1
-------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended March 31, 2003
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
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
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
On March 31, 2003, there were 390,833,851 shares of the registrant's
common stock outstanding.
This document contains 37 pages.
The exhibit index is set forth on page 30.
-------------------------------------------------------------------------
2
3M Company and Subsidiaries
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3M Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
-----------------------------------------------------------
Three months ended
(Amounts in millions, March 31
except per share amounts) 2003 2002
-----------------------------------------------------------
Net sales $4,318 $3,890
-----------------------------------------------------------
Operating expenses
Cost of sales 2,211 2,036
Selling, general and
administrative expenses 963 877
Research, development and
related expenses 270 264
Other expense 93 --
-----------------------------------------------------------
Total 3,537 3,177
-----------------------------------------------------------
Operating income 781 713
-----------------------------------------------------------
Interest expense and income
Interest expense 23 19
Interest income (6) (9)
-----------------------------------------------------------
Total 17 10
-----------------------------------------------------------
Income before income taxes
and minority interest 764 703
Provision for income taxes 248 227
Minority interest 14 24
-----------------------------------------------------------
Net income $ 502 $ 452
-----------------------------------------------------------
Weighted average common
shares outstanding - basic 390.0 389.9
Earnings per share - basic $ 1.29 $ 1.16
-----------------------------------------------------------
Weighted average common
shares outstanding - diluted 395.3 395.2
Earnings per share - diluted $ 1.27 $ 1.14
-----------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
3
3M Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Unaudited)
---------------------------------------------------------------------------
Mar. 31 Dec. 31
(Dollars in millions, except per share amounts) 2003 2002
---------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 561 $ 618
Accounts receivable - net 2,643 2,527
Inventories
Finished goods 1,008 1,011
Work in process 621 591
Raw materials and supplies 328 329
---------------------------------------------------------------------------
Total inventories 1,957 1,931
Other current assets 1,303 983
---------------------------------------------------------------------------
Total current assets 6,464 6,059
Investments 221 238
Property, plant and equipment 15,191 15,058
Less accumulated depreciation (9,641) (9,437)
---------------------------------------------------------------------------
Property, plant and equipment - net 5,550 5,621
Goodwill 2,157 1,898
Intangible assets 271 269
Other assets 1,182 1,244
---------------------------------------------------------------------------
Total assets $15,845 $15,329
---------------------------------------------------------------------------
LIABILITIES
Current liabilities
Short-term debt $ 1,200 $ 1,237
Accounts payable 963 945
Payroll 409 411
Income taxes 652 518
Other current liabilities 1,468 1,346
---------------------------------------------------------------------------
Total current liabilities 4,692 4,457
Long-term debt 2,119 2,140
Other liabilities 2,718 2,739
---------------------------------------------------------------------------
Total liabilities 9,529 9,336
---------------------------------------------------------------------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 472,016,528 shares issued 5 5
Capital in excess of par value 291 291
Retained earnings 12,935 12,748
Treasury stock, at cost; 81,182,677 shares at
Mar. 31, 2003; 81,820,847 shares at Dec. 31, 2002 (4,688) (4,767)
Unearned compensation (242) (258)
Accumulated other comprehensive income (loss) (1,985) (2,026)
---------------------------------------------------------------------------
Total stockholders' equity 6,316 5,993
---------------------------------------------------------------------------
Total liabilities and stockholders' equity $15,845 $15,329
---------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
4
3M Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
------------------------------------------------------------------------
Three months ended
March 31
(Dollars in millions) 2003 2002
------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 502 $ 452
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 234 250
Pension company contributions (32) (24)
Deferred income tax provision (23) 17
Changes in assets and liabilities
Accounts receivable (97) (140)
Inventories 7 82
Other current assets (311) 11
Other assets - net of amortization 76 10
Income taxes payable 165 25
Accounts payable and other current liabilities 150 (83)
Other liabilities 88 63
Other - net 5 8
------------------------------------------------------------------------
Net cash provided by operating activities 764 671
------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (120) (161)
Proceeds from sale of property, plant and equipment 69 16
Acquisitions of businesses (416) --
Purchases of investments -- (3)
Proceeds from sale of investments 2 5
------------------------------------------------------------------------
Net cash used in investing activities (465) (143)
------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt - net 6 (255)
Repayment of debt (maturities greater than 90 days) (196) (259)
Proceeds from debt (maturities greater than 90 days) 152 525
Purchases of treasury stock (173) (420)
Reissuances of treasury stock 160 124
Dividends paid to stockholders (257) (242)
Distributions to minority interests -- (40)
Other - net (14) --
------------------------------------------------------------------------
Net cash used in financing activities (322) (567)
------------------------------------------------------------------------
Effect of exchange rate changes on cash (34) 13
------------------------------------------------------------------------
Net decrease in cash and cash equivalents (57) (26)
------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 618 616
------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 561 $ 590
------------------------------------------------------------------------
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. This Quarterly Report on Form 10-Q should be read in conjunction
with the company's consolidated financial statements and notes included in
its 2002 Annual Report on Form 10-K.
RECLASSIFICATIONS
Certain prior period Consolidated Statement of Cash Flows amounts within
the "Net cash provided by operating activities" section have been
reclassified to conform to the current year presentation.
ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations," which was issued by the Financial Accounting Standards Board
(FASB). This statement establishes accounting standards for recognition
and measurement of a liability for an asset retirement obligation and the
associated asset retirement cost. The adoption of this standard did not
impact 3M's consolidated financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This statement amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The company is reviewing
the requirements of this standard. The company has not yet finalized its
determination of the impact of this standard on 3M's consolidated
financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities." This interpretation
addresses the requirements for business enterprises to consolidate
related entities in which they are determined to be the primary economic
beneficiary as a result of their variable economic interests. The
interpretation is intended to provide guidance in judging multiple
economic interests in an entity and in determining the primary
beneficiary. The interpretation outlines disclosure requirements for
VIEs in existence prior to January 31, 2003, and outlines consolidation
requirements for VIEs created after January 31, 2003. The company has
reviewed its major commercial relationships and its overall economic
interests with other companies consisting of related parties, contracted
manufacturing vendors, companies in which it has an equity position, and
other suppliers to determine the extent of its variable economic interest
in these parties. The review has not resulted in a determination that 3M
6
would be judged to be the primary economic beneficiary in any material
relationships, or that any material entities would be judged to be
Variable Interest Entities of 3M.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements concerning its obligations under certain guarantees
that it has issued. It also clarifies (for guarantees issued after
January 1, 2003), that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligations undertaken in issuing the guarantee. For the first quarter of
2003, 3M did not have any significant guarantees.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure. An amendment of FASB
Statement No. 123." The company is choosing to continue with its current
practice of applying the recognition and measurement principles of APB
No. 25, "Accounting for Stock Issued to Employees." The company has
adopted the disclosure requirements of SFAS No. 148. Pro forma amounts
based on the options' estimated fair value, net of tax, at the grant dates
for awards under the General Employees' Stock Purchase Plan and Management
Stock Ownership Program for the quarter ended March 31, 2003 and 2002,
follow.
-----------------------------------------------------------------
PRO FORMA NET INCOME AND EARNINGS PER SHARE
Three months ended
(Dollars in millions, March 31
except per share amounts) 2003 2002
-----------------------------------------------------------------
Net income, as reported $ 502 $ 452
Add: Stock-based compensation expense
included in net income, net of
related tax effects 1 1
Deduct: Total stock-based compensation
expense determined under fair value,
net of related tax effects (37) (43)
Pro forma net income 466 410
-----------------------------------------------------------------
Earnings per share - basic
As reported $ 1.29 $ 1.16
Pro forma 1.20 1.05
Earnings per share - diluted
As reported $ 1.27 $ 1.14
Pro forma 1.18 1.04
-----------------------------------------------------------------
7
BUSINESS COMBINATIONS
During the quarter ended March 31, 2003, 3M purchased an additional 25
percent interest of Sumitomo 3M Limited from NEC Corporation for $377
million in cash. Because all business segments benefit from this
combination, goodwill acquired in this acquisition was allocated to 3M's
seven business segments. As a result of this acquisition, 3M now owns 75
percent of Sumitomo 3M Limited. Sumitomo Electric Industries, Ltd., a
Japanese corporation, owns the remaining 25 percent of Sumitomo 3M
Limited. The purchase price allocation at March 31, 2003, was
preliminary.
During the quarter ended March 31, 2003, 3M (Display and Graphics
business) finalized the purchase of Corning Precision Lens, Inc. The
purchase price allocation at year-end 2002 was preliminary. The
contingent consideration related to the final working capital valuation,
as discussed in the Annual Report on Form 10-K for the year ended
December 31, 2002, was resolved. 3M paid $9 million in contingent
consideration to Corning Incorporated, the former parent company of
Corning Precision Lens, Inc. 3M paid $4 million in direct acquisition
expenses in the first quarter. The impacts of finalizing the purchase
price allocation, including the working capital adjustment and payment of
direct acquisition expenses, are displayed in the business combination
activity table that follows.
During the quarter ended March 31, 2003, 3M entered into two additional
business combinations for $26 million, net of cash acquired.
1) 3M (Industrial Business) purchased 100 percent of the outstanding
shares of Solvay Fluoropolymers, Inc. (SFI), a previously wholly owned
subsidiary of Solvay America, Inc. SFI is a manufacturer of
fluoroplastic products.
2) 3M (Display and Graphics Business) purchased Corning Shanghai
Logistics Company Limited, a previously wholly owned subsidiary of
Corning Incorporated. This business is involved in the distribution of
lens systems for projection televisions.
The first quarter 2003 business combination activity is summarized in the
following table. Pro forma information related to these acquisitions is
not included because the impact of these acquisitions, either
individually or in the aggregate, on the company's consolidated results
of operations is not considered to be significant.
8
---------------------------------------------------------------------------
BUSINESS COMBINATION ACTIVITY
Asset (Liability)
Sumitomo Corning Aggregation
3M Precision of Remaining Total
(Millions) Limited Lens, Inc. Acquisitions Activity
---------------------------------------------------------------------------
Accounts receivable $ -- $-- $ 4 $ 4
Inventory 9 -- 8 17
Investments -- -- (15) (15)
Property, plant and
equipment - net -- (3) 29 26
Purchased intangible assets -- 4 3 7
Purchased goodwill 233 8 -- 241
Accounts payable and
other current liabilities -- 4 (5) (1)
Minority interest liability 139 -- -- 139
Other long-term liabilities (4) -- 2 (2)
--------------------------------------------------------------------------
Net assets acquired $377 $13 $26 $416
--------------------------------------------------------------------------
GOODWILL
As discussed later in the "Business Segments" note, 3M realigned its
business segments and began reporting under this new structure effective
January 1, 2003. Impairment testing for goodwill is done at the
reporting unit level. Reporting units are one level below the business
segment level, and have been combined when reporting units within the
same segment have similar economic characteristics. The business segment
realignment resulted in certain changes in reporting units. Effective
January 1, 2003, 3M has 18 reporting units under the criteria set forth
by Statement of Financial Accounting Standards (SFAS) No. 142. SFAS No.
142 requires that goodwill be tested for impairment when reporting units
are changed. The company completed its assessment of any potential
goodwill impairments under this new structure and determined that no
impairments existed.
The goodwill balance by business segment as of December 31, 2002 and March
31, 2003 follows. Goodwill acquired in the first quarter of 2003 totaled
$241 million, with $8 million expected to be fully deductible for tax
purposes. The increase in the goodwill balance in the first quarter of
2003 primarily relates to the 2003 business combination activity and
changes in foreign currency exchange rates during the period.
9
------------------------------------------------------------------------
GOODWILL Dec. 31 2003 2003 Mar. 31
2002 acquisition translation 2003
(Millions) balance activity and other balance
------------------------------------------------------------------------
Health Care $ 393 $ 42 $ 4 $ 439
Industrial 220 51 4 275
Consumer and Office 17 26 -- 43
Display and Graphics 824 55 -- 879
Electro and Communications 380 30 10 420
Safety, Security and
Protection Services 59 21 (1) 79
Transportation 5 16 1 22
-----------------------------------------------------------------------
Total Company $1,898 $241 $ 18 $2,157
-----------------------------------------------------------------------
ACQUIRED INTANGIBLE ASSETS
The carrying amount and accumulated amortization of acquired intangible
assets follow.
