------------------------------------------------
NET SALES
Transportation,
Graphics and Safety $ 974 $ 881 $ 2,862 $ 2,681
Health Care 901 818 2,642 2,436
Industrial 815 781 2,413 2,438
Consumer and Office 719 707 2,065 2,127
Electro and
Communications 481 514 1,448 1,702
Specialty Material 242 251 727 802
Corporate and
Unallocated 11 9 37 12
-------------------------------------------------------------
Total Company $4,143 $3,961 $12,194 $12,198
-------------------------------------------------------------
OPERATING INCOME
Transportation,
Graphics and Safety $ 237 $ 170 $ 693 $ 545
Health Care 224 189 657 539
Industrial 150 126 429 419
Consumer and Office 143 133 388 357
Electro and
Communications 70 44 209 189
Specialty Material 37 33 110 119
Corporate and
Unallocated (10) (75) (236) (477)
--------------------------------------------------------------
Total Company $ 851 $ 620 $2,250 $1,691
--------------------------------------------------------------
17
BUSINESS SEGMENTS (continued)
First and second quarter 2002 operating income includes non-recurring
charges (included in Corporate and Unallocated) of $54 million and $148
million, respectively, principally related to employee separation costs,
accelerated depreciation charges and other associated exit costs under the
company's previously announced restructuring plan. The restructuring costs
are not recorded in the individual business segments for internal
management reporting purposes. This enhances comparability and reflects
management focus on ongoing results.
The company had numerous non-recurring items that impacted the first nine
months of 2001. Third quarter 2001 operating income includes 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 restructuring plan. Second
quarter 2001 operating income includes 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 inventory acquired in business combinations 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.
As previously discussed, the company adopted EITF No. 00-25 effective
January 1, 2002, and effective July 1, 2002, also reclassified certain net
sales and operating income amounts for all periods presented related to
the realignment of certain businesses from Health Care to Consumer and
Office. The reclassified prior-period net sales in total (including both
of these reclassification impacts) are summarized as follows.
Net Sales Fourth Third Second First
(Millions) Year Quarter Quarter Quarter Quarter
------------------------------------------------------------------
Consumer and Office
2001 $ 2,817 $ 690 $ 707 $ 700 $ 720
2000 2,951 728 779 727 717
1999 2,805 726 742 671 666
Health Care
2001 $ 3,301 $ 865 $ 818 $ 820 $ 798
2000 3,007 766 744 761 736
1999 3,013 767 741 763 742
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
18
BUSINESS SEGMENTS (continued)
Operating Income Fourth Third Second First
(Millions) Year Quarter Quarter Quarter Quarter
------------------------------------------------------------------
Consumer and Office
2001 $ 454 $ 97 $ 133 $ 108 $ 116
2000 442 96 135 104 107
1999 403 95 123 97 88
Health Care
2001 $ 753 $ 214 $ 189 $ 188 $ 162
2000 667 158 162 156 191
1999 678 161 181 192 144
The reclassified net sales and operating income for the first and second
quarter of 2002 are summarized as follows.
Net Sales Operating Income
----------------- ----------------
Second First Second First
Quarter Quarter Quarter Quarter
2002 2002 2002 2002
------------------------------------------------------------------
Consumer and Office $ 695 $ 651 $ 126 $ 119
Health Care 896 845 213 220
DEBT ISSUANCES
In October 2000, the company filed a shelf registration with the
Securities and Exchange Commission related 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 under 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 that was swapped to a rate based on a
floating LIBOR index (1.68 percent at September 30, 2002). As of
September 30, 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 outstanding debt securities issued 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 potential dilution from the company's stock-based compensation
plans for the three-month and nine-month periods ended September 30, 2002
and 2001. Certain Management Stock Ownership Program options outstanding
were not included in the computation of diluted earnings per share because
they would not have had a dilutive effect (6.2 million and 6.7 million
average options for the three months ended September 30, 2002 and 2001,
respectively; 5.3 million and 3.3 million average options for the nine
months ended September 30, 2002 and 2001, respectively). Dividends are
paid quarterly to shareholders and totaled 62 cents per common share in
the first, second and third quarters of 2002, compared with 60 cents per
common share in each quarter of 2001.
19
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. For a more
detailed discussion of the company's derivative instruments, refer to the
company's 2001 Annual Report on Form 10-K.
During the second quarter of 2002, the company converted a foreign
currency based pricing contract into a dollar-based pricing contract. This
resulted in the discontinuance of certain foreign currency cash flow
hedges. The company recognized a $10 million pre-tax loss (recorded in
cost of sales) related to the discontinuance of these contracts.
The table that follows provides the amount recorded in cumulative
translation related to net investment hedging, and also provides cash flow
hedging instrument disclosures. Reclassification adjustments are made to
avoid double counting in comprehensive income items that are also included
as part of net income. The amount of the reclassification adjustment
recognized in other comprehensive income is equal to, but opposite in sign
from, the amount of the realized gain or loss in net income.
