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 September 30, 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 September 30, 2003, there were 784,883,033 shares of the
registrant's common stock outstanding (reflects two-for-one stock split
effective with third quarter 2003 reporting).
This document contains 43 pages.
The exhibit index is set forth on page 36.
-----------------------------------------------------------------------------
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 Nine months ended
(Amounts in millions, September 30 September 30
except per share amounts) 2003 2002 2003 2002
------------------------------------------------------------------------
Net sales $4,616 $4,143 $13,514 $12,194
------------------------------------------------------------------------
Operating expenses
Cost of sales 2,322 2,115 6,856 6,382
Selling, general and
administrative expenses 994 913 2,978 2,765
Research, development and
related expenses 270 264 816 797
Other expense -- -- 93 --
------------------------------------------------------------------------
Total operating expenses 3,586 3,292 10,743 9,944
------------------------------------------------------------------------
Operating income 1,030 851 2,771 2,250
------------------------------------------------------------------------
Interest expense and income
Interest expense 22 19 69 58
Interest income (6) (9) (17) (27)
------------------------------------------------------------------------
Total interest expense
and income 16 10 52 31
------------------------------------------------------------------------
Income before income taxes
and minority interest 1,014 841 2,719 2,219
Provision for income taxes 339 274 897 711
Minority interest 12 22 38 45
------------------------------------------------------------------------
Net income $ 663 $ 545 $1,784 $1,463
------------------------------------------------------------------------
Weighted average common
shares outstanding - basic 784.6 779.6 782.2 779.8
Earnings per share - basic $ 0.85 $ 0.70 $ 2.28 $ 1.88
------------------------------------------------------------------------
Weighted average common
shares outstanding - diluted 797.5 790.0 793.4 790.9
Earnings per share - diluted $ 0.83 $ 0.69 $ 2.25 $ 1.85
------------------------------------------------------------------------
Cash dividends paid
per common share $ 0.33 $ 0.31 $ 0.99 $ 0.93
------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement. Share and per share data have been adjusted to reflect
the two-for-one stock split effective with third quarter 2003 reporting.
3
3M Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Unaudited)
---------------------------------------------------------------------------
Sep. 30 Dec. 31
(Dollars in millions, except per share amounts) 2003 2002
---------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 1,279 $ 618
Accounts receivable - net 2,791 2,527
Inventories
Finished goods 961 1,011
Work in process 611 591
Raw materials and supplies 310 329
---------------------------------------------------------------------------
Total inventories 1,882 1,931
Other current assets 1,390 983
---------------------------------------------------------------------------
Total current assets 7,342 6,059
Investments 214 238
Property, plant and equipment 15,507 15,058
Less accumulated depreciation (10,040) (9,437)
---------------------------------------------------------------------------
Property, plant and equipment - net 5,467 5,621
Goodwill 2,330 1,898
Intangible assets - net 264 269
Other assets 1,180 1,244
---------------------------------------------------------------------------
Total assets $16,797 $15,329
---------------------------------------------------------------------------
LIABILITIES
Current liabilities
Short-term debt $ 1,255 $ 1,237
Accounts payable 969 945
Payroll 457 411
Income taxes payable 825 518
Other current liabilities 1,462 1,346
---------------------------------------------------------------------------
Total current liabilities 4,968 4,457
Long-term debt 1,738 2,140
Other liabilities 2,583 2,739
---------------------------------------------------------------------------
Total liabilities 9,289 9,336
---------------------------------------------------------------------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 944,033,056 shares issued 9 5
Capital in excess of par value 287 291
Retained earnings 13,649 12,748
Treasury stock, at cost; 159,150,023 shares at
Sep. 30, 2003; 163,641,694 shares at Dec. 31, 2002 (4,535) (4,767)
Unearned compensation (227) (258)
Accumulated other comprehensive income (loss) (1,675) (2,026)
---------------------------------------------------------------------------
Total stockholders' equity 7,508 5,993
---------------------------------------------------------------------------
Total liabilities and stockholders' equity $16,797 $15,329
---------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement. Share data has been adjusted to reflect the
two-for-one stock split effective with third quarter 2003 reporting.
4
3M Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
-------------------------------------------------------------------------
Nine months ended
September 30
(Dollars in millions) 2003 2002
-------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,784 $ 1,463
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 717 728
Pension company contributions (675) (854)
Deferred income tax provision 146 273
Changes in assets and liabilities
Accounts receivable (142) (18)
Inventories 150 195
Other current assets (306) (35)
Other assets - net of amortization 106 (52)
Income taxes payable 348 50
Accounts payable and other current liabilities 112 33
Other liabilities 224 150
Other - net 43 60
-------------------------------------------------------------------------
Net cash provided by operating activities 2,507 1,993
-------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (416) (530)
Proceeds from sale of property, plant and equipment 88 44
Acquisitions of businesses (428) (88)
Proceeds from sale of businesses -- 1
Purchases of investments (10) (4)
Proceeds from sale of investments 30 11
-------------------------------------------------------------------------
Net cash used in investing activities (736) (566)
-------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt - net (204) (25)
Repayment of debt (maturities greater than 90 days) (615) (482)
Proceeds from debt (maturities greater than 90 days) 447 525
Purchases of treasury stock (394) (813)
Reissuances of treasury stock 425 426
Dividends paid to stockholders (775) (725)
Distributions to minority interests -- (78)
Other - net (19) --
-------------------------------------------------------------------------
Net cash used in financing activities (1,135) (1,172)
-------------------------------------------------------------------------
Effect of exchange rate changes on cash 25 (50)
-------------------------------------------------------------------------
Net increase in cash and cash equivalents 661 205
-------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 618 616
-------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,279 $ 821
-------------------------------------------------------------------------
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)
NOTE 1. BASIS OF PRESENTATION
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 and its Current Report on Form 8-K
dated May 23, 2003 (which updated 3M's 2002 Annual Report on Form 10-K).
Part II, Item 1, Legal Proceedings, should also be read in conjunction
with the company's Quarterly Reports on Form 10-Q for the periods ended
March 31, 2003 and June 30, 2003.
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
In November 2002, the Financial Accounting Standards Board (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 nine-month period ended September 30, 2003, 3M did not have any
material guarantees that required recognition of a liability. Disclosures
concerning guarantees are found in Note 18 to the Consolidated Financial
Statements in 3M's 2002 Annual Report on Form 10-K.
In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123." The
company continues to apply 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 follow.
6
-------------------------------------------------------------------
STOCK-BASED COMPENSATION
PRO FORMA NET INCOME AND EARNINGS PER SHARE
-------------------------------------------------------------------
Three months ended Nine months ended
(Dollars in millions, September 30 September 30
except per share amounts) 2003 2002 2003 2002
-------------------------------------------------------------------
Net income, as reported $ 663 $ 545 $1,784 $1,463
Add: Stock-based compensation
expense included in net
income, net of related tax
effects 1 -- 2 1
Deduct: Total stock-based
compensation expense
determined under fair value,
net of related tax effects (25) (35) (93) (108)
-------------------------------------------------------------------
Pro forma net income $ 639 $ 510 $1,693 $1,356
-------------------------------------------------------------------
Earnings per share - basic
As reported $ 0.85 $ 0.70 $ 2.28 $ 1.88
Pro forma $ 0.81 $ 0.65 $ 2.16 $ 1.74
Earnings per share - diluted
As reported $ 0.83 $ 0.69 $ 2.25 $ 1.85
Pro forma $ 0.80 $ 0.65 $ 2.13 $ 1.71
-------------------------------------------------------------------
Effective January 1, 2003, the company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations". 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 materially impact 3M's consolidated
financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 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 provides guidance in evaluating multiple economic
interests in an entity and in determining the primary beneficiary. The
interpretation outlines disclosure requirements for Variable Interest
Entities (VIEs) in existence prior to January 31, 2003, and outlines
consolidation requirements for VIEs created after January 31, 2003. In a
FASB staff position (FSP) concerning the effective date of FIN 46, the
FASB decided to defer the latest date by which all public entities must
apply FIN 46 to certain VIEs to the first reporting period ending after
December 15, 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.
