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 June 30, 1998 Commission file number: 1-3285
MINNESOTA MINING AND MANUFACTURING COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification No. 41-0417775
Executive offices: 3M Center, St. Paul, Minnesota 55144
Telephone number: (651) 733-1110
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes X . No .
On June 30, 1998, there were 403,878,085 shares of the
Registrant's common stock outstanding.
This document contains 26 pages.
The exhibit index is set forth on page 23.
Minnesota Mining and Manufacturing Company and Subsidiaries
PART I. Financial Information
Consolidated Statement of Income
(Amounts in millions, except per-share amounts)
(Unaudited)
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
Net sales $3,770 $3,817 $7,470 $7,531
Operating expenses
Cost of goods sold 2,162 2,156 4,258 4,245
Selling, general and
administrative expenses 967 972 1,891 1,909
Total 3,129 3,128 6,149 6,154
Operating income 641 689 1,321 1,377
Other income and expense
Interest expense 35 28 69 51
Investment and other
income - net (11) (19) (22) (31)
Total 24 9 47 20
Income before income taxes
and minority interest 617 680 1,274 1,357
Provision for income taxes 219 242 456 486
Minority interest 12 20 32 43
Net income $ 386 $ 418 $ 786 $ 828
Weighted average common
shares outstanding 404.3 415.5 404.3 416.1
Earnings per share - basic $ 0.95 $ 1.01 $ 1.94 $ 1.99
Weighted average common
and common equivalent
shares outstanding 410.0 421.9 409.8 422.2
Earnings per share - diluted $ 0.94 $ 0.99 $1.92 $1.96
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
Minnesota Mining and Manufacturing Company and Subsidiaries
Consolidated Balance Sheet
(Dollars in millions)
June 30,
1998 December 31,
(Unaudited) 1997
Assets
Current assets
Cash and cash equivalents $ 219 $ 230
Other securities 185 247
Accounts receivable - net 2,612 2,434
Inventories
Finished goods 1,331 1,293
Work in process 647 605
Raw materials and supplies 489 501
Total inventories 2,467 2,399
Other current assets 883 858
Total current assets 6,366 6,168
Investments 605 613
Property, plant and equipment 12,552 12,098
Less accumulated depreciation (7,286) (7,064)
Property, plant and equipment - net 5,266 5,034
Other assets 1,641 1,423
Total $13,878 $13,238
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 901 $ 898
Payroll 327 306
Income taxes 334 238
Short-term debt 1,787 1,499
Other current liabilities 1,034 1,042
Total current liabilities 4,383 3,983
Other liabilities 2,230 2,314
Long-term debt 1,221 1,015
Stockholders' equity - net 6,044 5,926
Shares outstanding
June 30, 1998, 403,878,085
December 31, 1997, 404,724,947
________ ________
Total $13,878 $13,238
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
Minnesota Mining and Manufacturing Company and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Dollars and shares in millions, except per-share amounts)
(Unaudited)
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
Common stock and capital in excess of
par value at beginning and end of period $ 296 $ 296 $ 296 $ 296
Retained earnings
Balance at beginning of period 9,970 8,921 9,848 8,756
Net income (A) 386 418 786 828
Dividends paid (per share:
$0.55, $0.53, $1.10, $1.06) (223) (220) (445) (441)
Stock option plans and other (52) (58) (108) (82)
Balance at end of period 10,081 9,061 10,081 9,061
Accumulated other comprehensive income - net
Balance at beginning of period
Cumulative foreign currency translation
adjustments (589) (334) (547) (178)
Unrealized gain on securities - net 7 8 8 15
Other comprehensive income
Foreign currency translation and other
adjustments (B) (35) 32 (77) (124)
Unrealized gain (loss) on
securities - net (C) 1 (3) -- (10)
Balance at end of period
Cumulative foreign currency translation
adjustments (624) (302) (624) (302)
Unrealized gain on securities - net 8 5 8 5
Balance at end of period (616) (297) (616) (297)
Unearned compensation - ESOP
Balance at beginning of period (370) (405) (379) (412)
Amortization 10 9 19 16
Balance at end of period (360) (396) (360) (396)
Treasury stock, at cost
Balance at beginning of period
(shares: 67.5, 55.8, 67.3, 55.2) (3,301) (2,250) (3,300) (2,193)
Reacquired stock
(shares: 2.0, 2.9, 4.2, 5.8) (190) (252) (377) (501)
Issuances pursuant to stock option plans
(shares: 1.4, 2.1, 3.4, 4.4) 134 187 320 379
Balance at end of period (3,357) (2,315) (3,357) (2,315)
(shares: 68.1, 56.5, 68.1, 56.5)
Stockholders' equity - net $ 6,044 $ 6,349 $ 6,044 $ 6,349
Total comprehensive income (A + B + C) $ 352 $ 447 $ 709 $ 694
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
Minnesota Mining and Manufacturing Company and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in millions)
(Unaudited)
Six months ended
June 30
1998 1997
Cash Flows from Operating Activities
Net income $ 786 $ 828
Adjustments to reconcile net income
to net cash provided by operating activities