DERIVATIVES Three months ended Nine months ended
Net of Tax September 30 September 30
(Millions) 2002 2001 2002 2001
------------------------------------------
Unrealized gain/(loss) recorded in cumulative translation
Net investment hedging $ 3 $ (23) $(14) $ (5)
==========================================
Cash flow hedging instruments balance and activity
Beginning balance $(37) $ 6 $ 9 $ 0
------------------------------------------
Net unrealized holding
gain/(loss)* 11 (22) (48) 2
Reclassification
adjustment* 3 5 16 (13)
-------------------------------------------
Total activity 14 (17) (32) (11)
-------------------------------------------
Ending balance $(23)** $ (11) $ (23)** $(11)
===========================================
*Tax expense or benefit
Net unrealized holding
gain/(loss) $ (6) $ 13 $ 28 $ (1)
Reclassification
adjustment (1) (3) (9) 8
** Based on exchange rates at September 30, 2002, the company expects to
reclassify to earnings over the next 12 months a majority of the cash flow
hedging instruments after-tax loss of $23 million (with the impact largely
offset by foreign currency cash flows from underlying hedged items).
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) 2002 2001
----------------------------------------------------------------------
Cumulative translation - net $(1,039) $(1,152)
Minimum pension liability adjustments (74) (74)
Debt and equity securities,
unrealized gain (loss) - net (3) 12
Cash flow hedging instruments,
unrealized gain (loss) - net (23) 9
----------------------------------------------------------------------
Accumulated other comprehensive income (loss) $(1,139) $(1,205)
======================================================================
The minimum pension liability adjustment is calculated on an annual basis.
Accounting rules require that, if the accumulated benefit obligation (ABO)
exceeds the fair value of pension assets, the employer must recognize a
liability that is at least equal to the unfunded ABO. In the fourth
quarter of 2002, 3M anticipates recording a minimum pension liability
adjustment within other comprehensive income of approximately $1 billion
(net of tax).
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
(other than for cash flow hedging instruments which were discussed in the
"Accounting for Derivative Instruments" section) were not material.
-------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME Three months ended
September 30
(Millions) 2002 2001
-------------------------------------------------------------------
Net income $ 545 $ 394
Other comprehensive income (loss)
Cumulative translation - net of $1 million
tax provision in 2002 and $5 million tax
provision in 2001 (70) 100
Debt and equity securities,
unrealized gain (loss) - net of $2 million
tax benefit in 2002 and $2 million tax
benefit in 2001 (3) (5)
Cash flow hedging instruments, unrealized gain
(loss) - net of $7 million tax provision
in 2002 and $10 million tax benefit in 2001 14 (17)
-------------------------------------------------------------------
Total comprehensive income $ 486 $ 472
===================================================================
21
-------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME Nine months ended
September 30
(Millions) 2002 2001
-------------------------------------------------------------------
Net income $1,463 $1,049
Other comprehensive income (loss)
Cumulative translation - net of $11 million
tax benefit in 2002 and $7 million tax
provision in 2001 113 (148)
Debt and equity securities,
unrealized gain (loss) - net of $9 million
tax benefit in 2002 and $11 million tax
benefit in 2001 (15) (18)
Cash flow hedging instruments, unrealized
gain (loss) - net of $19 million tax benefit
in 2002 and $7 million tax benefit in 2001 (32) (11)
-------------------------------------------------------------------
Total comprehensive income $1,529 $ 872
===================================================================
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.
22
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 September 30, 2002, and the related consolidated
statements of income for each of the three-month and nine-month periods
ended September 30, 2002 and 2001, and of cash flows for the nine-month
periods ended September 30, 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
October 21, 2002
23
3M Company and Subsidiaries
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
country, region, business or industry; 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 net
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 net 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.
24
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 net sales and/or profit expectations. As part of the
company's strategy for growth, the company has made and may continue to
pursue 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.
RESULTS OF OPERATIONS
Third Quarter
--------------
Pro forma amounts (non-recurring items):
The company believes that discussion of results excluding significant non-
recurring items provides a useful analysis of operating trends. The pro
forma amounts (which exclude non-recurring items) that follow are not in
accordance with, or preferable to, amounts determined in conformity with
U.S. generally accepted accounting principles. Reference should be made
to the Consolidated Financial Statements and accompanying Notes for
additional information concerning non-recurring items, and for additional
information on amounts determined in accordance with U.S. generally
accepted accounting principles. The determination of non-recurring items
may not be comparable to similarly titled measures used by other
companies. There is discussion of operating measures that exclude non-
recurring items within this "Third Quarter" section. An (#) will be used
to cross-reference such subsequent discussion to this paragraph. The
third quarter of 2002 had no significant non-recurring items.
Overview:
The company reported net income of $545 million, or $1.38 per diluted
share, in the third quarter of 2002, versus $394 million, or $0.99 per
diluted share, in the third quarter last year. Third-quarter 2001 non-
recurring charges related to the company's restructuring plan reduced net
income by $43 million, or $0.11 per diluted share. Currency impacts
reduced earnings by 2 cents per diluted share in the third quarter of
25
2002, while the adoption of a new accounting standard resulting in the
cessation of goodwill and other indefinite-lived intangible asset
amortization boosted earnings by 3 cents per diluted share.
Goodwill and other intangible assets:
Statement of 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. The company completed its assessment of any potential
impairment upon adoption of this standard and determined that no
impairment existed at January 1, 2002. Additional information regarding
accounting pronouncements of the FASB, including SFAS No. 142, is included
in the Notes to the Consolidated Financial Statements.
Net Sales:
Components of Net Sales Change
Third Quarter 2002
W.W. U.S. Intl.