As a result of this review, 3M determined that no material entities are
VIEs of 3M and that 3M is not a primary economic beneficiary of any VIE.
7
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." SFAS No. 149 is
effective for certain contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The
adoption of this standard did not impact 3M's consolidated financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 requires that an issuer classify certain financial
instruments within its scope as a liability (or an asset in some
circumstances). Effective July 1, 2003, the company adopted SFAS No.
150. The adoption of this standard did not impact 3M's consolidated
financial position or results of operations.
In May 2003, Emerging Issues Task Force No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables" was finalized. This
addresses certain aspects of accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities. The
guidance in the consensus is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The adoption of
this standard did not impact 3M's consolidated financial position or
results of operations.
NOTE 2. BUSINESS COMBINATIONS
In January 2003, 3M purchased an additional 25 percent interest of
Sumitomo 3M Limited from NEC Corporation for $377 million in cash. Prior
to this purchase, 3M controlled and owned 50 percent of Sumitomo 3M
Limited and fully consolidated both Sumitomo 3M Limited's balance sheet
and results of operations, with a provision for minority interest that
did not have participating rights. 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. Because all business segments benefit from this
combination, goodwill acquired in this acquisition was allocated to 3M's
seven business segments.
During the first quarter of 2003, 3M (Display and Graphics Business)
finalized the purchase of Corning Precision Lens, Inc. (Precision Optics,
Inc.), which was acquired in December 2002. The impacts of finalizing the
purchase price allocation, including a working capital adjustment and
payment of direct acquisition expenses, are shown in the business
combination activity table that follows.
During the nine-month period ended September 30, 2003, 3M entered into
five additional business combinations for $38 million, net of cash
acquired.
1) 3M (Industrial Business) purchased 100 percent of the outstanding
shares of Solvay Fluoropolymers, Inc. (SFI), previously a wholly owned
subsidiary of Solvay America, Inc. SFI is a manufacturer of
fluoroplastic products.
8
2) 3M (Display and Graphics Business) purchased Corning Shanghai
Logistics Company Limited, previously a wholly owned subsidiary of
Corning Incorporated. This business is involved in the distribution of
lens systems for projection televisions.
3) 3M (Safety, Security and Protection Services Business) purchased 100
percent of the outstanding shares of GuardiaNet Systems, Inc., a software
company.
4) 3M (Electro and Communications Business) purchased the outstanding
minority interest of Pouyet Communications, Inc. (PCI), an Indian
company. PCI is a telecommunications supplier.
5) 3M (Health Care Business) purchased 100 percent of the outstanding
shares of Vantage Health Limited, a British company. Vantage Health
Limited develops health information systems software.
The business combination activity for the nine-month period ended
September 30, 2003, 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.
--------------------------------------------------------------------------
BUSINESS COMBINATION ACTIVITY
Precision
Sumitomo Optics, Inc. Aggregation
Asset (Liability) 3M (2003 of Remaining Total
(Millions) Limited activity) 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 4 8
Purchased goodwill 289 8 11 308
Deferred tax asset 37 -- -- 37
Accounts payable and
other current liabilities -- 4 (6) (2)
Minority interest liability 139 -- 1 140
Other long-term liabilities (97) -- 2 (95)
--------------------------------------------------------------------------
Net assets acquired $377 $13 $38 $428
--------------------------------------------------------------------------
NOTE 3. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
As discussed in Note 11 to the Consolidated Financial Statements, 3M
realigned its business segments and began reporting under this new
structure effective January 1, 2003. The business segment realignment
resulted in certain changes in reporting units for 3M. 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. During the first quarter of 2003, the company completed its
assessment of any potential goodwill impairments under this new structure
and determined that no impairments existed.
9
The goodwill balance by business segment as of December 31, 2002, and
September 30, 2003, follows. Goodwill acquired in the first nine months
of 2003 totaled $308 million, with $8 million expected to be fully
deductible for tax purposes. The increase in the goodwill balance during
the nine month period ended September 30, 2003, primarily relates to 2003
business combination activity and changes in currency exchange rates.
-------------------------------------------------------------------------
GOODWILL Dec. 31 2003 2003 Sep. 30
2002 acquisition translation 2003
(Millions) balance activity and other balance
-------------------------------------------------------------------------
Health Care $ 393 $ 56 $ 33 $ 482
Industrial 220 64 18 302
Consumer and Office 17 33 4 54
Display and Graphics 824 65 5 894
Electro and Communications 380 38 54 472
Safety, Security and
Protection Services 59 32 8 99
Transportation 5 20 2 27
-------------------------------------------------------------------------
Total Company $1,898 $308 $124 $2,330
-------------------------------------------------------------------------
ACQUIRED INTANGIBLE ASSETS
The carrying amount and accumulated amortization of acquired intangible
assets follow.
-----------------------------------------------------------------------
Sep. 30 Dec. 31
(Millions) 2003 2002
-----------------------------------------------------------------------
Patents $316 $297
Other amortizable intangible assets 99 93
Non-amortizable intangible assets (tradenames) 65 61
-----------------------------------------------------------------------
Total gross carrying amount 480 451
Accumulated amortization - patents (148) (123)
Accumulated amortization - other (68) (59)
-----------------------------------------------------------------------
Less total accumulated amortization (216) (182)
Total intangible assets - net $264 $269
-----------------------------------------------------------------------
Amortization expense for acquired intangible assets for the three months
and nine months ended September 30, 2003 and 2002 follows.
-------------------------------------------------------------------------
(Millions) Three months ended Nine months ended
Sep. 30 Sep. 30 Sep. 30 Sep. 30
2003 2002 2003 2002
-------------------------------------------------------------------------
Amortization expense $ 10 $ 10 $ 31 $ 28
-------------------------------------------------------------------------
10
The table that follows shows estimated amortization expense for acquired
intangible assets recorded as of September 30, 2003. Actual amounts of
amortization expense may differ from estimated amounts due to additional
intangible asset acquisitions, changes in currency exchange rates,
impairment of intangible assets, accelerated amortization of intangible
assets, and other events.
-----------------------------------------------------------------
Fourth
Quarter Year Year Year Year After
(Millions) 2003 2004 2005 2006 2007 2007
-----------------------------------------------------------------
Estimated
amortization
expense $10 $37 $30 $25 $22 $75
-----------------------------------------------------------------
11
NOTE 4. RESTRUCTURING
Restructuring program actions related to the 2001/2002 corporate
restructuring program 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)
Second quarter 2003
cash payments (2) -- (4) (6)
Third quarter 2003
cash payments (3) -- (1) (4)
-----------------------------------------------------------------------
Current liability at
September 30, 2003 $ 3 $ -- $ 5 $ 8
-----------------------------------------------------------------------
NOTE 5. DEBT
In September 2003, the company filed a shelf registration statement with
the Securities and Exchange Commission relating to the potential offering
of debt securities of up to $1.5 billion. This shelf registration became
effective in October 2003. 3M plans to use the net proceeds from future
issuances of debt securities under this registration for general corporate
purposes, including: the repayment of debt; investments in or extensions
12
of credit to 3M subsidiaries; or the financing of possible acquisitions or
business expansion.
NOTE 6. 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. As part of
this strategy, in September 2003, the company entered into a three-year
combined interest rate and currency swap with a notional amount of $300
million. This transaction is a partial hedge of 3M's net investment in 3M
Japanese subsidiaries. This swap converts a variable rate U.S. dollar
exposure to a variable rate yen denominated exposure.