-----------------------------------------------------------------------
Mar. 31 Dec. 31
(Millions) 2003 2002
-----------------------------------------------------------------------
Patents $304 $297
Other amortizable intangible assets 98 93
Non-amortizable intangible assets (tradenames) 62 61
-----------------------------------------------------------------------
Total gross carrying amount 464 451
Accumulated amortization - patents (131) (123)
Accumulated amortization - other (62) (59)
-----------------------------------------------------------------------
Less total accumulated amortization (193) (182)
Total intangible assets, net $271 $269
-----------------------------------------------------------------------
Amortization expense for acquired intangible assets for the quarters ended
March 31, 2003 and 2002 follow:
-----------------------------------------------------------------------
(Millions) Mar. 31 Mar. 31
2003 2002
-----------------------------------------------------------------------
Amortization expense $ 10 $ 9
-----------------------------------------------------------------------
The table below shows expected amortization expense for acquired
intangible assets recorded as of March 31, 2003.
-------------------------------------------------------------------------
Last 3
Quarters Year Year Year Year After
(Millions) 2003 2004 2005 2006 2007 2007
-------------------------------------------------------------------------
Amortization
expense $28 $35 $28 $24 $21 $73
-------------------------------------------------------------------------
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.
10
RESTRUCTURING
As discussed in the 2002 Annual Report on Form 10-K, the restructuring
program actions were substantially completed by June 30, 2002. Selected
information related to the restructuring follows.
------------------------------------------------------------------------
RESTRUCTURING Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
------------------------------------------------------------------------
Charges
Year 2001 charges $472 $ 80 $ 17 $569
First quarter 2002 charges 24 26 4 54
Second quarter 2002 charges 87 21 40 148
------------------------------------------------------------------------
Total charges $583 $127 $61 $771
------------------------------------------------------------------------
------------------------------------------------------------------------
Current liability at
December 31, 2000 $ -- $ -- $ --
------------------------------------------------------------------------
2001 Charges 472 $ 80 17 569
2001 Cash payments (155) (4) (159)
2001 Non-cash and long-term
portion of liability (132) (80) -- (212)
------------------------------------------------------------------------
Current liability at
December 31, 2001 $185 $13 $198
------------------------------------------------------------------------
2002 Charges 111 47 44 202
2002 Cash payments (267) (39) (306)
2002 Reclassification from
long-term portion of liability 47 -- 47
2002 Non-cash and long-term
portion of liability (46) (47) -- (93)
------------------------------------------------------------------------
Current liability at
December 31, 2002 $ 30 $ 18 $ 48
------------------------------------------------------------------------
First quarter 2003
cash payments (22) (8) (30)
------------------------------------------------------------------------
Current liability at
March 31, 2003 $ 8 $ 10 $ 18
------------------------------------------------------------------------
11
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 2002 Annual Report on Form 10-K.
The table that follows provides the amounts 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
Net of Tax March 31
(Millions) 2003 2002
-----------------------------------------------------------
UNREALIZED GAIN/(LOSS) RECORDED IN CUMULATIVE TRANSLATION
Net investment hedging $ (1) $ 2
-----------------------------------------------------------
CASH FLOW HEDGING INSTRUMENTS BALANCE AND ACTIVITY
Beginning balance $(39) $ 9
-----------------------------------------------------------
Net unrealized holding
gain/(loss)* (13) (3)
Reclassification
adjustment* 21 (1)
-----------------------------------------------------------
Total activity 8 (4)
-----------------------------------------------------------
Ending balance $(31)** $ 5
-----------------------------------------------------------
*TAX EXPENSE OR BENEFIT
Net unrealized holding
gain/(loss) $ 11 $ 2
Reclassification
adjustment (17) --
-----------------------------------------------------------
** Based on exchange rates at March 31, 2003, the company expects to
reclassify to earnings over the next 12 months a majority of the cash flow
hedging instruments after-tax loss of $31 million (with the impact largely
offset by foreign currency cash flows from underlying hedged items).
12
BUSINESS SEGMENTS
As more fully described in 3M's 2002 Annual Report on Form 10-K, 3M
announced in September 2002 a strategic realignment of its organization,
designed to achieve faster growth and a closer focus on its markets and
customers. This realignment resulted in seven reportable business
segments compared to the previous structure of six reportable business
segments. These structural changes were driven by 3M's strategic planning
process and represent an important step toward access to larger and
faster-growing markets. Internal management reporting for the new
reportable business segments commenced on January 1, 2003.
3M provided in its "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section in its 2002 Annual Report on
Form 10-K supplemental financial information related to these new
business segments on an annual basis. This information was provided on a
supplemental basis as the company did not operate under this new
structure for these periods, and has only operated under this new
structure since January 1, 2003.
On April 4, 2003, 3M filed a Current Report on Form 8-K that furnished
supplemental unaudited financial information on both an annual and
quarterly basis for the years ended December 31, 2002, 2001 and 2000,
reflecting the realigned segments. This was provided to show the results
on an interim basis for prior years. Results under the new structure for
the quarters ended March 31, 2003 and 2002, follow.
----------------------------------------------------------
BUSINESS
SEGMENT Three months ended
INFORMATION March 31
(Millions) 2003 2002
----------------------------------------------------------
NET SALES
Health Care $ 946 $ 845
Industrial 821 753
Consumer and Office 612 569
Display and Graphics 661 505
Electro and
Communications 434 444
Safety, Security and
Protection Services 458 413
Transportation 381 349
Corporate and
Unallocated 5 12
----------------------------------------------------------
Total Company $4,318 $3,890
----------------------------------------------------------
13
BUSINESS SEGMENTS (continued)
----------------------------------------------------------
BUSINESS
SEGMENT Three months ended
INFORMATION March 31
(Millions) 2003 2002
----------------------------------------------------------
OPERATING INCOME
Health Care $ 238 $ 220
Industrial 132 111
Consumer and Office 110 105
Display and Graphics 182 117
Electro and
Communications 47 52
Safety, Security and
Protection Services 105 86
Transportation 100 85
Corporate and
Unallocated (133) (63)
----------------------------------------------------------
Total Company $ 781 $ 713
----------------------------------------------------------
As announced by 3M on March 26, 2003, a court issued an adverse ruling
associated with a lawsuit filed against 3M in 1997 by LePage's Inc.