Volume - core 3.4% 0.3% 6.3%
Volume - acquisitions 0.4 0.4 0.3
Price 0.1 (0.6) 0.9
Translation 0.7 -- 1.3
----- ----- -----
Total 4.6% 0.1% 8.8%
===== ===== =====
Worldwide net sales for the third quarter of 2002 totaled $4.143 billion,
up 4.6 percent from the third quarter of last year. Core volume (which
excludes acquisition and divestiture impacts) increased 3.4 percent from
the third quarter last year. Acquisitions within the past 12 months
increased net sales by four-tenths of one percent. Selling prices were up
one-tenth of one percent. The weaker U.S dollar increased worldwide net
sales by seven-tenths of one percent.
Some of the products or components sold by 3M's international countries to
third parties are exported back to the United States and other parts of
the world. Thus, the net sales growth by area may not be indicative of
end-user consumption in the local country. In the United States, net
sales for the third quarter of 2002 totaled $1.915 billion, with core
volume up three-tenths of one percent. International net sales for the
third quarter of 2002 totaled $2.228 billion (an increase of 8.8 percent
in U.S. dollars), with core volume up 6.3 percent. Volume growth was led
by 19.3 percent growth in the Asia Pacific area, including volume growth
of 10.4 percent in Japan and 27.9 percent in the remainder of the region.
Volume increased 6.6 in Canada. Volume declined 2.5 percent in Europe and
0.5 percent in Latin America.
26
Non-recurring items:
The third quarter of 2002 had no significant non-recurring items. The
third quarter of 2001 includes restructuring charges of $69 million,
resulting from 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 2001 charge, $27 million related to employee severance and
benefit costs, $39 million related to accelerated depreciation
(incremental charges resulting from shortened depreciable lives, primarily
related to downsizing or consolidating manufacturing operations), and $3
million related to other exit activities.
27
Supplemental Unaudited Consolidated Statement of Income Information
(Dollars in millions, except per-share amounts)
Three months ended Three months ended
September 30, 2002 September 30, 2001
---------------------------- ----------------------------
Excluding Excluding
non- Non- non- Non-
recurring recurring REPORTED recurring recurring REPORTED
items items TOTAL items(#) items TOTAL
--------- ------- -------- --------- -------- -------
Net sales $4,143 $ -- $4,143 $3,961 $ -- $3,961
------ ------ ------ ------ ------ ------
Operating expenses
Cost of sales 2,115 -- 2,115 2,109 47 2,156
Selling, general and
administrative
expenses 913 -- 913 908 16 924
Research, develop-
ment and related
expenses 264 -- 264 255 6 261
------ ------ ------ ------ ------ ------
Total 3,292 -- 3,292 3,272 69 3,341
------ ------ ------ ------ ------ ------
Operating
income (loss) 851 -- 851 689 (69) 620
Interest expense
and (income), net 10 -- 10 21 -- 21
------ ------ ------ ------ ------ ------
Income (loss) before
income taxes and
minority interest 841 -- 841 668 (69) 599
Provision (benefit)
for income taxes 274 -- 274 220 (25) 195
Effective tax rate 32.5% 32.5% 32.9% 32.5%
Minority interest
expense (income) 22 -- 22 11 (1) 10
------ ------ ------ ------ ------ ------
Net income (loss) $ 545 -- $ 545 $ 437 (43) $ 394
====== ====== ====== ====== ====== ======
Weighted average
diluted shares 395.0 398.4
Net income per
diluted share $1.38 $0.99
====== ======
(#) Refer to discussion in paragraph 1 of this section
(#) Refer to discussion in paragraph 1 of this section
33
Costs:
Cost of sales for the first nine months of 2002 was 52.3 percent of net
sales, down 2.0 percentage points from the first nine months of last year.
Excluding non-recurring charges, cost of sales for the first nine months
of 2002 was down 1.1 percentage points from the first nine months of 2001.
Gross margins were positively impacted by accelerated implementation of
Six Sigma, indirect cost control, and employment 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.
Selling, general and administrative (SG&A) expenses for the first nine
months of 2002 were 22.7 percent of net sales, down 2.4 percentage points
from the first nine months of last year. Excluding non-recurring charges,
SG&A expenses were $121 million lower (down 1.0 percentage point) than in
the first nine months of last year, a reduction of 4.3 percent. This
improvement in SG&A costs was the result of Six Sigma implementation,
indirect cost control and employment reductions under the current
restructuring plan. SG&A also benefited by $49 million due to the
cessation of goodwill amortization and other indefinite-lived asset
amortization effective January 1, 2002.
Operating income:
Operating income for the first nine months of 2002 was 18.5 percent of net
sales, compared with 13.9 percent in the first nine months of last year.
Excluding non-recurring charges, operating income for the first nine
months of 2002 was 20.1 percent(#) of net sales, compared with 17.9
percent(#) in the first nine months of last year. Although the company
faced continued economic weakness, operating income excluding non-
recurring items grew by $272 million, or 12.5 percent, for the first nine
months of 2002, as compared to the first nine months of last year. The
cessation of goodwill amortization and other indefinite-lived asset
amortization benefited operating income by $49 million, while currency
impacts reduced operating income by an estimated $61 million. Excluding
non-recurring items, operating income margins in the first nine months of
2002 were 16.3 percent(#) in the United States and 23.3 percent(#)
internationally.
Interest expense and income:
Net interest expense (interest expense less interest income) for the first
nine months of 2002 was $31 million, which was $40 million lower than in
the first nine months of last year. Declining rates on floating-rate debt
drove the reduction in expense, along with some benefit related to lower
overall average debt balances. Interest income remained consistent with
the first nine months of last year.