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 Nine months ended
Net of Tax September 30 September 30
(Millions) 2003 2002 2003 2002
-------------------------------------------------------------------
UNREALIZED GAIN/(LOSS) RECORDED IN CUMULATIVE TRANSLATION
Net investment hedging $ (9) $ 3 $ (8) $(14)
-------------------------------------------------------------------
CASH FLOW HEDGING INSTRUMENTS BALANCE AND ACTIVITY
Beginning balance $(43) $(37) $ (39) $ 9
-------------------------------------------------------------------
Net unrealized holding
gain/(loss)* (10) 11 (63) (48)
Reclassification
adjustment* 15 3 64 16
-------------------------------------------------------------------
Total activity 5 14 1 (32)
-------------------------------------------------------------------
Ending balance $(38)** $(23) $(38) $(23)
-------------------------------------------------------------------
*TAX EXPENSE OR BENEFIT
Net unrealized holding
gain/(loss) $ 9 $ (6) $ 32 $ 28
Reclassification
adjustment (11) (1) (33) (9)
-------------------------------------------------------------------
** Based on exchange rates at September 30, 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 $38 million (with the impact largely
offset by foreign currency cash flows from underlying hedged items).
13
NOTE 7. 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.
NOTE 8. STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME INFORMATION
During the third quarter of 2003, $4 million was transferred within
stockholders' equity from "Capital in excess of par value" to "Common
stock" in connection with the two-for-one split of the company's common
stock (discussed in Note 9 to the Consolidated Financial Statements).
The components of the ending balances of accumulated other comprehensive
income (loss) follow.
----------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Sep. 30 Dec. 31
(Millions) 2003 2002
----------------------------------------------------------------------
Cumulative translation - net $ (509) $ (858)
Minimum pension liability adjustments (1,130) (1,130)
Debt and equity securities, unrealized gain - net 2 1
Cash flow hedging instruments, unrealized loss - net (38) (39)
----------------------------------------------------------------------
Accumulated other comprehensive income (loss) $(1,675) $(2,026)
----------------------------------------------------------------------
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 Note 6 to the
Consolidated Financial Statements) were not material. The components of
total comprehensive income follow.
--------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME Three months ended
September 30
(Millions) 2003 2002
--------------------------------------------------------------------
Net income $ 663 $ 545
Other comprehensive income (loss)
Cumulative translation - net of $7 million
tax benefit in 2003 and $1 million tax
provision in 2002 63 (70)
Debt and equity securities,
unrealized gain (loss) - net of immaterial
tax impact in 2003 and $2 million tax
benefit in 2002 1 (3)
Cash flow hedging instruments, unrealized
gain (loss) - net of $2 million tax provision
in 2003 and $7 million tax provision in 2002 5 14
--------------------------------------------------------------------
Total comprehensive income $ 732 $ 486
--------------------------------------------------------------------
14
-------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME Nine months ended
September 30
(Millions) 2003 2002
-------------------------------------------------------------------
Net income $1,784 $1,463
Other comprehensive income (loss)
Cumulative translation - net of $8 million
tax benefit in 2003 and $11 million tax
benefit in 2002 349 113
Debt and equity securities,
unrealized gain (loss) - net of immaterial
tax impact in 2003 and $9 million tax
benefit in 2002 1 (15)
Cash flow hedging instruments, unrealized
gain (loss) - net of $1 million tax provision
in 2003 and $19 million tax benefit in 2002 1 (32)
-------------------------------------------------------------------
Total comprehensive income $2,135 $1,529
-------------------------------------------------------------------
NOTE 9. STOCK SPLIT
On August 11, 2003, 3M's Board of Directors declared a two-for-one split
of the company's common stock. The stock split was in the form of a
stock dividend of one additional share for each share owned by
stockholders of record and each share held in treasury as of the close of
business on September 22, 2003, and was distributed on September 29,
2003.
Information (such as per share amounts, weighted average shares and
shares outstanding) has been adjusted in the accompanying financial
statements and related notes to reflect this split. This information is
presented on a post split basis effective with third quarter 2003
reporting. Information on an adjusted basis, showing the impact of this
split for the first two quarters of 2003, and by quarter and total year
for 2002 and 2001 follows.
Quarterly Data (Unaudited)
-------------------------------------------
POST SPLIT BASIS First Second
Quarter Quarter
-------------------------------------------
Basic earnings per share - net income
2003 $ 0.64 $ 0.79
Diluted earnings per share - net income
2003 $ 0.63 $ 0.78
-------------------------------------------
15
Quarterly Data (Unaudited)
--------------------------------------------------------------------------
POST SPLIT BASIS First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------------------------------------------------------------------------
Basic earnings per share - net income
2002 $ 0.58 $ 0.60 $ 0.70 $ 0.65 $ 2.53
2001 $ 0.57 $ 0.26 $ 0.50 $ 0.49 $ 1.81
Diluted earnings per share - net income
2002 $ 0.57 $ 0.59 $ 0.69 $ 0.65 $ 2.50
2001 $ 0.56 $ 0.25 $ 0.49 $ 0.48 $ 1.79
--------------------------------------------------------------------------
NOTE 10. EARNINGS PER SHARE
The computations for basic and diluted earnings per share for each period
presented follow.
---------------------------------------------------------------------------
EARNINGS PER SHARE
Three months ended Nine months ended
(Amounts in millions, September 30 September 30
except per share amounts) 2003 2002 2003 2002
---------------------------------------------------------------------------
Numerator:
Net income $ 663 $ 545 $1,784 $1,463
---------------------------------------------------------------------------
Denominator:
Denominator for weighted
average common shares
outstanding - basic 784.6 779.6 782.2 779.8
Dilution associated
with the company's
stock-based
compensation plans 12.9 10.4 11.2 11.1
---------------------------------------------------------------------------
Denominator for weighted
average common shares
outstanding - diluted 797.5 790.0 793.4 790.9
---------------------------------------------------------------------------
Earnings per share - basic $ 0.85 $ 0.70 $ 2.28 $ 1.88
Earnings per share - diluted $ 0.83 $ 0.69 $ 2.25 $ 1.85
---------------------------------------------------------------------------
Certain stock options outstanding were excluded from the computation of
diluted earnings per share because they would not have had a dilutive
effect as the options' exercise price was greater than the average market
price of the company's common stock (zero options for the three month
period ended September 30, 2003; 8.5 million average options for the nine
month period ended September 30, 2003; 12.5 million average options for
the three month period ended September 30, 2002; 10.5 million average
options for the nine month period ended September 30, 2002). The
conditions for conversion related to the company's $639 million in
aggregate face amount of convertible notes were not met for the third
quarter of 2003; accordingly, there was no impact on 3M's third quarter or
year to date diluted earnings per share. If the conditions for conversion
are met, 3M may choose to pay in cash and/or common stock.
16
NOTE 11. BUSINESS SEGMENTS
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. Internal management reporting for the
new reportable business segments commenced on January 1, 2003. Results
under the new structure for the three and nine month periods ended
September 30, 2003 and 2002, follow.