During the first quarter of 2003, 3M recorded pre-tax charges of $93
million related to this proceeding (recorded in Corporate and
Unallocated). For a more detailed discussion, refer to Part II, Item 1,
Legal Proceedings, of the Quarterly Report on Form 10-Q. First quarter
2003 Corporate and Unallocated also includes certain acquisition-related
costs and respirator mask/asbestos litigation expenses. During the first
quarter of 2002, under its previously announced restructuring plan, 3M
incurred pre-tax charges of $54 million primarily related to employee
separation costs and accelerated depreciation charges (recorded in
Corporate and Unallocated).
14
EARNINGS PER SHARE AND DIVIDENDS PER SHARE
The computations for basic and diluted earnings per share for each year
follow.
-----------------------------------------------------------------------
EARNINGS PER SHARE Three months ended
March 31
(Amounts in millions, except per share amounts) 2003 2002
-----------------------------------------------------------------------
Numerator:
Net income $ 502 $ 452
-----------------------------------------------------------------------
Denominator:
Denominator for weighted average common
shares outstanding - basic 390.0 389.9
Dilution associated with the company's
stock-based compensation plans 5.3 5.3
-----------------------------------------------------------------------
Denominator for weighted average common
shares outstanding - diluted 395.3 395.2
-----------------------------------------------------------------------
Earnings per share - basic $1.29 $1.16
Earnings per share - diluted 1.27 1.14
-----------------------------------------------------------------------
Certain stock options outstanding were not included in the computation of
diluted earnings per share because they would not have had a dilutive
effect (6.4 million average options for the three months ended March 31,
2003 and March 31, 2002). As discussed in the 2002 Annual Report on Form
10-K, the company sold $639 million in aggregate face amount of
"Convertible Notes" on November 15, 2002. There was no impact on 3M's
diluted earnings per share related to these "Convertible Notes", as the
conversion rights commence after March 31, 2003. Additionally, because
the conditions for conversion were not met for the second quarter of 2003,
there will be no impact on 3M's second quarter diluted earnings per share.
If the conditions for conversion are met, 3M may choose to pay in cash
and/or common stock. Dividends paid to shareholders were 66 cents per
common share in the first quarter of 2003, compared with 62 cents per
common share in the first quarter of 2002.
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME INFORMATION
The components of the ending balances of accumulated other comprehensive
income (loss) follow.
------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Mar. 31, Dec. 31,
(Millions) 2003 2002
------------------------------------------------------------------------
Cumulative translation - net $ (824) $ (858)
Minimum pension liability adjustments (1,130) (1,130)
Debt and equity securities, unrealized gain - net -- 1
Cash flow hedging instruments, unrealized loss - net (31) (39)
------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $(1,985) $(2,026)
------------------------------------------------------------------------
15
The components of total comprehensive income follow. 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 discussed in the "Accounting for Derivative
Instruments" section) were not material.
---------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME Three months ended
March 31
(Millions) 2003 2002
---------------------------------------------------------------------------
Net income $ 502 $ 452
Other comprehensive income (loss)
Cumulative translation - net of $2 million
tax provision in 2003 and $1 million tax
provision in 2002 34 (9)
Debt and equity securities,
unrealized loss - net of $1 million
tax benefit in 2003 and $4 million
tax benefit in 2002 (1) (6)
Cash flow hedging instruments, unrealized
gain (loss) - net of $6 million tax provision
in 2003 and $2 million tax benefit in 2002 8 (4)
---------------------------------------------------------------------------
Total comprehensive income $ 543 $ 433
---------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
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.
OTHER
PricewaterhouseCoopers LLP, the company's independent accountants, have
performed reviews of the unaudited interim consolidated financial
statements included herein, and their review report thereon accompanies
this filing. Pursuant to Rule 436(c) of the Securities Act of 1933
("Act") their report on these reviews should not be considered a "report"
within the meaning of Sections 7 and 11 of the Act and the independent
accountant liability under Section 11 does not extend to it.
16
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of 3M Company:
We have reviewed the accompanying consolidated balance sheet of 3M Company
and its subsidiaries as of March 31, 2003, and the related consolidated
statements of income and of cash flows for the three-month periods ended
March 31, 2003 and 2002. 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, 2002, 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 10, 2003, 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, 2002, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
April 21, 2003
17
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 or region; social, political or labor conditions in a specific
country or region; or potential adverse foreign tax consequences.
* Foreign currency exchange rates and fluctuations in those rates may
affect the company's ability to realize projected growth rates in its
sales and net earnings and its results of operations. Because the company
derives more than half its revenues from outside the United States, its
ability to realize projected growth rates in sales and net earnings and
results of operations could be adversely affected if the United States
dollar strengthens significantly against foreign currencies.
* The company's growth objectives are largely dependent on the timing and
market acceptance of its new product offerings, including its ability to
renew its pipeline of new products and to bring those products to market.
This ability may be adversely affected by difficulties or delays in
product development, such as the inability to: identify viable new
products; obtain adequate intellectual property protection; gain market
acceptance of new products, or successfully complete clinical trials and
obtain regulatory approvals. For example, new 3M pharmaceutical products,
like any pharmaceutical under development, face substantial risks and
uncertainties in the process of development and regulatory review. There
are no guarantees that products will receive regulatory approvals or
prove to be commercially successful.
18
* The company's future results are subject to fluctuations in the costs
of purchased components and materials due to market demand, currency
exchange risks, shortages and other factors. The company depends on
various components and materials for the manufacturing of its products.