Provision for income taxes:
The worldwide effective income tax rate for the first nine months of 2002
was 32.0 percent, down from 32.5 percent in the same period last year and
32.1 percent for total year 2001. Excluding non-recurring items, the
worldwide effective income tax rate for the first nine months of 2002 was
32.5 percent(#), down from 33.3 percent(#) in the same period last year
and 32.9 percent(#) for total year 2001. The tax rate decrease compared
to total year 2001 is principally due to the effect of the cessation of
34
amortization for goodwill and other indefinite-lived assets effective
January 1, 2002.
Net income:
Net income for the first nine months of 2002 totaled $1.463 billion, or
$3.70 per diluted share, compared with $1.049 billion, or $2.62 per
diluted share, in the same period last year, on a reported basis. Non-
recurring charges negatively impacted net income by $108 million, or 27
cents per diluted share, in the first nine months of 2002. In addition,
non-recurring charges negatively impacted net income by $306 million, or
76 cents per diluted share, in the first nine months of 2001. The
cessation of goodwill amortization and other indefinite-lived asset
amortization effective January 1, 2002, increased earnings per diluted
share by 9 cents. The company estimates that currency effects reduced net
income for the first nine months of 2002 by about $34 million, or 8 cents
per diluted share, compared with the same period last year. 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. These derivative instruments and other transaction
impacts reduced net income by $11 million for the first nine months of
2002 compared with the same period last year.
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 2002.
Effective July 1, 2002, the company reclassified certain net sales and
operating income amounts for all periods presented. This related to the
realignment of certain businesses from Health Care to Consumer and Office.
All markets benefited from savings associated with the restructuring plan.
In the Industrial Markets segment, volume increased 2.9 percent in the
third quarter, after decreasing 0.5 percent in the second quarter and 7.0
percent in the first quarter, compared with the same periods of 2001. The
third quarter improvement was driven by growth in the automotive
aftermarket, engineered adhesives, and the industrial tape businesses.
However, weaknesses still exist in most sectors of the global
manufacturing and industrial economy, and these weaknesses held back
growth in other product categories. Operating income increased 18.8
percent in the third quarter, driven by higher net sales and ongoing
process efficiencies. Operating income for the first nine months of 2002
increased 2.4 percent.
In the Transportation, Graphics and Safety Markets segment, volume grew
9.8 percent in the third quarter, 9.3 percent in the second quarter and
5.3 percent in the first quarter, compared with the same periods in 2001.
Growth was broad-based in the quarter. For the first nine months, growth
was led by optical films and automotive OEM products. Operating income
grew 39.1 percent in the third quarter and more than 25 percent for the
first nine months, boosted by strong volume growth and favorable product
mix.
35
In the Health Care Markets segment, including acquisitions, volume grew
9.0 percent in the third quarter, 7.1 percent in the second quarter, and
7.8 percent in the first quarter, compared with the same periods in 2001.
This growth includes approximately 2 percent due to acquisitions in the
first quarter, with minimal impact from acquisitions in the second and
third quarters. The third quarter and first nine months growth was led by
pharmaceuticals, dental and medical products. Operating income improved
18.5 percent in the third quarter, and about 20 percent for the first nine
months.
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 efforts. 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 the year 2002, the company estimates $43 million of
revenue will be recorded related to this agreement.
In the Consumer and Office Markets segment, volume increased eight-tenths
of one percent in the third quarter of 2002 after decreasing 2.8 percent
in the second quarter and 8.5 percent in the first quarter, compared with
the same periods in 2001. The third quarter growth was led by growth in
the home improvement channel. However, ongoing weaknesses in certain
segments in the office supply market continue to negatively affect demand
in the Consumer and Office Market segment. Operating income increased 7.5
percent in the third quarter and about 9 percent for the first nine months
of 2002, as compared to the same periods last year.
In the Electro and Communications Markets segment, volume declined 5.8
percent in the third quarter of 2002, about 15 percent in the second
quarter, and 23 percent in the first quarter, compared with the same
periods in 2001. Volumes remained weak in the telecom industry. Looking
ahead, the company has more work to do in improving its telecom business,
as the end-markets remain very weak. On the positive side, good growth
was achieved in the Microinterconnect Systems and the Electrical Products
businesses in the third quarter. Operating income increased about 58.4
percent for the third quarter, resulting in positive income growth for the
first nine months of 2002.
In the Specialty Material Markets segment, volume declined 4.7 percent in
the third quarter of 2002, 5.9 percent in the second quarter and 16.8
percent in the first quarter, compared with the same periods in 2001.
These decreases were primarily due to the product related phase-out
discussed in previous Annual Reports on Form 10-K and Quarterly Reports on
Form 10-Q filings. The company plans to introduce several new Scotchgard
brand products over the next few months to rebuild this business.
Operating income in the market improved 12.3 percent in the third quarter,
despite the volume reduction, but profits were down about 7 percent for
the first nine months.
36
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong. Working
capital (defined as current assets minus current liabilities) totaled
$2.045 billion at September 30, 2002, increasing $258 million from year-
end 2001. The increase in working capital, when compared with year-end
2001, was partially driven by a shift in debt from short-term to long-term
and an increase in cash and cash equivalents.