-------------------------------------------------------------------
BUSINESS
SEGMENT Three months ended Nine months ended
INFORMATION September 30 September 30
(Millions) 2003 2002 2003 2002
-------------------------------------------------------------------
NET SALES
Health Care $ 1,012 $ 901 $ 2,975 $ 2,642
Industrial 830 797 2,489 2,354
Consumer and Office 673 628 1,922 1,799
Display and Graphics 772 572 2,152 1,659
Electro and
Communications 454 460 1,346 1,383
Safety, Security and
Protection Services 482 423 1,458 1,281
Transportation 386 351 1,150 1,039
Corporate and
Unallocated 7 11 22 37
-------------------------------------------------------------------
Total Company $ 4,616 $ 4,143 $13,514 $12,194
-------------------------------------------------------------------
OPERATING INCOME
Health Care $ 272 $ 224 $ 773 $ 657
Industrial 115 130 349 372
Consumer and Office 128 121 346 334
Display and Graphics 251 142 642 405
Electro and
Communications 66 67 184 198
Safety, Security and
Protection Services 111 89 347 267
Transportation 106 88 301 253
Corporate and
Unallocated (19) (10) (171) (236)
-------------------------------------------------------------------
Total Company $1,030 $ 851 $2,771 $ 2,250
-------------------------------------------------------------------
Corporate and Unallocated operating income principally includes corporate
investment gains and losses, certain derivative gains and losses,
insurance-related gains and losses, certain litigation expenses,
corporate restructuring charges, and other miscellaneous items. Because
this category includes a variety of miscellaneous items, it is subject to
fluctuations on a quarterly and annual basis. Significant items included
in Corporate and Unallocated for the periods presented follow.
Corporate and Unallocated for 2003 includes a pre-tax charge of $93
million recorded during the first quarter related to an adverse ruling
associated with a lawsuit filed against 3M in 1997 by LePage's Inc.
17
Corporate and Unallocated in the first quarter of 2003 also includes
certain acquisition-related costs and respirator mask/asbestos litigation
expenses. The third quarter of 2003 also includes respirator
mask/asbestos litigation expenses and implant litigation expenses.
Corporate and Unallocated for 2002 includes charges related to employee
separation costs, accelerated depreciation and other business exit costs,
under the Company's 2001/2002 corporate restructuring plan. During the
first nine months of 2002, 3M incurred pre-tax charges of $202 million
($148 million in the second quarter and $54 million in the first
quarter), related to this restructuring plan.
NOTE 12. REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
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.
18
REVIEW REPORT OF INDEPENDENT AUDITORS
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 September 30, 2003, and the related
consolidated statements of income for each of the three-month and nine-
month periods ended September 30, 2003 and 2002, and of cash flows for the
nine-month periods ended September 30, 2003 and 2002. These interim
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, except as to Note 12, for which the date
is May 22, 2003, relating to the consolidated financial statements in the
Current Report on Form 8-K, 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
October 20, 2003
19
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 of 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.
* The company's future results are subject to fluctuations in the costs
of purchased components and materials due to market demand, currency
20
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 and divestitures and enter into strategic alliances.
However, there can be no absolute assurance that these will be completed
or beneficial to the company.
* The company's future results may be affected by various legal and
regulatory proceedings, including those involving product liability,
antitrust, environmental or other subjects. The outcome of these legal
proceedings may differ from the company's expectations because the
outcomes of litigation, including regulatory matters, are often difficult
to predict reliably. Various factors or developments can lead the company
to change current estimates of liabilities and related insurance
receivables where applicable, such as a final adverse judgment,
significant settlement or changes in applicable law. A future adverse
ruling or unfavorable development could result in future charges that
could have a material adverse effect on the company's consolidated
financial position, results of operations or cash flows in any particular
period. A specific factor that may influence the company's estimate of
its future asbestos-related liabilities is the currently pending
Congressional consideration of legislation to reform asbestos-related
litigation and pertinent information derived from that process. For a
more detailed discussion of the company's legal proceedings and the
factors affecting estimates about them, see the discussion of "Legal
Proceedings" in Part II, Item 1 of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Third Quarter
--------------
Stock Split:
On August 11, 2003, 3M's Board of Directors declared a two-for-one split
of the company's common stock. The stock split was in the form of a
stock dividend of one additional share for each share owned by
stockholders of record and each share held in treasury as of the close of
business on September 22, 2003, and was distributed on September 29,
2003. Information (such as per share amounts, weighted average shares
and shares outstanding) has been adjusted to reflect this split.
21
Overview:
3M had strong sales and earnings growth in the third quarter of 2003.
Sales were a record $4.616 billion, driven by a combination of higher
volume and favorable currency translation, with six of seven business
segments achieving worldwide volume growth. 3M companies in all major
geographic regions had volume growth, with Asia Pacific leading the way.
Net income totaled $663 million, or $.83 per diluted share, in the third
quarter of 2003, versus $545 million, or $.69 per diluted share, in the
same period last year.
3M's five corporate initiatives, aimed at improving organic growth,
productivity and cash flow, continue to contribute to improved results.
The company is on track to achieve at least $400 million in pre-tax
savings from its cost initiatives in 2003. 3M is confident in its ability
to sustain sales, earnings and cash momentum, despite the ongoing
uncertainties in the global marketplace.
Net Sales:
-----------------------------------------------------------------
Components of Net Sales Change
Third Quarter 2003
Worldwide U.S. International
-----------------------------------------------------------------
Volume - core 5.8% 2.1% 9.1%
Volume - acquisitions 2.0 1.5 2.4
-----------------------------------------------------------------
Volume - total 7.8 3.6 11.5
Price (0.3) 0.1 (0.7)
Translation 3.9 -- 7.2
-----------------------------------------------------------------
Total 11.4% 3.7% 18.0%
-----------------------------------------------------------------
Worldwide net sales for the third quarter of 2003 totaled $4.616 billion,
up 11.4 percent from the same period last year. Volumes increased 7.8
percent, with 2.0 percentage points of this growth due to acquisitions.
The termination of an agreement with Eli Lilly (discussed later in the
"Performance by Business Segment" section) added five-tenths of one
percentage point to the third quarter growth rate. The weaker U.S dollar
increased worldwide sales by 3.9 percent, while selling prices decreased
sales by three-tenths of one percent.
In the United States, net sales totaled $1.987 billion, up 3.7 percent
from the same period last year. Volumes increased 3.6 percent, with 1.5
percentage points of this growth coming from acquisitions. The Consumer
and Office; Health Care; Safety, Security and Protection Services; Display
and Graphics; and Transportation businesses all posted volume growth.
Selling prices were up one-tenth of one percent.
International net sales totaled $2.629 billion, an increase of 18.0
percent from the same period last year. Volumes increased 11.5 percent,
which included 2.4 percentage points of growth from acquisitions. In the
Asia Pacific area, volumes increased over 22 percent. Asia Pacific growth
was strongest in Display and Graphics, but all businesses posted positive
volume growth. Volume increased 14 percent in Japan and 29 percent in the
rest of the Asia Pacific area. In Latin America, volumes increased 21.2
percent, benefiting from the acquisition in December 2002 of Corning
22
Precision Lens, Inc. Acquisitions increased growth in Latin America by
17.4 percent. In Europe, volumes increased nine-tenths of one percent.
Although 3M experienced growth in many of its European businesses, general
economic conditions still remain soft overall in Western Europe. Selling
prices decreased international sales by seven-tenths of one percent.
Currency effects increased international sales by 7.2 percent, driven by
positive currency translation of 10.7 percent in Europe and 4.1 percent in
the Asia Pacific area.
Costs:
Cost of sales was 50.3 percent of sales, down about seven-tenths of one
percentage point from the same period last year. Gross margins were
positively impacted by Six Sigma and other projects aimed at improving
manufacturing throughput, yield and productivity. 3M's global sourcing
initiative has helped mitigate the impact of raw material cost increases.
Raw material costs were relatively flat compared to the same period last
year. The termination of the Eli Lilly agreement increased gross margins
by two-tenths of one percentage point. The company continues to see a
positive benefit from mix as 3M's highest margin businesses continue to
grow. Cost of sales includes manufacturing, engineering and freight
costs.