Implant litigation - net (185) (41)
Depreciation and amortization 427 434
Working capital and other changes - net (261) (216)
Net cash provided by continuing operations 767 1,005
Net cash used by discontinued operations -- (82)
Net cash provided by operating activities 767 923
Cash Flows from Investing Activities
Capital expenditures (712) (656)
Other changes - net (56) 33
Net cash used in investing activities (768) (623)
Cash Flows from Financing Activities
Change in short-term debt - net 269 441
Repayment of long-term debt (22) (540)
Proceeds from long-term debt 336 298
Purchases of treasury stock (377) (501)
Reissuances of treasury stock 213 225
Payment of dividends (445) (441)
Other (19) --
Net cash used in financing activities (45) (518)
Effect of exchange rate changes on cash 35 26
Net decrease in cash and cash equivalents (11) (192)
Cash and cash equivalents at beginning of year 230 583
Cash and cash equivalents at end of period $ 219 $ 391
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
Minnesota Mining and Manufacturing Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation
of 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 condensed
consolidated financial statements and notes are presented as
permitted by the requirements for Form 10-Q and do not contain
certain information included in the company's annual consolidated
financial statements and notes. This Form 10-Q should be read in
conjunction with the company's consolidated financial statements and
notes included in its 1997 Annual Report on Form 10-K.
Derivatives and Hedging Activities:
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The company must
adopt this standard no later than January 1, 2000. The company is
reviewing the requirements of this standard which are quite complex.
Although the company expects that this standard will not materially
affect its financial position and results of operations, it has not
yet determined the impact of this standard on the financial
statements of the company.
Debt issuance:
In July 1998, 3M Germany completed a 3-year, $200 million, 5.75
percent Eurobond offering. After giving effect to an interest rate
swap, the company will have an interest obligation based on a
floating LIBOR index.
Comprehensive income:
Effective January 1, 1998, the company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income."
Total comprehensive income and the components of accumulated other
comprehensive income are presented in the Consolidated Statement of
Changes in Stockholders' Equity.
Earnings per share:
The difference in the weighted average shares outstanding for
calculating basic and diluted earnings per share is attributable to
the assumed exercise of the Management Stock Ownership Program stock
options for the three-month and six-month periods ended June 30, 1998
and 1997, and also includes the effect of the assumed exercise of
General Employees' Stock Purchase Plan (GESPP) options for the three-
month and six-month periods ended June 30, 1997. Effective July
1997, all GESPP options are exercised on the last business day of
each month of grant, resulting in no dilutive effect.
Other:
Discussion of legal matters is cross-referenced to this Form 10-Q,
Part II, Item 1, Legal Proceedings, and should be considered an
integral part of the Consolidated Financial Statements and Notes.
PricewaterhouseCoopers LLP, the company's independent auditors, have
performed a review of the unaudited interim financial statements
included herein and their review report thereon accompanies this
filing.
Review Report of Independent Auditors
To the Stockholders of Minnesota Mining and Manufacturing Company:
We have reviewed the accompanying condensed consolidated balance
sheet of Minnesota Mining and Manufacturing Company and Subsidiaries
as of June 30, 1998, and the related condensed consolidated
statements of income and changes in stockholders' equity for the
three-month and six-month periods ended June 30, 1998 and 1997, and
cash flows for the six-month periods ended June 30, 1998 and 1997.
These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, 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 condensed consolidated financial
statements referred to above for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated February 9, 1998, except
for the last paragraph under Debt in the Notes to Consolidated
Financial Statements, as to which the date is February 18, 1998, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31,
1997, 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
St. Paul, Minnesota
July 23, 1998
Minnesota Mining and Manufacturing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Second Quarter
Worldwide sales for the second quarter totaled $3.770 billion, down
about 1 percent from the second quarter last year. Excluding changes
in currency exchange rates, sales rose about 4 percent. Worldwide
volume and selling prices were both up about 2 percent.