The accounts receivable turnover index (defined as quarterly net sales
multiplied by 4 divided by ending accounts receivable) totaled 6.41 at
September 30, 2002, an improvement from 6.22 at year-end 2001 and 5.56 at
September 30, 2001. Receivables increased $103 million compared with
year-end, but decreased $266 million, or 9 percent, versus the comparable
period last year. The inventory turnover index (defined as quarterly
factory cost excluding non-recurring amounts multiplied by 4 divided by
ending inventory) was 4.15 at September 30, 2002, an improvement from 3.76
at year-end 2001, and 3.57 at September 30, 2001. Inventories declined
$146 million versus year-end 2001, and declined by $297 million compared
with September 30, 2001. Currency effects also impacted these
consolidated balance sheet comparisons. Currency effects at September 30,
2002, compared with December 31, 2001, increased the accounts receivable
and inventory balances (due to the weaker U.S. dollar) by $78 million and
$44 million, respectively.
Total debt increased $46 million from year-end 2001. As of September 30,
2002, total debt was 31 percent of total capital, compared with 32 percent
at year-end 2001. The company's believes its strong credit rating
provides sufficient access to funds in the global capital markets. The
company's available short-term lines of credit have not materially changed
since December 31, 2001. The company also estimates that its uncommitted
lines of credit total approximately $250 million.
An additional letter of credit of $297 million at September 30, 2002,
relates to the potential acquisition by 3M of the 43 percent minority
interest in 3M Inter-Unitek GmbH from former shareholders of ESPE Dental
AG. As discussed in the 2001 Annual Report on Form 10-K, 3M entered into
put/call option agreements with former shareholders of ESPE Dental AG. In
October 2002, 3M received written advice from the former ESPE shareholders
regarding their intention to exercise the put option in December 2002.
Under the put agreements, 3M would be required to purchase the remaining
43 percent minority interest for cash of approximately $300 million.
Net cash provided by operating activities totaled $1.993 billion in the
first nine months of the year, down $267 million from the same period
last year. Cash flow from operating activities can fluctuate
significantly from quarter to quarter. Pension funding decisions, tax
timing differences and other impacts can significantly impact cash flows.
As discussed in more detail later, 3M made a $789 million tax deductible
contribution to its United States pension plan in the third quarter of
2002. This resulted in an increase of $789 million in prepaid pension
benefits within "Other assets" and an increase of approximately $300
million related to the deferred income tax balance included within "Other
liabilities". In the Consolidated Statement of Cash Flows, the deferred
income tax change is shown as part of "Deferred income tax assets and
37
liabilities" within the operating activities section. Restructuring-
related cash payments totaled $298 million in the first nine months of
2002, compared with cash payments of $97 million in the first nine months
of 2001.
3M's pension plan assets have declined due to recent equity market
weakness while pension liabilities and benefit payments have continued to
grow. 3M currently anticipates that pension plan assets will be below
3M's accumulated benefit obligation (ABO) at its most recent measurement
dates for its plans. Accounting rules require that, if ABO exceeds the
fair value of pension plan assets, the employer must recognize a
liability that is at least equal to the unfunded ABO. In the fourth
quarter of 2002, 3M anticipates recording a minimum pension liability
adjustment within other comprehensive income of approximately $1 billion
(net of tax). Other comprehensive income is a term that captures certain
items excluded from net income, such as changes in cumulative
translation, unrealized gains or losses related to debt and equity
securities, as well as additional pension liabilities not
yet recognized in the Consolidated Statement of Income as part of net
pension cost. Other balance sheet accounts impacted by this would
include deferred taxes, a reduction in the unfunded pension assets, and
an increase in pension liabilities. This anticipated fourth quarter
impact is a result of recent declines in 3M's pension plan trust assets
which are invested in the equity markets, benefit payments from plan
assets, and the growth in 3M's pension liabilities due in part to
declining interest rates which reduced the discount rate. The exact
amount will not be known until the company finalizes its worldwide
pension plan actuarial analysis. 3M has embarked on a contribution
strategy to fully fund its pension plans on an ABO basis within three to
five years, so the company expects a reversal of this equity adjustment
within that same time period.
Due to Internal Revenue Service regulations, 3M could not fully fund its
United States pension liability on a tax-deductible basis in 2002. 3M
contributed $789 million in the third quarter of 2002. 3M's pension
measurement date for its United States employee benefit plans is
September 30, so the size of this contribution was heavily impacted by
continued market weakness. Future contributions will depend on market
conditions. In looking at a number of different scenarios, 3M is
confident its strong cash flow and balance sheet will allow it to fund
future pension needs without compromising growth opportunities.
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, including recent developments in implant
insurance recovery litigation, 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 $41 million of net cash inflows in the first nine months of
2002, compared with $28 million of net cash inflows in the same period of
2001.
38
Cash used in investing activities totaled $566 million in the first nine
months of the year, compared with $906 million in the same period last
year. Capital expenditures for the first nine months of 2002 were $530
million, a decrease of $236 million from the same period last year.
Capital expenditures are expected to total approximately $800 million for
total year 2002. Cash used for acquisitions of businesses totaled $88
million in the first nine months of 2002, compared with $208 million in
the same period last year. In 2002, 3M purchased six small businesses
with $88 million in cash and $35 million in shares of 3M common stock
(non-cash transaction). In the first nine months of 2001, cash used for
business combinations principally related to MicroTouch Systems Inc.