Although the company has not experienced any difficulty in obtaining
components and materials, it is possible that any of its supplier
relationships could be terminated in the future. Any sustained
interruption in the company's receipt of adequate supplies could have a
material adverse effect on the company. In addition, while the company
has a process to minimize volatility in component and material pricing,
no assurance can be given that the company will be able to successfully
manage price fluctuations due to market demand, currency risks, or
shortages, or that future price fluctuations will not have a material
adverse effect on the company.
* The possibility that acquisitions, divestitures and strategic alliances
may not meet sales and/or profit expectations. As part of the company's
strategy for growth, the company has made and may continue to make
acquisitions, divestitures and strategic alliances. However, there can be
no absolute 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
First Quarter
-------------
Overview:
3M had a strong earnings performance in the first quarter. The company
reported net income of $502 million, or $1.27 per diluted share, in the
first quarter of 2003, versus $452 million, or $1.14 per diluted share, in
the first quarter of 2002. These results include special items (discussed
later) that reduced earnings per diluted share by 15 cents in the first
quarter of 2003 and by 9 cents in the first quarter of 2002.
Aided by a weaker U.S. dollar, sales in the first quarter were a record
$4.318 billion, up 11 percent compared to a year ago, with six of seven
business segments achieving worldwide volume growth. 3M's five corporate
initiatives, aimed at improving organic growth, productivity and cash
flow, continue to contribute to improved results. While the company is on
track to achieve its estimated cost savings objective of $300 million in
savings from these initiatives in 2003, 3M also faces many challenges.
These challenges include expected higher raw material costs, potential
impacts from the SARS (Severe Acute Respiratory Syndrome) outbreak and
continued geopolitical concerns.
19
Special items:
As announced by 3M on March 26, 2003, a court issued an adverse ruling
associated with a lawsuit filed against 3M in 1997 by LePage's Inc.
During the first quarter of 2003, 3M recorded pre-tax charges of $93
million ($58 million after-tax, or $.15 per diluted share) related to
this proceeding. The pre-tax charge of $93 million has been classified
as "Other expense" within operating income. For a more detailed
discussion, refer to Part II, Item 1, Legal Proceedings, of this
Quarterly Report on Form 10-Q.
During the first quarter of 2002, under its previously announced
restructuring plan, 3M incurred pre-tax charges of $54 million ($35
million after-tax, or $.09 per diluted share) primarily related to
employee separation costs and accelerated depreciation charges. These
charges have been classified as a component of cost of sales ($30
million); selling, general and administrative expenses ($21 million); and
research, development and related expenses ($3 million).
Net Sales:
-------------------------------------------------------------------------
Components of Net Sales Change
First Quarter 2003
W.W. U.S. Intl.
-------------------------------------------------------------------------
Volume - core 3.4% (0.4)% 6.5%
Volume - acquisitions 2.0 1.8 2.2
-------------------------------------------------------------------------
Volume - total 5.4 1.4 8.7
Price -- (0.4) 0.4
Translation 5.6 -- 10.4
-------------------------------------------------------------------------
Total 11.0% 1.0% 19.5%
-------------------------------------------------------------------------
Worldwide net sales for the first quarter totaled $4.318 billion, up 11.0
percent from the same quarter last year. Volumes increased 5.4 percent,
with 2.0 percentage points of this growth due to acquisitions. The weaker
U.S dollar increased worldwide sales by 5.6 percent, while selling prices
were flat.
In the United States, net sales totaled $1.800 billion, up 1.0 percent
from the same quarter last year. Volumes improved 1.4 percent, benefiting
from 1.8 points of growth from acquisitions. Display and Graphics,
Consumer and Office, and Health Care all posted volume growth. Selling
prices were down four-tenths of one percent.
International net sales totaled $2.518 billion, an increase of 19.5
percent in U.S. dollars. Volumes increased 8.7 percent, which included
2.2 points of growth from acquisitions. In the Asia Pacific area, volumes
increased 19 percent. Volume improved 8 percent in Japan and almost 30
percent in the rest of the Asia Pacific region. All business segments
experienced positive growth in Asia Pacific, with six of seven segments
posting double-digit sales growth. In Latin America, volumes increased
17.5 percent, benefiting from the acquisition of Corning Precision Lens,
Inc., which added 10.5 points of growth. In Europe, volumes decreased 1.1
percent. Selling prices increased international sales by four-tenths of
one percent. Currency effects increased international sales by 10.4
20
percent, driven by positive translation of 19 percent in Europe and 9
percent in the Asia Pacific area. Translation negatively impacted sales
in Latin America by 22 percent.
Costs:
Cost of sales was 51.2 percent of sales, down from 52.4 percent from the
same quarter last year. Gross margins were positively impacted by 3M's
initiatives, such as Six Sigma, Indirect Cost Control, Global Sourcing
Effectiveness and eProductivity. Raw material costs were flat in the
first quarter of 2003, despite significant cost pressures in certain
commodities. The global sourcing initiative has offset much of this
upward pressure; however, the company continues to face a more difficult
environment. Corporate restructuring charges (totaling $30 million)
negatively impacted first quarter 2002 cost of sales. Cost of sales
includes manufacturing, engineering and freight costs.
Selling, general and administrative (SG&A) expenses were 22.3 percent of
sales, down two-tenths of one percentage point from the first quarter of
2002. SG&A expenses were $86 million higher than in the first quarter of
2002, an increase of 9.8 percent. In addition to the estimated increase in
SG&A dollars of $47 million related to currency translation, increases in
SG&A spending in the first quarter of 2003 included higher advertising
spending and costs associated with additional employment reduction actions
in Europe in the Electro and Communications business. First quarter 2002
SG&A expenses include a charge of $21 million relating to the corporate
restructuring plan.
The $93 million pre-tax charge in the "Other expense" line within
operating income relates to an adverse ruling associated with a lawsuit
filed against 3M in 1997 by LePage's Inc. For a more detailed discussion,
refer to Part II, Item 1, Legal Proceedings, of this Quarterly Report on
Form 10-Q.
Operating income:
Operating income was 18.1 percent of sales, compared with 18.3 percent in
the first quarter last year. Although the company faced continued economic
weakness, operating income grew by $68 million, or 9.5 percent, compared
with the first quarter of 2002.