In the United States, sales increased about 1 percent to $1.826
billion. Adjusting for the third-quarter 1997 sale of the outdoor
advertising business, sales rose about 4 percent. A number of U.S.
businesses posted solid growth, with particularly good gains in
pharmaceuticals, automotive body repair, home improvement, commercial
graphics, and occupational health and safety businesses. The company
experienced soft demand in businesses serving the electronics,
transportation safety and industrial tape markets. In the
electronics area, U.S. sales were affected by a slowdown in industry
growth, particularly in the semiconductor and disk drive segments.
3M's connector and chemical businesses both were affected by this
slowdown. In transportation safety, demand for 3M reflective
sheetings was affected by the expiration of the bill providing
federal funding of highway projects. A multi-year bill was recently
enacted which should be a significant plus for 3M in the months and
years ahead.
Internationally, sales totaled $1.944 billion. Overall, local-
currency sales gains were more than offset by currency translation.
Expressed in dollars, international sales declined 3 percent. Volume
increased about 4 percent and selling prices were up 2 percent. The
company increased selling prices in all major geographic areas,
helping to offset part of the currency devaluation. Currency
translation reduced international sales by about 9 percent. In
Europe, sales in local currencies were up more than 6 percent, with
good contributions from Germany, France, Italy and Spain. 3M's
growth in Europe also continued to be helped by strong volume gains
in developing economies, including Turkey, Poland and Hungary. In
the Asia Pacific area, volume decreased about 2 percent. In Japan,
volume growth this quarter was up less than 2 percent, due to
continued economic softness there. In Asia outside Japan, volume
declined more than 6 percent. Overall volume growth in the region
was negatively affected by the economic turmoil in Korea, Thailand,
Malaysia and Indonesia. In Latin America, volume increased 9
percent, with double-digit gains in several countries. In Brazil,
volume increased only 5 percent, affected by economic softness there.
In Canada, volume increased about 5 percent.
Cost of goods sold, which includes manufacturing, research and
development, and engineering, was 57.4 percent of sales, up nearly
one point from the second quarter last year. Gross margins benefited
from higher selling prices and lower raw material costs. However, the
effects of currency exchange rates and low volume growth more than
offset these benefits. Currency reduced gross margins by nearly one
percentage point. The currency effect relates to the impact of
currency fluctuations on the transfer of goods between 3M operations
in the United States and abroad.
Selling, general and administrative spending was 25.6 percent of
sales, up slightly from the same quarter last year.
Worldwide operating income was 17.0 percent of sales, down one
percentage point from the second quarter last year. Margins were
down about a point both in the United States and internationally.
Operating income was $641 million, down 6.8 percent from the year-
earlier quarter. Currency reduced operating income by about $70
million, or 10 percent.
Second quarter interest expense of $35 million was up $7 million from
the same quarter last year, reflecting a moderate increase in the
company's financial leverage. Net investment and other income was
$11 million, in line with the level averaged in each of the past
three quarters.
The worldwide effective income tax rate for the quarter was 35.5
percent, the same as in the second quarter last year.
Net income totaled $386 million, or $0.94 per diluted share, compared
with $418 million, or $0.99 per diluted share, in the second quarter
of 1997. The company estimates that changes in the value of the U.S.
dollar decreased earnings for the quarter by about 12 cents per share
compared with the second quarter of 1997. This estimate includes the
effect of translating profits from local currencies into U.S.
dollars; the impact of currency fluctuations on the transfer of goods
between 3M operations in the United States and abroad; and
transaction gains and losses in countries not considered to be highly
inflationary.
Year-to-date
On a year-to-date basis, worldwide sales totaled $7.470 billion, down
about 1 percent from the same period last year. Excluding changes in
currency exchange rates, sales rose about 4 percent. Unit sales
increased about 3 percent, while selling prices were up about 1
percent.
In the United States, sales decreased slightly to $3.565 billion.
Adjusting for the third-quarter 1997 sale of the outdoor advertising
business, sales rose about 3 percent. Internationally, sales totaled
$3.905 billion. Overall, local-currency sales gains were more than
offset by currency translation. Expressed in dollars, international
sales declined 1 percent. Volume increased about 6 percent and
selling prices were up 2 percent. Currency translation reduced
international sales by about 9 percent.
Cost of goods sold, which includes manufacturing, research and
development,and engineering, was 57.0 percent of sales, up six-tenths
of a percentage point from the same period last year. The factors
that influenced gross margins for the second quarter were the same
factors that affected the year-to-date results.