The company is actively considering additional acquisitions. On November
12, 2002, 3M announced that it had entered into a definitive agreement to
acquire the stock of Corning Precision Lens Inc., a wholly owned
subsidiary of Corning Incorporated. Corning Precision Lens is the
largest worldwide manufacturer of lens systems for rear projection
televisions. The transaction has been approved by the board of directors
of both companies and is subject to customary closing conditions and
regulatory approvals. The transaction is expected to close by the end of
2002. Upon completion of the transaction, Corning Precision Lens will
become a subsidiary of 3M's Optical Systems Division, which is in 3M's
Transportation, Graphics and Safety Markets segment. The 3M Optical
Systems Division has grown from about $300 million in 1999 to an
estimated $800 million in 2002, due to a combination of strong organic
growth and acquisitions in the touch screen area.
Employing approximately 1,500 people, Corning Precision Lens currently
supplies customers globally from its headquarters in Cincinnati, Ohio.
Sales for total year 2002 are expected to be $260 million. The gross
purchase price of this business is approximately $850 million in cash.
This acquisition qualifies for a joint election tax benefit under Section
338(h)(10), which allows goodwill to be fully deductible for tax purposes
over a period of 15 years. The net present value of the tax benefit,
largely related to goodwill, is approximately $170 million. The purchase
is expected to contribute approximately 7 cents to 3M earnings per share
in 2003 after one-time acquisition and transition costs.
The company expects to finance the Corning Precision Lens acquisition
through a combination of operating cash flows and other financing. Other
expected fourth quarter events (discussed earlier) that may impact the
debt to capital ratio include the expected purchase by 3M of the remaining
43 percent minority interest in ESPE for cash of approximately $300
million, and the minimum pension liability adjustment within other
comprehensive income of approximately $1 billion. For these reasons,
over the next quarter or two, 3M's debt to capital ratio may increase to
37 or 38 percent. The debt to capital ratio is expected to return to the
traditional 30 to 35 percent range shortly thereafter.
39
Financing activities in the first nine months of 2002 for both short-term
and long-term debt included net cash inflows of $18 million, compared with
net cash inflows of $283 million in the same period last year. The
decrease in net short-term debt of $25 million includes the portion of
short-term debt with original maturities of 3 months or less. Repayment of
other debt of $482 million includes $454 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 nine months of 2002 totaled $813
million, compared with $1.112 billion in the same period last year. The
company repurchased about 6.9 million shares of common stock in the first
nine months of 2002, compared with about 10.1 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 September 30, 2002, about $1.7
billion remains available for repurchases. Stock repurchases are made to
support the company's Management Stock Ownership Program, 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 1
cent per diluted share in the third quarter of 2002, and 5 cents per
diluted share for the first nine months of 2002, compared with the same
periods last year.
Cash dividends paid to shareholders totaled $725 million in the first nine
months of this year, compared with $713 million in the same period last
year. In February 2002, the quarterly dividend was increased to 62 cents
per share from 60 cents per share.
2002 MANAGEMENT STOCK OWNERSHIP PROGRAM
The 3M 2002 Management Stock Ownership Program was approved by
shareholders on May 14, 2002. The plan has 22.7 million shares of common
stock available to be issued or delivered as a result of options,
restricted stock or other stock awards granted during the term of the 2002
Program, or made subject to stock appreciation rights granted during the
term of the 2002 Program. The term of the 2002 Program expires on May 14,
2005. The annual stock options granted on May 14, 2002, totaled
approximately 6.2 million. The company currently estimates that the
impact on pro forma diluted earnings per share in 2002 will be similar to
that experienced in 2001.
THE EURO CONVERSION
There have been no 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.
40
FUTURE OUTLOOK
The company sees no material change in the economic outlook and,
consequently, remains cautious about business conditions in the fourth
quarter of 2002 and also for 2003. 3M's operating plans are focused on
delivering results in what appears to be a continued difficult economic
environment. The company will continue to press ahead with its five
corporate initiatives (Six Sigma, Global Sourcing Effectiveness, 3M
Acceleration, Indirect Cost Reduction and eProductivity) aimed at
accelerating long-term top-line growth, improving cash efficiency and
lowering its total cost structure. 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 year 2002 reported earnings to be within a range of
$4.95 to $5.00 per diluted share. This expectation includes a negative
impact of 27 cents per diluted share related to non-recurring items.
This range assumes a positive 12 cent impact due to cessation of goodwill
amortization and other indefinite-lived intangible asset amortization in
accordance with the adoption of a recent accounting standard. Raw
material costs were down an estimated 3 percent in the first nine months
of 2002, and 3M also expects some improvement for the remainder of 2002,
due both to 3M's continued global sourcing initiatives and cost-reduction
efforts. The company expects a tax rate in the 32.5 percent range for the
remainder of 2002. Reported earnings for the fourth quarter of 2002 are
expected to be within a range of $1.25 to $1.30 per diluted share.
As discussed previously, the company is cautious about business
conditions in 2003, especially in the United States, Europe and Latin
America. The company expects higher pension expense in 2003. The amount
of the increase is dependent on how the markets perform, interest rate
changes, foreign currency exchange rate changes, and the amounts of any
3M contributions to its international pension plans. In addition, wage
inflation and health care cost increases will create challenges. 3M will
continue to focus on its initiatives (such as 3M Acceleration to help
drive sales), its large international presence, acquisitions, and other
programs.