Selling, general and administrative (SG&A) expenses were 21.5 percent of
sales, down five-tenths of one percentage point from the same period last
year. 3M's continued efforts in Six Sigma, indirect cost management and
lower headcount levels helped to reduce SG&A as a percent of sales. SG&A
dollar expenses were $81 million higher than in the same period last year,
an increase of 8.9 percent, partially due to the negative impact of
currency translation.
During the third quarter of 2003, research, development and related
expenses totaled $270 million, up about 2 percent from the same period
last year.
Operating income:
Operating income was 22.3 percent of sales, compared with 20.6 percent in
the same period last year. This margin improvement was driven by higher
sales and increased productivity. Also, the termination of an agreement
with Eli Lilly added about three-tenths of one percentage point to
operating margins in the third quarter. Third quarter 2003 results
included costs associated with additional employment reduction actions to
realign the Electro and Communications business down to three divisions to
provide better alignment with the market environment and a sharper focus
on key customers.
Interest expense and income:
Third quarter interest expense was $22 million, $3 million higher than in
the same period last year. The increase reflected higher average debt
levels and a smaller benefit for capitalized interest (related to lower
capital spending and lower interest rates), with a partial offset due to
lower interest rates on debt. Interest income was $6 million, compared
with $9 million in the same period last year, impacted by lower interest
rates.
23
Provision for income taxes:
The worldwide effective income tax rate for the third quarter of 2003 was
33.4 percent, up from 32.5 percent in the same period last year and 32.1
percent for total year 2002. The company expects a rate of 33.0 percent in
the fourth quarter of 2003. Income taxes associated with repatriating
cash from outside the United States negatively impacted the 2003 rate.
Minority interest:
Minority interest expense for the third quarter of 2003 was $12 million,
compared with $22 million in the same period last year. The decrease
primarily related to a decrease in minority interest ownership related to
the purchase of an additional 25 percent of the shares of Sumitomo 3M
Limited (a Japanese company) in January 2003, and the purchase of the
minority interest shares of 3M Inter-Unitek GmbH (a German company) in
December 2002.
Net income:
Net income for the third quarter of 2003 totaled $663 million, or $.83 per
diluted share, compared with $545 million, or $.69 per diluted share, in
the same period last year. The company estimates that currency effects
increased net income for the third quarter of 2003 by about $12 million.
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 $10 million in
the third quarter of 2003.
First Nine Months
------------------
Overview:
Sales in the first nine months of 2003 were $13.514 billion, up 10.8
percent from the same period last year. Sales benefited from an increase
in volumes and favorable currency translation, with six of 3M's seven
business segments achieving growth in worldwide volume. Net income totaled
$1.784 billion, or $2.25 per diluted share, in the first nine months of
2003, versus $1.463 billion, or $1.85 per diluted share, in the same
period last year. 3M's five corporate initiatives, aimed at improving
organic growth, productivity and cash flow, continue to contribute to
improved results.
Special items:
During the first quarter of 2003, 3M recorded pre-tax charges of $93
million ($58 million after-tax, or $.07 per diluted share) related to an
adverse ruling in a lawsuit filed against 3M in 1997 by LePage's Inc.
The pre-tax charge of $93 million has been classified as "Other expense"
within operating income.
During the first six months of 2002, under its 2001/2002 corporate
restructuring plan, 3M incurred pre-tax charges of $202 million ($108
million after-tax and minority interest, or $0.14 per diluted share)
related to employee separation costs, accelerated depreciation charges
and other exit activities. These charges have been classified as a
component of cost of sales ($121 million), selling, general and
24
administrative expenses ($77 million), and research and development
expenses ($4 million).
Net Sales:
----------------------------------------------------------------
Components of Net Sales Change
First Nine Months 2003
Worldwide U.S. International
----------------------------------------------------------------
Volume - core 4.3% 0.7 7.3%
Volume - acquisitions 1.9 1.7 2.2
----------------------------------------------------------------
Volume - total 6.2 2.4 9.5
Price (0.1) (0.2) (0.1)
Translation 4.7 -- 8.7
----------------------------------------------------------------
Total 10.8% 2.2% 18.1%
----------------------------------------------------------------
Worldwide sales for the first nine months of 2003 totaled $13.514 billion,
up 10.8 percent from the same period last year. Core volume increased 4.3
percent, with acquisitions increasing growth by 1.9 percent. Currency
translation increased sales by 4.7 percent.
In the United States, sales for the first nine months of 2003 totaled
$5.712 billion, an increase of 2.2 percent from the same period last year.
This growth was driven by acquisitions, which increased sales by 1.7
percent. Pricing decreased sales in the United States by two-tenths of
one percent.
International sales for the first nine months of 2003 totaled $7.802
billion, up 18.1 percent from the same period last year. Core volume
increased 7.3 percent. Acquisitions increased international sales by 2.2
percent. In the Asia Pacific area, volumes increased 19.8 percent. All
business segments experienced positive growth in Asia Pacific, with five
of seven segments posting double-digit sales growth. In Latin America,
volumes increased 16.0 percent, benefiting from the December 2002
acquisition of Corning Precision Lens, Inc. In Europe, volumes increased
two-tenths of one percent. Selling prices decreased international sales
by one-tenth of one percent. Currency effects increased international
sales by 8.7 percent, driven by positive currency translation of 15.4
percent in Europe and 5.5 percent in the Asia Pacific area. Currency
translation negatively impacted sales in Latin America by 10.4 percent.
Costs:
Cost of sales was 50.8 percent of sales in the first nine months of 2003,
down from 52.3 percent in the same period last year. Gross margins were
positively impacted by Six Sigma and other projects aimed at improving
manufacturing throughput, yield and productivity. 3M's global sourcing
initiative has helped mitigate the impact of raw material cost increases.
3M's raw material costs were relatively flat compared to the first nine
months of 2002. Corporate restructuring charges in the first six months
of 2002 (totaling $121 million) negatively impacted cost of sales. Cost
of sales includes manufacturing, engineering and freight costs.
Selling, general and administrative (SG&A) expenses were 22.0 percent of
sales in the first nine months of 2003, down from 22.7 percent of sales in
the same period last year. SG&A expenses for the first nine months of 2002
25
include a charge of $77 million relating to the corporate restructuring
plan. Excluding these 2002 charges, SG&A for the first nine months of
2003 was flat as a percent of sales compared to the same period last year.
SG&A expenses were $213 million higher than in the same period last year,
an increase of 7.7 percent. This increase in SG&A dollar spending reflects
the impacts of currency translation, as well as increased advertising and
merchandising spending.
Research, development and related expenses totaled $816 million for the
first nine months of 2003, up 2.4 percent from the same period last year.
Operating income:
Operating income was 20.5 percent of sales, compared with 18.5 percent in
the same period last year. This margin improvement was driven by higher
sales and increased productivity. The first nine months of 2003 included
a $93 million loss related to an adverse ruling associated with a lawsuit
filed by LePage's Inc. The first nine months of 2002 included $202
million of charges related to the corporate restructuring plan.
Interest expense and income:
Interest expense in the first nine months of 2003 was $69 million, $11
million higher than in the same period last year. The increase reflected
higher average debt levels and a lower benefit for capitalized interest
(related to lower capital spending and lower interest rates), with a
partial offset due to lower interest rates on debt. Interest income was
$17 million, compared with $27 million in the same period last year,
impacted by lower interest rates.
Provision for income taxes:
The worldwide effective income tax rate for the first nine months of 2003
was 33.0 percent, up from 32.0 percent in the same period last year and
32.1 percent for total year 2002. Income taxes associated with
repatriating cash from outside the United States negatively impacted the
2003 rate.