Interest expense and income:
First-quarter interest expense was $23 million, $4 million higher than in
the same quarter last year. The increase was primarily due to higher
average debt levels compared with the first quarter of 2002. Interest
income was $6 million, compared with $9 million in the same quarter last
year, impacted by lower interest rates.
Provision for income taxes:
The worldwide effective income tax rate for the quarter was 32.5 percent,
up slightly from 32.2 percent in the first quarter last year and 32.1
percent for total year 2002.
21
Minority interest:
Minority interest in the quarter was $14 million, compared with $24
million in the first quarter of 2002. The decrease in minority interest
expense was primarily related to the January 2003 acquisition of an
additional 25 percent of Sumitomo 3M Limited and the December 2002
purchase of the 43 percent minority ownership of 3M Inter-Unitek GmbH.
Net income:
Net income for the first quarter of 2003 totaled $502 million, or $1.27
per diluted share, compared with $452 million, or $1.14 per diluted share,
in the first quarter of 2002. The company estimates that currency effects
increased net income for the quarter by about $8 million, or 2 cents per
diluted share. 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 entities and with third
parties; and transaction gains and losses, including derivative
instruments designed to reduce exchange rate risks. These derivative
instruments and other transaction impacts decreased net income by an
estimated $26 million in the first quarter of 2003.
22
RESTRUCTURING
As discussed in the 2002 Annual Report on Form 10-K, the restructuring
program actions were substantially completed by June 30, 2002. The
company estimates incremental savings under this plan of approximately
$120 million on a pre-tax basis in 2003, primarily in the first half.
The majority of the savings will be from reduced employee costs.
Selected information related to the restructuring follows.
-----------------------------------------------------------------------
RESTRUCTURING Employee
Severance
and Accelerated
(Millions) Benefits Depreciation Other Total
-----------------------------------------------------------------------
Charges
Year 2001 charges $472 $ 80 $ 17 $569
First quarter 2002 charges 24 26 4 54
Second quarter 2002 charges 87 21 40 148
-----------------------------------------------------------------------
Total charges $583 $127 $61 $771
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Current liability at
December 31, 2000 $ -- $ -- $ --
-----------------------------------------------------------------------
2001 Charges 472 $ 80 17 569
2001 Cash payments (155) (4) (159)
2001 Non-cash and long-term
portion of liability (132) (80) -- (212)
-----------------------------------------------------------------------
Current liability at
December 31, 2001 $185 $13 $198
-----------------------------------------------------------------------
2002 Charges 111 47 44 202
2002 Cash payments (267) (39) (306)
2002 Reclassification from
long-term portion of liability 47 -- 47
2002 Non-cash and long-term
portion of liability (46) (47) -- (93)
-----------------------------------------------------------------------
Current liability at
December 31, 2002 $ 30 $ 18 $ 48
-----------------------------------------------------------------------
First quarter 2003
cash payments (22) (8) (30)
-----------------------------------------------------------------------
Current liability at
March 31, 2003 $ 8 $ 10 $ 18
-----------------------------------------------------------------------
23
PERFORMANCE BY BUSINESS SEGMENT
Following is a discussion of the global operating results of the company's
seven business segments in the first quarter of 2003 compared with the
same quarter last year. As discussed in the "Business Segments" note, 3M
realigned its business segments and began reporting under this new
structure effective January 1, 2003. With the exception of the Electro
and Communications business segment, all of the segments showed growth in
both sales and operating income. All businesses benefited from the
corporate initiatives, which are designed to help drive improvement in
sales growth, productivity and cash flow.
In the Health Care business segment, volumes grew 4.7 percent with most
product categories posting strong growth. However, generic competition
negatively impacted sales of 3M's Tambocor brand product, reducing Health
Care sales growth by more than 2 percent. Operating income in Health Care
increased by more than 8 percent to $238 million.
In September 2001, 3M signed an agreement with Eli Lilly and Company to
collaborate on resiquimod, a potential treatment for genital herpes. In
the first quarter of 2003, Eli Lilly and 3M announced the suspension of
Phase III studies for resiquimod. Lilly continues to evaluate its
strategic options with respect to these trials. 3M is encouraged by the
Phase III results for Aldara in treating Superficial Basal Cell Carcinoma
and Actinic Keratosis. 3M has submitted a supplemental new drug
application (sNDA) for actinic keratosis and anticipates submitting an
sNDA for superficial basal cell carcinoma around mid-year.
In the Industrial business segment, volumes increased 3.9 percent. This
growth was led by industrial tapes, Dyneon products and electronic
materials. Operating income in Industrial increased 19 percent to $132
million.
In the Consumer and Office business segment, volumes increased 3.3
percent. 3M's construction and home improvement, stationery products and
home care businesses more than offset weakness in other product
categories. Operating income in Consumer and Office increased by 5
percent to $110 million.
In the Display and Graphics business segment, volumes increased 24.4
percent, with the December 2002 Corning Precision Lens acquisition adding
12 points of growth. Organic or core volume growth of more than 12
percent was led by the Optical Systems business. Operating income in
Display and Graphics increased more than 50 percent to $182 million.
In the Electro and Communications business segment, volumes declined 5.1
percent reflecting continuing weakness in the global telecommunications
industry. 3M's telecom business sales were down about 15 percent.
Operating income of the Electro and Communications business segment
declined by 9.4 percent to $47 million, largely due to lower sales.
In the Safety, Security, and Protection Services business segment, volumes
increased 5 percent. Increasing global demand for safety products and
solutions fueled this growth. Operating income in this business segment
increased by 22 percent to $105 million.
24
In the Transportation business segment, volumes increased 1.7 percent.
This growth was driven by the automotive OEM business. Operating income
in Transportation increased over 17 percent to $100 million.
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong. Various
assets and liabilities, including cash and short-term debt, can fluctuate
significantly from month to month depending on short-term liquidity needs.
Working capital (defined as current assets minus current liabilities)
totaled $1.772 billion at March 31, 2003, increasing $170 million from
year-end 2002. This increase was largely related to an increase in
current assets, primarily due to the reclassification of certain insurance
receivables from long-term to current and an increase in various prepaid
items.