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 3,000 positions
during the first nine months of 2002, and since inception has eliminated
about 6,500 positions. These positions represent a wide range of functions
throughout the company. Once all final actions have been completed, the
company expects to have eliminated approximately 6,900 positions. The
remaining 400 positions represent employees who are expected to leave the
company in the fourth quarter of 2002 under the restructuring plan. These
employees were included in the plan management approved, and severance
benefits have been communicated to them. Cash payments related to the
restructuring for the fourth quarter of 2002 and year 2003 are expected to
total less than $100 million.
41
Selected information related 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
Second quarter 2002 87 21 40 148
----- ----- ----- -----
Total charges $583 $127 $61 $771
===== ===== ===== =====
Restructuring liability
Current liability at
December 31, 2001 $185 $13 $198
First nine months 2002 activity
Charges 111 47 44 202
Reclassification from
long-term portion
of liability 47 - 47
Non-cash and long-term
portion of liability (35) (47) - (82)
Cash payments (275) (23) (298)
----- ----- -----
Current liability as of
September 30, 2002 $ 33 $34 $ 67
===== ===== =====
Related to this restructuring plan, the company estimates it saved $80
million in the second half of 2001, and $235 million on an incremental
basis in the first nine months of 2002. The company expects the
incremental impact for the year 2002 to be around $300 million. Upon
completion of all actions, it is estimated that the restructuring plan
will have generated approximately $500 million in annualized savings. 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 factors.
42
The company is increasingly striving to move costs outside the United
States to more closely match its operations and supply chains to its
customers. This also offers 3M protection 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the context of Item 3, market risk refers to the risk of loss arising
from adverse changes in financial and derivative instrument market rates
and prices, such as fluctuations in interest rates and foreign-currency
exchange rates. For discussion of sensitivity analysis related to these
types of market risks refer to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in our Annual Report on Form
10-K for the year ended December 31, 2001. The company believes that
there have been no material changes in these market risks since year-end
2001.
ITEM 4. CONTROLS AND PROCEDURES
a. Within the 90 days prior to the filing date of this quarterly report,
the company carried out an evaluation, under the supervision and with the
participation of the company's management, including the company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
company (including its consolidated subsidiaries) required to be included
in the company's periodic SEC filings.
b. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls subsequent to the date the Company carried out this evaluation.
43
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. Given the uncertainty of
litigation and in making future projections, the company has and will
continue to periodically reexamine its estimates of probable liabilities
and associated expenses and make appropriate adjustments to such
estimates based on experience and developments in the litigation. As a
result, the current estimates of the potential impact on the company's
44
consolidated financial position, results of operations and cash flows
for the proceedings and claims described in "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 vast majority of claims against
the company have been resolved. Claims against the company registered
in the revised class action settlement program approved by the United
States District Court for the Northern District of Alabama (the "Revised
Settlement Program") have been or will be resolved through the Revised
Settlement Program. The company has confirmed that approximately 7
remaining claimants who have opted out of the Revised Settlement Program
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's insurers providing occurrence-based coverage 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 a portion
of the company's reasonable attorney fees in connection with the
insurance coverage litigation. 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. Oral argument on the appeal was heard on
July 3, 2002. On September 24, 2002, the Minnesota Court of Appeals
affirmed in part and reversed in part the trial court's judgment. The
Court of Appeals confirmed coverage but allocated the coverage so as to
reduce a substantial portion of the amounts for losses and defense costs
owing by insurers as reflected in the trial court judgment. The Court of
Appeals also reversed the company's award of attorneys' fees referenced
above. The company filed a Petition for Review with the Minnesota
Supreme Court. The company believes that the Petition for Review should
be granted and that the trial court judgment should be sustained on
appeal. If the Minnesota Supreme Court does not accept the Petition for
Review, the company could be effectively deprived of significant and
potentially material insurance coverage for breast implant claims.
45
The company also initiated an arbitration proceeding in London, England,
to recover insurance coverage for breast implant liability and costs
from claims-made insurance carriers which represents another portion of
the company's potential recovery that is being contested. The
arbitration hearing is currently scheduled for January 2003.
As of September 30, 2002, the company had receivables for insurance
recoveries related to the breast implant matter of $354 million,
representing settled but yet to be received amounts ($31 million), as
well as amounts contested by the insurance carriers ($323 million).
During the third quarter of 2002, the company received payments of $17
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
-----------------------------------
For more than twenty years, the company has successfully defended and
resolved the claims of over 200,000 individual claimants alleging
injuries from occupational dust exposures. The vast majority of the
lawsuits and claims resolved by the company alleged use of some of the
company's mask and respirator products and sought damages from the
company and other defendants for alleged personal injury from work place
exposures to asbestos or, less frequently, silica and other occupational
dust, found in products manufactured by other defendants. The remaining
lawsuits and claims generally alleged 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.
The company's vigorous defense of this litigation has resulted in: (i)
jury verdicts for the company in two of three cases tried to verdict;
(ii) frequent dismissals of lawsuits without any payment by the company;
and (iii) an average settlement value of less than $1,000 per case for
all of the claims and lawsuits that the company has resolved. In many of
these lawsuits and claims, the 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.