Minority interest:
Minority interest expense was $38 million, compared with $45 million in
the same period last year. This primarily related to a decrease in
minority interest ownership related to the purchase of an additional 25
percent of the shares of Sumitomo 3M Limited in January 2003, and the
purchase of the minority interest shares of 3M Inter-Unitek GmbH in
December 2002. In the first nine months of 2002, primarily in the second
quarter, Sumitomo 3M Limited profitability was negatively impacted by the
corporate restructuring plan.
Net income:
Net income for the first nine months of 2003 totaled $1.784 billion, or
$2.25 per diluted share, compared with $1.463 billion, or $1.85 per
diluted share, in the same period last year. The company estimates that
currency effects increased net income for the first nine months of 2003 by
about $42 million. 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
26
instruments and other transaction impacts decreased net income by an
estimated $58 million in the first nine months of 2003.
Accounting pronouncements:
Information regarding accounting pronouncements is included in Note 1 to
the Consolidated Financial Statements.
RESTRUCTURING
Restructuring program actions related to the 2001/2002 corporate
restructuring program were substantially completed by June 30, 2002. The
company estimates incremental savings under this plan of approximately
$100 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)
Second quarter 2003
cash payments (2) -- (4) (6)
Third quarter 2003
cash payments (3) -- (1) (4)
-----------------------------------------------------------------------
Current liability at
September 30, 2003 $ 3 $ -- $ 5 $ 8
-----------------------------------------------------------------------
27
PERFORMANCE BY BUSINESS SEGMENT
Following is a discussion of the global operating results of the company's
seven business segments in the third quarter and first nine months of 2003
compared with the same periods last year. As discussed in Note 11 to the
Consolidated Financial Statements, 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 sales growth in both the third quarter and the first
nine months of 2003. All businesses benefited from the corporate
initiatives, which are designed to drive improvement in sales growth,
productivity and cash flow.
In the Health Care business segment, volumes grew 6.8 percent in the third
quarter of 2003 and 5.7 percent in the first nine months of 2003 compared
with the same periods last year. Virtually all of the businesses in the
Health Care segment posted volume growth in the third quarter and first
nine months of 2003, with the largest dollar growth in the medical
business. The accelerated revenue recognition associated with the Eli
Lilly agreement termination accounted for 2.3 percentage points of the
Health Care revenue growth rate for the quarter. Operating income in
Health Care increased by 21.4 percent in the third quarter of 2003, with 9
percentage points of this growth attributable to the Eli Lilly
transaction. Operating income for the first nine months of 2003 increased
17.7 percent, with about 3 percentage points of this growth attributable
to the Eli Lilly transaction.
In September 2001, 3M signed an agreement with Eli Lilly and Company to
collaborate on resiquimod, a potential treatment for genital herpes. In
the third quarter of 2003, 3M and Eli Lilly reached a final agreement to
return control of resiquimod to 3M. Upon termination of the agreement, 3M
recognized the remaining revenue (with deferral of some immaterial
remaining obligations). This acceleration of revenue provided a benefit
to revenue and operating income of approximately $20 million in the third
quarter of 2003. 3M continues to evaluate its strategic options with
respect to this potential treatment.
IVAX Corporation has agreed to assume exclusive rights to 3M's branded
health care respiratory products, together with related marketing and
sales personnel, in nine European countries. The agreement covers QVAR
brand (beclomethasone dipropionate HFA) Inhalation Aerosol, a
"maintenance" medication used to prevent asthma attacks, and also covers
Airomir brand (albuterol sulfate) Inhaler, a "rescue" medication used to
relieve acute asthma symptoms. 3M will continue to manufacture and supply
these products to IVAX. Because this agreement was completed on October
1, 2003, there was no material impact on results for the first nine months
of 2003 related to this transaction.
In the Industrial business segment, volumes were basically flat in the
third quarter of 2003 and increased 1.3 percent in the first nine months
of 2003. Core volumes remain sluggish, especially in the United States
and Europe, with Asia Pacific continuing to grow. Operating income in
Industrial decreased about 11.5 percent in the third quarter of 2003 and
decreased about 6 percent in the first nine months of 2003. This decrease
in profitability was driven by lower factory production.
28
In the Consumer and Office business segment, volumes increased 5.0 percent
in the third quarter and 3.9 percent for the first nine months of 2003.
In the third quarter of 2003, U.S. volume growth exceeded 8 percent, while
international was down versus the same period last year. Operating income
in Consumer and Office increased about 6 percent in the third quarter of
2003 and increased nearly 4 percent during the first nine months of 2003.
In the Display and Graphics business segment, volumes increased over 30
percent in the third quarter of 2003 and more than 25 percent in the first
nine months of 2003, with the December 2002 Corning Precision Lens, Inc.
acquisition adding about 12 percentage points of growth in the third
quarter of 2003 and 11 percentage points of growth in the first nine
months of 2003. Core volume growth and operating income growth in both
the third quarter and first nine months of 2003 were led by the Optical
Systems business. Operating income in Display and Graphics increased
nearly 78 percent in the third quarter of 2003 and nearly 59 percent in
the first nine months of 2003, reflecting the leverage in this business.
In the Electro and Communications business segment, volumes declined 2.6
percent in the third quarter of 2003 and 4.9 percent in the first nine
months of 2003. This volume decrease reflects continuing weakness in the
global telecommunications industry. Operating income of the Electro and
Communications business segment declined about 1 percent in the third
quarter and declined about 7 percent in the first nine months of 2003,
largely due to lower sales. In the third quarter of 2003, 3M took
additional employment reduction actions to realign this business down to
three divisions to provide better alignment with the market environment
and a sharper focus on key customers.
In the Safety, Security and Protection Services business segment, volumes
increased 9.3 percent in the third quarter of 2003 and 8.5 percent in the
first nine months of 2003. This volume increase was led by continued
strong demand for 3M's respiratory protection products, as well as
positive volume growth in several other parts of this business. Operating
income in this business segment increased by about 25 percent in the third
quarter of 2003 and by about 30 percent for the first nine months of 2003.
In the Transportation business segment, volumes increased 3.9 percent in
the third quarter of 2003 and 4.3 percent in the first nine months of
2003. Operating income increased more than 20 percent in the third
quarter of 2003, with approximately 7 percentage points of this growth
attributable to the sale of 3M's 50 percent ownership interest in the
Durel joint venture (announced on September 30, 2003). Operating income
increased about 19 percent in the first nine months of 2003.
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 $2.374 billion at September 30, 2003, increasing $772 million from
December 31, 2002. This increase was largely related to an increase in
cash and other current assets, with the increase in other current assets
primarily due to the reclassification of certain insurance receivables
29
from long-term to current, and increases in various prepaid items and
deferred taxes.
The accounts receivable turnover index (defined as quarterly net sales
divided by ending accounts receivable, multiplied by 4) totaled 6.62 at
September 30, 2003, an improvement from 6.55 at December 31, 2002, and
from 6.41 at September 30, 2002. The inventory turnover index (defined as
quarterly factory cost divided by ending inventory, multiplied by 4) was
4.73 at September 30, 2003, an improvement from 4.17 at December 31, 2002,
and 4.15 at September 30, 2002.
Net cash provided by operating activities totaled $2.507 billion in the
first nine months of 2003, an increase of $514 million from the same
period last year, driven by higher net income, lower pension contributions
and tax timing benefits. Corporate restructuring-related cash payments
made by 3M totaled $40 million in the first nine months of 2003, compared
with $298 million in the same period last year. Restructuring-related
cash payments made by 3M related to the 2001 corporate restructuring plan
are not expected to be significant in the future.
3M made a voluntary, special contribution of $600 million to its U.S.
qualified pension plan in the third quarter of 2003, compared with a
voluntary contribution of $789 million in the third quarter of 2002.