The accounts receivable turnover index (defined as quarterly net sales
divided by ending accounts receivable, multiplied by 4) totaled 6.54 at
March 31, 2003, compared with 6.55 at year-end 2002 and an improvement
from 5.96 at March 31, 2002. The inventory turnover index (defined as
quarterly factory cost divided by ending inventory, multiplied by 4)
continues to improve. The inventory turnover index was 4.33 at March 31,
2003, an improvement from 4.17 at year-end 2002 and 3.87 at March 31,
2002.
Net cash provided by operating activities totaled $764 million in the
first three months of the year, an increase of $93 million from the same
period last year. Restructuring-related cash payments made by 3M totaled
$30 million in the first quarter of 2003, compared with $95 million in the
first quarter of 2002. Restructuring-related cash payments made by 3M
related to the 2001 corporate restructuring plan are not expected to be
significant in the future.
There were several legal proceeding developments during the first quarter
of 2003. As discussed earlier, the company recorded a $93 million pre-
tax charge related to an adverse ruling associated with a lawsuit filed
against 3M in 1997 by LePage's Inc. At the end of the first quarter of
2003, the company also increased its respirator mask/asbestos liabilities
by $100 million and its related insurance receivables by $94 million,
resulting in $6 million of pre-tax expense being recorded. For a more
detailed discussion of these and other legal proceedings, 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 $12 million of net cash inflows in the first quarter
of 2003, compared with $15 million of net cash inflows in the first
quarter of 2002. Because most of the company's implant liabilities have
been paid, receipt of related insurance recoveries will increase future
cash flows.
Cash used in investing activities totaled $465 million in the first three
months of the year, compared with $143 million in the same period last
year. Capital expenditures for the first three months of 2003 were $120
million, a decrease of $41 million from the same period last year. Capital
expenditures are expected to total approximately $900 million during 2003,
as the company anticipates capital spending to ramp up later in the year.
Cash used for acquisitions of businesses totaled $416 million in the first
25
three months of 2003, with the majority related to the purchase of an
additional 25 percent ownership in Sumitomo 3M Limited. The company is
actively considering additional acquisitions.
Financing activities in the first three months of 2003 for both short-term
and long-term debt included net cash outflows of $38 million, compared
with net cash inflows of $11 million in the same period last year. The
increase in net short-term debt of $6 million includes the portion of
short-term debt with original maturities of 3 months or less. Repayment of
other debt of $196 million includes $193 million of commercial paper
having original maturities greater than 3 months. Proceeds from other
debt of $152 million related to commercial paper having original
maturities greater than 3 months.
Total debt decreased $58 million from year-end 2002. As of March 31, 2003,
total debt was 34 percent of total capital, down from 36 percent as of as
year-end 2002. The company believes its strong credit rating provides
ready and ample access to funds in the global capital markets. The
company's credit facilities have not materially changed since year-end
2002. In March 2003, the company completed its annual renewal of $565
million of certain short-term lines of credit. While the previous
agreement (discussed in 3M's 2002 Annual Report on Form 10-K) would
require repayment of debt based on ratings triggers, the new agreement has
a covenant that indicates that 3M is not to exceed a funded debt to
capital limit of 60 percent (capital defined as funded debt plus
stockholders' equity).
Treasury stock repurchases for the first three months of 2003 were $173
million, compared with $420 million in the same period last year. The
company repurchased about 1.4 million shares of common stock in the first
three months of 2003, compared with about 3.7 million shares in the same
period last year. In November 2001, the Board of Directors authorized the
repurchase of up to $2.5 billion of the company's stock between January 1,
2002 and December 31, 2003. As of March 31, 2003, about $1.4 billion
remained authorized for repurchase. Stock repurchases are made to support
the company's stock-based compensation plans and for other corporate
purposes.
Cash dividends paid to shareholders totaled $257 million in the first
three months of this year, compared with $242 million in the same period
last year. In February 2003, the quarterly dividend was increased by 6.5
percent to 66 cents per share, marking the 45th consecutive annual divided
increase for 3M.
Included in the financing section of the Consolidated Statement of Cash
Flows is $14 million classified as "Other - net". This category
represents changes in cash overdraft balances and principal payments for
capital leases.
26
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 a 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 3M's Annual Report on Form
10-K for the year ended December 31, 2002. The company believes that
there have been no material changes in these market risks since year-end
2002.
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.
27
3M Company and Subsidiaries
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A description of the significant legal proceedings in which the company is
involved, both in general and with respect to specific matters, is
contained in the company's Annual Report on Form 10-K for the period
ending December 31, 2002 (the "Annual Report"). This section describes
significant developments since the preparation of the Annual Report and
should be read with reference to it. Unless specifically indicated, all
previously reported matters remain pending.
Antitrust Litigation
--------------------
As previously reported, the United States Court of Appeals for the Third
Circuit ruled against 3M on March 26, 2003, in a federal antitrust claim
brought in 1997 by LePage's Inc., a transparent tape competitor of 3M. 3M
intends to petition the United States Supreme Court to review the Third
Circuit's ruling.
LePage's claim focused on specific rebate programs involving transparent
tape and other products. 3M discontinued such programs more than three
years ago. The ruling affirms a jury verdict entered in 1999 that had
been reversed by a prior ruling in 3M's favor by a panel of the Third
Circuit court in 2002.
Although the Supreme Court will likely not decide whether or not to hear
3M's appeal until this fall, and the adverse judgment need not be paid in
the interim, 3M recorded pre-tax charges of $93 million ($58 million
after tax) in the first quarter of 2003 to reflect the reinstated
judgment with interest through March 31, 2003 and LePages's estimate of
its attorneys' fees.
Of the three class actions filed by certain tape purchasers after the
LePage's verdict, the court granted the Company's motion for summary
judgment in one; pre-trial proceedings related to the plaintiff's request
for class certification are occurring in the second, and the court stayed
the proceedings pending the outcome of the Supreme Court review in the
third.