In 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 certain
asbestos-related diseases allegedly caused by exposure to asbestos-
containing products manufactured by other defendants. The case against the
company initially involved six plaintiffs whose claims were consolidated
46
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, 2001 the jury returned verdicts 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 of the four verdicts against it is $22.5
million. The company can provide no assurance at this time about the
ability of the other two co-defendants to pay their respective shares of
any ultimate judgment or whether a co-defendant's inability to pay will
cause a reallocation of the liability for damages among the remaining
solvent defendants under state law. One of the co-defendants, ACandS, has
filed for Chapter 11 bankruptcy protection. Judgment was entered on
January 30, 2002. Oral argument on the post-trial motions occurred on May
23, 2002. The trial court denied the company's post-trial motions in a
decision on August 21, 2002, and the company has filed a notice of appeal
with the Mississippi Supreme Court. Because the company will vigorously
challenge the judgment through the appellate process, and believes that
the judgment ultimately will be overturned, no liability has been recorded
related to this matter as of September 30, 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.
As of September 30, 2002, the company is a named defendant, with
multiple co-defendants, in numerous lawsuits and claims in various
courts that purport to represent approximately 43,000 individual
claimants. The majority of these current claimants allege use of some of
the company's mask and respirator products. Others have made non-
specific claims against a number of defendants and have identified
specific products manufactured by the company. The company settled an
unusually large number of pending claims during the third quarter of
2002 and thus had a substantial reduction in the number of open
claimants - from approximately 74,700 claimants at the end of the second
quarter of 2002 to approximately 43,000 current claimants.
The company periodically reexamines its estimate of probable liabilities
and associated expenses and makes appropriate adjustments to such
estimates based on experience and developments in the litigation.
Because of the substantial number of settlements that occurred in the third
quarter of 2002, the company increased its accrued liabilities by $67
million (with an offsetting increase in the probable amount of insurance
recoveries) for the following reasons: (i) the company settled more
claims during the third quarter than in any previous quarter with some of
the claims involving allegations of more serious injury, which were
settled at more than previously estimated amounts, but consistent with
historical values paid by the company to settle such claims; (ii) a
substantial increase in defense spending in the first nine months of 2002
and especially the third quarter of 2002 was necessary and contributed to
the increase in settled claims in the quarter. The company anticipates
significant defense spending over the near term as the company continues
to aggressively manage this litigation. These increased legal costs
(incurred and expected in the future) amount to nearly one-half of the
increase in the estimated accrued liability. The company continues to
47
resolve significant numbers of cases at amounts consistent with
historical averages. As a result, the company has not changed its
estimate of the amount to cover the per- claim cost of resolving probable
future claims.
As of September 30, 2002, the company had estimated accrued liabilities
of approximately $178 million for respirator/mask asbestos related
claims. This amount represents the company's best estimate of the amount
to cover the cost and expense of resolving recently settled, current and
probable future respirator/mask asbestos related claims. The company also
had receivables for expected insurance recoveries of approximately $263
million. The difference between the accrued liability and insurance
receivable represents the time delay between payment of claims and
receipt of insurance reimbursements. Because of the lag time between
settlement and payment of a claim, no meaningful conclusions may be drawn
from quarterly changes in the amount of receivables for expected
insurance recoveries and the quarterly changes in the number of claimants
at the end of each quarter.
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) significant changes in the legal costs
of defending these claims and in maintaining trial readiness, (iv)
changes in the nature of claims received, (v) changes in the law and
procedure applicable to these claims, or (vi) financial viability of
other co-defendants and insurers, and (vii) other unknown variables. The
company cannot determine the impact of these potential developments on
the current estimate of its probable liabilities and associated
expenses.
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.
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
48
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.
The State of New York Department of Environmental Conservation has
issued a proposed penalty and consent agreement for $212,000 for alleged
violations of the New York air emissions regulations. The company plans
to meet with the agency to discuss the penalty and corrective actions
proposed by the company.
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 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.
49
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 55.
(15) A letter from the company's independent accountants
regarding unaudited interim consolidated
financial statements. Page 56.
Reports on Form 8-K:
3M filed one Form 8-K for the quarter ended September 30, 2002.
The Form 8-K dated August 12, 2002, indicated both the principal executive
officer, W. James McNerney, Jr., and principal financial officer, Patrick
D. Campbell, of 3M Company submitted sworn statements to the Securities
and Exchange Commission relating to Exchange Act Filings pursuant to
Commission Order No. 4-460.
None of the other item requirements of Part II of Quarterly Reports on
Form 10-Q are applicable to the company for the quarter ended September
30, 2002.
50
SIGNATURE PAGE
for Form 10-Q for quarter ended September 30, 2002
---------------------------------------------------
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: November 12, 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.)
51
Sarbanes-Oxley Section 302 Certification
I, W. James McNerney, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of 3M Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002
/s/ W. James McNerney, Jr.
---------------------------
W. James McNerney, Jr.
Chief Executive Officer
52
Sarbanes-Oxley Section 302 Certification
I, Patrick D. Campbell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 3M Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002
/s/ Patrick D. Campbell
------------------------
Patrick D. Campbell
Chief Financial Officer
53
Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
In connection with the Quarterly Report of 3M Company (the "Company") on
Form 10-Q for the period ended September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
W. James McNerney, Jr., Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ W. James McNerney, Jr.
---------------------------
W. James McNerney, Jr.
Chief Executive Officer
November 12, 2002
54
Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
In connection with the Quarterly Report of 3M Company (the "Company") on
Form 10-Q for the period ended September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Patrick D. Campbell, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Patrick D. Campbell
------------------------
Patrick D. Campbell
Chief Financial Officer
November 12, 2002