Selling, general and administrative spending was 25.3 percent of
sales, unchanged from the same period last year.
Worldwide operating income was 17.7 percent of sales, down six-tenths
of a percentage point from the same period last year. Margins were
down about a point in the United States and down slightly
internationally. Operating income was $1.321 billion, down 4.1
percent from the year-earlier period. Currency reduced operating
income by almost $145 million, or 10 percent.
Interest expense of $69 million was up $18 million from the first six
months of last year, reflecting the company's strategy to lower its
cost of capital by moderately increasing its financial leverage.
This strategy may increase interest expense by about $45 million for
total year 1998 when compared to 1997. Net investment and other
income was $22 million, in line with recent trends.
The worldwide effective income tax rate for the first six months was
35.8 percent, essentially the same as in the first half last year.
Net income totaled $786 million, or $1.92 per diluted share, compared
with $828 million, or $1.96 per diluted share, in the first half of
1997. The company estimates that changes in the value of the U.S.
dollar decreased earnings for the first six months by about 22 cents
per share compared with the first half of 1997. This estimate
includes the effect of translating profits from local currencies into
U.S. dollars; the impact of currency fluctuations on the transfer of
goods between 3M operations in the United States and abroad; and
transaction gains and losses in countries not considered to be highly
inflationary.
FUTURE OUTLOOK
3M expects higher second-half 1998 earnings per diluted share, with
full-year 1998 earnings per diluted share similar to last year,
excluding the 1997 gain on the sale of the company's outdoor
advertising business, and also excluding one-time charges, if any, in
the second-half of 1998. 3M expects the economic troubles in the
Asia Pacific area to persist, that the growth of the U.S. economy
will continue to moderate, and that the strong U.S. dollar will
continue to negatively affect the company. Based on exchange rates
as of July 23, 1998, currency effects could reduce earnings in the
second half of 1998 by about 15 cents per share. Results are
expected to benefit from somewhat better local-currency sales growth,
further spending adjustments and improved productivity.
3M has an 8 percent annual productivity improvement objective, as
measured by sales growth per employee in local currencies. Due to the
turmoil in Asia and Japan and softness in certain businesses in the
United States, 1998 productivity will not meet the 8 percent target
for the first time in 4 years. The company expects to reduce about
1,500 positions by the end of 1998, primarily through attrition, and
continue at that rate until the company regains and sustains the 8
percent productivity-improvement target.
The company is aggressively exploring cost reduction and portfolio
management opportunities around the world in addition to its
continuing emphasis on management of selling, general and
administrative spending. The company uses return on capital, return
on sales, cash flows, competitive assessments and other tools to
evaluate the financial performance and business symmetry of its
various product lines. While no decisions have been reached, any
future decisions based on these evaluations could have an adverse
effect on the short-term results of the company's operations.
The company is not able to project what all the consequences of the
turmoil in Asia and Japan may be. The company is monitoring business
conditions closely and will implement adjustments in pricing, costs
and investments as appropriate. Overall, the company has experienced
earnings declines of about 20 percent for both Asia and Japan in the
first half of 1998. The company does not expect a significant change
in this situation in the second half of 1998.
For total year 1998, the company expects to buy back about 9 million
shares. This is expected to result in shares outstanding, net of
issuances, of about one percent less when comparing year-end 1998 to
year-end 1997.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs using only the
last two digits to indicate the year. If uncorrected, such computer
programs will be unable to interpret dates beyond the year 1999,
which could cause computer system failure or other computer errors
disrupting operations. The company recognizes the importance of the
Year 2000 issue and has been giving it high priority. In November
1996, the company created a corporate-wide Year 2000 project team
representing all company business and staff units. The team's
objective is to ensure an uninterrupted transition into the Year
2000. The scope of the Year 2000 readiness effort includes (i)
information technology ("IT") such as software and hardware; (ii)
non-IT systems or embedded technology such as microcontrollers
contained in various manufacturing and lab equipment, environmental
and safety systems, facilities and utilities, and 3M products with
date-sensitivity; and (iii) readiness of key third parties, including
suppliers and customers, and the electronic data interchange (EDI)
with those key third parties. If needed modifications and
conversions are not made on a timely basis, the Year 2000 issue could
have a material adverse effect on the company operations.
The company is using both internal and external resources to
remediate and test millions of lines of application software code.