Respirator Mask/Asbestos Litigation
-----------------------------------
As of March 31, 2003, the company is a named defendant, with multiple co-
defendants, in numerous lawsuits in various courts that purport to
represent approximately 54,000 individual 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. As
previously reported in the Annual Report, the company experienced an
increase in the number of claims and an increase in the proportion of
silica-related claims in the fourth quarter of 2002. The company
experienced a similar phenomenon in the first quarter of 2003. The
28
company expects an increase in the number of future claims as claimants
attempt to file claims before the effective date of anticipated tort
reform legislation and significant defense spending as the company
continues to aggressively manage this litigation. As a result of these
developments, the company increased its accrued liabilities by $100
million at the end of the first quarter of 2003 to $231 million (with a
corresponding increase of $94 million in receivables for the probable
amount of insurance recoveries to $357 million). The company continues
to resolve cases for amounts consistent with cumulative historical
averages. Although silica claims to date have settled on average for
somewhat higher amounts than asbestos claims, the company does not
anticipate that distinction will necessarily continue as the majority of
future silica claims appear likely to be asserted by asymptomatic
claimants.
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. 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, and (vi)
financial viability of other co-defendants and insurers. The company
cannot determine the impact of these potential developments on the
current estimate of its probable liabilities and associated expenses.
Environmental Matters
---------------------
As previously reported, the company has been voluntarily cooperating with
ongoing reviews by the U.S. Environmental Protection Agency (EPA) and
international agencies of possible environmental and health effects of
perfluorooctanyl chemistry. The company has been phasing out its
production of such compounds. The EPA announced on April 14, 2003, that
it would engage in a consent order negotiating process (in which the
company, other manufacturers and others are expected to participate) by
which it will obtain additional information to enable it to further
develop a human health risk assessment and identify routes of exposure
for one such compound. The company confirmed to the EPA its intent to
continue its ongoing health and environmental investigation and
assessment of this compound and to maintain its phase-out decision, as a
result of which the company no longer manufactures that compound for
sale, although a subsidiary produces limited quantities for its own
industrial use. The company cannot predict what regulatory action, if
any, may be taken regarding some or all of such compounds or the
consequences of any such action.
As previously reported, a former employee filed an amended complaint
against the company in the Circuit Court of Morgan County, Alabama
seeking unstated compensatory and punitive damages on behalf of himself
and another former employee, a current employee and their minor children
alleging that the plaintiffs suffered fear, increased risk and sub
clinical injuries from exposure to perfluorooctanyl chemistry at or near
29
the company's Decatur, Alabama, manufacturing facility. The complaint
also alleges that the company acted improperly with respect to
disclosures to workers concerning such chemistry. On April 21, 2003,
plaintiffs filed a second amended complaint, adding class action
allegations. The putative class is defined to include current and former
employees of the company and their family members who were exposed to
perfluorooctanyl chemistry, real property owners in the vicinity of the
company's production sites in Alabama and Minnesota, and other persons
who were exposed to the company's perfluorooctanyl chemistry during their
employment at other manufacturers' facilities. The company believes that
the claims should not be certified by the court as a class action and
that the allegations have no merit. The company is vigorously defending
these claims.
As previously reported, the company has signed a consent agreement with
the State of New York Department of Environmental Conservation for
alleged violations of the New York air emissions regulations. While the
agency originally proposed a penalty of $212,000, the final consent
agreement calls for a penalty of $138,600. A portion of the penalty
($56,000) may be applied to improve processes at the company's Tonawanda,
New York, manufacturing facility.
As previously reported, the company entered into a voluntary agreement
with the EPA under both an "Agreement for TSCA Compliance" and the EPA's
Incentives for Self Policing Policy. The company voluntarily conducted
an audit under the Toxic Substances Control Act (TSCA) of its facilities
and business units and, as part of that audit, identified studies that
under current EPA guidelines could be potentially subject to notification
under TSCA section 8(e). The first two phases of this section 8(e) audit
relating to perfluorooctanyl chemistry studies are the subject of a
proposed agreement under which the company would pay $222,000 in
penalties. The third phase, relating to this and other chemistries, is
continuing.
30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
period covered by this report (first quarter of 2003). The registrant
will provide information concerning its Annual Meeting of Stockholders
(held on May 13, 2003) in its second quarter of 2003 report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this Report.
(12) A statement setting forth the calculation of the
ratio of earnings to fixed charges. Page 34.
(15) A letter from the company's independent accountants
regarding unaudited interim consolidated
financial statements. Page 35.
(99.1) Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
(99.2) Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
Reports on Form 8-K:
3M filed a Form 8-K dated April 22, 2003, and a Form 8-K dated April 4,
2003, that furnished information as indicated below. For the quarter
ended March 31, 2003, 3M filed a Form 8-K dated March 26, 2003, and a Form
8-K dated March 4, 2003.
The Form 8-K dated April 22, 2003, furnished 3M's earnings press release
dated April 21, 2003, which reported 3M's unaudited consolidated financial
results for the first quarter of 2003.
The Form 8-K dated April 4, 2003, furnished supplemental unaudited
financial information concerning 3M's realignment that resulted in seven
reportable business segments compared to the previous structure of six
reportable business segments. Reporting for the new reportable business
segments commenced on January 1, 2003.
The Form 8-K dated March 26, 2003, provided a press release concerning an
adverse court ruling associated with a lawsuit filed against 3M in 1997 by
LePage's Inc.
The Form 8-K dated March 4, 2003, provided the certificate of
incorporation as amended as of April 8, 2002. The amendment reflected
the change in the company's name from Minnesota Mining and Manufacturing
Company to 3M Company.
None of the other item requirements of Part II of Form 10-Q is applicable
to the company for the quarter ended March 31, 2003.
31
SIGNATURE PAGE
for Form 10-Q for the quarter ended March 31, 2003
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: May 14, 2003
------------------------
/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.)
32
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: May 14, 2003
/s/ W. James McNerney, Jr.
--------------------------
W. James McNerney, Jr.
Chief Executive Officer
33
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: May 14, 2003
/s/ Patrick D. Campbell
-----------------------
Patrick D. Campbell
Chief Financial Officer