Future contributions will depend on market conditions, interest rates and
other factors. 3M believes its strong cash flow and balance sheet will
allow it to fund future pension needs without compromising growth
opportunities.
As indicated in its year-end 2002 disclosures, 3M's U.S. qualified
pension plan assets in 2002 were below 3M's accumulated benefit
obligation (ABO) for its plans. 3M's pension measurement date for its
United States employee benefit plans is September 30. While 3M's pension
plan assets declined in 2002 due to equity market weakness, a rebound
occurred in 2003 as actual U.S. plan asset returns exceeded 18 percent
and anticipated future U.S. plan asset returns were maintained at 9
percent. However, 3M's pension liabilities and benefit payments have
continued to grow, primarily due to declining interest rates which
reduced the U.S. discount rate in 2002 to 6.75 percent and continued to
reduce the U.S. discount rate further in 2003 to 6.00 percent. The
discount rate reflects the current rate at which the pension liabilities
could be effectively settled at the end of the year. On a global basis,
the company expects an increase in its total year 2004 pension expense of
approximately 13 to 14 cents per diluted share.
3M currently anticipates that, for 2003, its U.S. qualified pension plan
assets will also be below 3M's accumulated benefit obligation (ABO) for
these 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
recorded 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
30
Income as part of net pension cost. In the fourth quarter of 2003, 3M
anticipates recording an additional minimum pension liability adjustment
within other comprehensive income of $200 million to $250 million (net of
tax) related to its U.S. qualified pension plan. The exact amount will
not be known until the company finalizes its worldwide pension plan
actuarial analysis. In future years, if 3M's pension plan is fully
funded on an ABO basis, the company would reverse the minimum pension
liability balance in other comprehensive income to an asset account.
There were several developments in legal proceedings during the first nine
months of 2003. As discussed earlier, in the first quarter of 2003, 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. In the third quarter of 2003, the company
increased its respirator mask/asbestos liabilities by $20 million and its
related insurance receivables by $16 million, resulting in $4 million of
pre-tax expense being recorded. Also, in the third quarter of 2003, the
breast implant liability was increased by $15 million and the related
receivable by $13.5 million, resulting in $1.5 million of pre-tax expense
being recorded. Because of the time delay between payment of claims and
receipt of insurance reimbursements, the September 30, 2003, amounts for
both breast implant and respirator mask/asbestos liabilities are less than
expected insurance recoveries. Thus, the expected net inflow of cash will
increase future cash flows. 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 and 3M's first and second quarter 2003
Form 10-Q's.
Cash used in investing activities totaled $736 million in the first nine
months of 2003, compared with $566 million in the same period last year.
Capital expenditures for the first nine months of 2003 were $416 million,
a decrease of $114 million from the same period last year. Capital
expenditures are expected to total approximately $650 million to $700
million for total year 2003, compared with $763 million for total year
2002. Two of the company's corporate initiatives are helping to drive
lower capital expenditures. Six Sigma discipline helps improve
utilization of existing assets and refines our process of determining new
capacity needs. In addition, through our sourcing initiative, 3M can
procure plant and equipment on more favorable terms than in the past.
Cash used for acquisitions of businesses totaled $428 million in the first
nine months of 2003, with $377 million related to the purchase of an
additional 25 percent ownership in Sumitomo 3M Limited. The company is
actively considering additional acquisitions. Proceeds from the sale of
investments include $26 million of cash received in the third quarter of
2003 related to the sale of 3M's 50 percent ownership in Durel to Rogers
Corporation.
Financing activities in the first nine months of 2003 for both short-term
and long-term debt included net cash outflows of $372 million, compared
with net cash inflows of $18 million in the same period last year. The
cash flow decrease in net short-term debt of $204 million includes the
31
portion of short-term debt with original maturities of 90 days or less.
Repayment of other debt of $615 million includes $366 million of
commercial paper having original maturities greater than 90 days and the
repayment of a $100 million medium term note and a $140 million Japanese
Yen eurobond. Proceeds from other debt of $447 million primarily related
to commercial paper having original maturities greater than 90 days.
Total debt as shown on the Consolidated Balance Sheet decreased $384
million from December 31, 2002. As of September 30, 2003, total debt was
28.5 percent of total capital, down from 36 percent as of December 31,
2002. The company believes its strong credit rating and its strong cash
flows provide ready and ample access to funds in the global capital
markets. The company's available short-term lines of credit facilities
have not materially changed since December 31, 2002. In March 2003, the
company completed its annual renewal of $565 million of certain short-term
lines of credit. While the previous agreement called for repayment of
debt based on ratings triggers, the new agreement has a covenant that
states 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 nine months of 2003 were $394
million, compared with $813 million in the same period last year. The
company repurchased about 6 million shares of common stock in the first
nine months of 2003, compared with about 13.7 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 September 30, 2003, about $1.2 billion
remained authorized for repurchase. On November 10, 2003, the Board of
Directors authorized the repurchase of up to $1.5 billion of the company's
common stock between January 1, 2004 and December 31, 2004. Stock
repurchases are made to support the company's stock-based employee
compensation plans and for other corporate purposes.
Cash dividends paid to shareholders totaled $775 million in the first nine
months of 2003, compared with $725 million in the same period last year.
In February 2003, the quarterly dividend was increased by 6.5 percent to
33 cents per share, marking the 45th consecutive annual dividend increase
for 3M.
Included in the financing section of the Consolidated Statement of Cash
Flows is $19 million classified as "Other - net". This category
represents changes in cash overdraft balances and principal payments for
capital leases.
32
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 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, and its Current Report on Form 8-K dated
May 23, 2003 (which updated 3M's 2002 Annual Report on Form 10-K). The
company believes that there have been no material changes in these market
risks since year-end 2002.
ITEM 4. CONTROLS AND PROCEDURES
a. 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" (as defined in the Exchange Act Rule 13a-15(e)) as of the end
of the period covered by this report. 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 was no significant change in the company's internal controls
over financial reporting that occurred during the company's most recently
completed fiscal quarter, that has materially affected, or is reasonably
likely to materially affect, the company's internal control over
financial reporting.
33
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
ended December 31, 2002, the company's Current Report on Form 8-K dated
May 23, 2003 (which updated the company's 2002 Annual Report on Form 10-
K), and the company's Quarterly Reports on Form 10-Q for the periods
ended March 31, 2003 and June 30, 2003 (collectively the "Reports"). This
section describes significant developments since the preparation of the
Reports and should be read with reference to them. Unless specifically
indicated, all previously reported matters remain pending. Where no
estimate of the amount of a possible loss or range of loss is noted with
respect to a pending matter, the Company is unable to make such an
estimate at this time.
Breast Implant Insurance Recovery and Related Litigation
---------------------------------------------------------
As previously reported, the Minnesota Supreme Court ruled in favor of 3M
in litigation with its insurers over insurance coverage for breast
implant claims on August 21, 2003. The court's ruling confirms insurance
coverage owed to 3M by 29 insurers remaining in the case and holds that
these insurers are liable up to the limits of their respective policies.
The Minnesota Supreme Court denied the insurers' petition for rehearing
on September 29, 2003. This ruling and the denial of the insurers'
petition essentially conclude the nine-year litigation between 3M and
these insurers, although subsequent proceedings to effectuate the ruling
are expected. 3M expects to collect approximately $250 million from these
insurers as a result of this decision. This event will not impact 3M's
earnings, as the amount received will offset a portion of a previously
recorded insurance receivable.
A hearing was conducted in September, 2003 in the arbitration proceeding
in London, England, brought by the company to recover insurance coverage
for some of its breast implant liability and costs from certain claims-
made insurance carriers. The company expects a decision on whether
coverage exists from the arbitration panel in the first half of 2004. If
the panel decides the coverage question in the company's favor, it will
then determine the amount, if any, of coverage in a subsequent
proceeding.
The company increased its accrued liabilities related to the company's
best estimate of probable future contributions to the Revised Settlement
Program (and legal expenses in connection with the insurance recovery
actions in St. Paul and London) by $15 million in the third quarter (with
a corresponding increase of $13.5 million in receivables for the probable
amount of insurance recoveries, raising that receivable to $338 million).
On September 15, 2003 a 3-judge panel of the U. S. Court of Appeals for
the Eleventh Circuit reversed, in part, the dismissal of a lawsuit by the
United States seeking reimbursement of the cost of medical treatment
provided to certain women with breast implants from the company and other
breast implant manufacturers, and remanded the case to the District Court
34
for further proceedings. 3M and the other defendants intend to file a
petition asking the Eleventh Circuit for a rehearing of the appeal by the
full court.
Antitrust Litigation
---------------------
The Supreme Court on October 6, 2003 invited the Solicitor General to
express the views of the United States on the Company's pending request
that the Supreme Court agree to hear an appeal from the Third Circuit's
ruling of March 26, 2003 affirming a trial verdict against the company in
favor of LePage's. The Supreme Court is not expected to act on the
company's petition to review the Third Circuit's ruling until after the
government files its brief with the Court. As previously reported,
certain tape purchasers filed seven purported class actions against the
company in the aftermath of the LePage's verdict and appellate ruling,
two of which were filed in August of 2003 - one filed in the Circuit
Court of Davidson County, Tennessee and the second filed in the Superior
Court of Passaic County, New Jersey. The company moved to dismiss both
cases.
Respirator Mask/Asbestos Litigation
------------------------------------
As of September 30, 2003, the company is a named defendant, typically
with multiple co-defendants, in numerous lawsuits in various courts that
purport to assert claims by approximately 84,500 individual claimants.
On October 24, 2003, a jury in state court in Orange County, Texas, found
the company had no liability whatever to the plaintiff, who sought to
recover damages from the company arising from his silicosis, which he
claimed to have contracted from occupational exposure to silica despite
his purported use of the company's respirator mask equipment at various
times. The jury rejected each of the plaintiff's theories of liability
against the company.
This is only the fourth mask respirator case to proceed to a jury verdict
among the hundreds of thousands of such claims asserted against the
company in the past approximately two decades. The company has been
absolved of any liability in three of these four cases (including the
Orange County case). The single jury verdict adverse to the company
returned in Holmes County, Mississippi, as previously reported, is the
subject of an appeal now pending in that state's Supreme Court.
The company periodically reexamines its estimate of probable liabilities
and associated expenses with respect to its respirator mask and asbestos
product claims and makes appropriate adjustments to such estimates based
on experience and developments. As previously reported, the company
experienced in the first half of 2003 an increase in the number of claims
and an increase in the proportion of silica-related claims. The total
number of new claimants filing claims against the Company during the
third quarter declined somewhat from each of the first two quarters, but
the proportion of silica-related claims relative to total claims
continued at a rate that is higher than the Company's historical
experience. The company believes that much of the increased number of
claims filed in 2003 is due to claimants filing claims before recent and
anticipated tort reform legislation becomes effective and that many of
these newer claims are asserted on behalf of asymptomatic claimants. As a
result of the larger caseload and the costs of aggressively defending
35
itself, the company increased its accrued liabilities by $20 million in
the third quarter of 2003 to $202 million (with a corresponding increase
of $16 million in insurance receivables for the probable amount of
insurance recoveries to $373 million). Congress's current active
consideration of significant legislative reform at the federal level
increases the uncertainty associated with assessment of the Company's
likely future liability.
The State of West Virginia, through its Attorney General, filed a
complaint against the company and two other manufacturers of respiratory
protection products in the Circuit Court of Lincoln County, West
Virginia. The complaint seeks substantial but unspecified compensatory
damages primarily for reimbursement of the costs allegedly incurred by
the State for worker's compensation and healthcare benefits provided to
more than 20,000 current or former miners allegedly suffering from
silicosis and/or coal miner's pneumoconiosis ("Black Lung disease"). The
complaint also seeks unquantified punitive damages. The company believes
that the allegations have no merit and is vigorously defending this
lawsuit.
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 previously disclosed EPA consent
order negotiating process concerning one perfluorooctanyl compound is in
progress. The EPA is also considering the addition of one and possibly
two perfluorooctanyl compounds to its Integrated Risk Information
System, an EPA database that assesses the possible human health effects
that may result from exposure to certain compounds. The Centers for
Disease Control and Prevention recently identified several
perfluorooctanyl compounds and other fluorinated substances, certain of
which have been or are produced by the Company, that it plans to include
in a future National Report(s) on Human Exposure to Environmental
Chemicals.
Several hundred plaintiffs who claim to have lived in the vicinity of the
ACME Barrel Company's storage drum reconditioning facility in Chicago
filed a lawsuit in the Circuit Court of Cook County, Illinois against 3M
and a number of other companies that allegedly were customers of ACME
Barrel. The complaint seeks unspecified damages for personal injuries
allegedly caused by the plaintiffs' exposure to chemicals migrating from
ACME Barrel's drum reconditioning operations. The plaintiffs also assert
that a class should be certified on behalf of all persons similarly
situated. A separate wrongful death lawsuit was filed in the Circuit
Court of Cook County, Illinois against 3M and a number of other companies
on behalf of the estate and family of a person who worked at the Cook
County Juvenile Detention Center in the vicinity of the ACME Barrel
facility. The lawsuit alleges unspecified damages from personal injuries
and death allegedly caused by exposure to chemicals migrating from ACME
Barrel's drum reconditioning operations. The company is vigorously
defending these lawsuits.
36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this Report.
(12) A statement setting forth the calculation of the
ratio of earnings to fixed charges. Page 38.
(15) A letter from the company's independent accountants
regarding unaudited interim consolidated
financial statements. Page 39.
(31.1) Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350. Page 40.
(31.2) Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350. Page 41.
(32.1) Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350. Page 42.
(32.2) Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350. Page 43.
(b) Reports on Form 8-K:
In a Form 8-K dated October 20, 2003, 3M furnished information as
indicated below. For the quarter ended September 30, 2003, reports
provided on Form 8-K were dated August 21, 2003, August 13, 2003, and July
23, 2003.
The Form 8-K dated October 20, 2003, furnished 3M's earnings press release
dated October 20, 2003, which reported 3M's unaudited consolidated
financial results for the third quarter of 2003.
The Form 8-K dated August 21, 2003, reported that the Minnesota Supreme
Court ruled in favor of 3M in litigation with its insurers over insurance
coverage for breast implant claims.
The Form 8-K dated August 13, 2003, reported that 3M's Board of Directors
declared a two-for-one split of the company's common stock. The stock
split was in the form of a stock dividend distributed on September 29,
2003, to shareholders of record at the close of business on September 22,
2003. 3M's Board of Directors also declared a quarterly cash dividend.
3M's previously announced Q3 and year 2003 earnings outlook was provided
on a split-adjusted basis.
The Form 8-K dated July 23, 2003, furnished 3M's earnings press release
dated July 21, 2003, which reported 3M's unaudited consolidated financial
results for the second quarter of 2003.
None of the other item requirements of Part II of Form 10-Q is applicable
to the company for the quarter ended September 30, 2003.
37
SIGNATURE PAGE
for Form 10-Q for the quarter ended September 30, 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: November 10, 2003
---------------------------
/s/ Patrick D. Campbell
-------------------------------------------
Patrick D. Campbell, Senior Vice President
and Chief Financial Officer
(Mr. Campbell is the Principal Financial
Officer and has been duly authorized to
sign on behalf of the registrant.)