The majority of the most vital information systems located in the
United States are now Year 2000 compliant. The company expects that
the remainder of the information systems located in the United States
and in subsidiaries outside the United States will be Year 2000
compliant by December 1998. The company expects to complete
compliancy testing on any unplanned components and finalize
contingency plans in 1999.
In addition to internal Year 2000 IT and non-IT remediation
activities, the company is in contact with key suppliers and
electronic commerce customers to assure no interruption in the
relationship between the company and these important third parties
from the year 2000 issue. If third parties do not convert their
systems in a timely manner and in a way that is compatible with the
company's systems, the Year 2000 issue could have a material adverse
effect on company operations. The company believes that its diligent
actions with key suppliers and customers will minimize these risks.
The vast majority of the company's products are not date-sensitive.
The company has collected information on current and discontinued
date-sensitive products. This information is available to customers
as of the date of this filing.
The company's primary focus has been directed at solving the Year
2000 problem. While 3M expects its internal IT and non-IT systems to
be Year 2000 compliant by the dates specified, the company is working
on a contingency plan specifying what the company will do if it or
important third parties are not Year 2000 compliant by the required
dates. The company expects to have such a contingency plan finalized
by March 31, 1999.
Through June 1998, the company had expensed incremental costs of $30
million related to the Year 2000 issue. The total remaining
incremental cost is estimated to be $45 million. The company is
expensing as incurred all costs related to the assessment and
remediation of the Year 2000 issue. These costs are being funded
through operating cash flows. The company's total cost for the Year
2000 issue includes estimated costs and time associated with
interfacing with third parties' Year 2000 issues. These estimates
are based on currently available information.
The company's current estimates of the amount of time and costs
necessary to remediate and test its computer systems are based on the
facts and circumstances existing at this time. The estimates were
made using assumptions of future events including the continued
availability of certain resources, Year 2000 modification plans,
implementation success by key third-parties, and other factors. New
developments may occur that could affect the company's estimates of
the amount of time and costs necessary to modify and test its IT and
non-IT systems for Year 2000 compliance. These developments include,
but are not limited to: (i) the availability and cost of personnel
trained in this area; (ii) the ability to locate and correct all
relevant computer codes and equipment, and (iii) the planning and Year
2000 compliance success that key customers and suppliers attain.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Quarterly
Report on Form 10-Q contains forward-looking statements, which
reflect the Company's current views with respect to future events and
financial performance.
These forward-looking statements are subject to certain risks and
uncertainties, including those identified below, which could cause
actual results to differ materially from historical results or those
anticipated. The words "aim," "believe," "expect," "anticipate,"
"intend," "estimate," "will," "should," "could" and other expressions
which indicate future events and trends identify forward-looking
statements.
Actual future results and trends may differ materially from
historical results or those anticipated depending on a variety of
factors, including, but not limited to: foreign exchange rates and
fluctuations in those rates; the effects of, and changes in,
worldwide economic conditions, particularly in Japan, the Asia region
and the United States; raw materials, including shortages and
increases in the costs of key raw materials; the impact of the Year
2000 issue; and legal proceedings (see discussion of Legal
Proceedings in Part II, Item 1 of this Form 10-Q).
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong.
Working capital decreased $202 million to $1.983 billion at June 30,
1998, compared to $2.185 billion at year-end 1997. The accounts
receivable average days' sales outstanding was 58 days, unchanged
from year-end. The company's key inventory index was 3.9 months,
compared to 3.8 months at year-end. The company's current ratio was
1.5, unchanged from year-end.
Total debt increased $494 million from year-end 1997 to $3.008
billion. In line with the company's strategy to lower its cost of
capital, total debt increased from an average of about $2 billion in
1997 to $3.008 billion as of June 30, 1998. As of June 30, 1998,
total debt was 33 percent of total capital.
The company's strong credit rating provides ready and ample access to
funds in global capital markets. In February 1998, the parent
company issued $330 million of 30-year, 6.375 percent debentures. In
July 1998, 3M Germany completed a 3-year, $200 million, 5.75 percent
Eurobond offering. At June 30, 1998, the company had available short-
term lines of credit totaling about $600 million.
Net cash provided by operating activities from continuing operations
totaled $767 million in the first six months of the year, down $238
million from the same period last year. Net cash outflows from
mammary implant litigation were $144 million higher than in the same
period last year.
Timing differences between payment of implant liabilities and receipt
of related insurance recoveries could affect the cash flows of future
periods. This is discussed in Part II, Item 1, Legal Proceedings, of
this Form 10-Q.
Net cash used by operating activities from discontinued operations
was $82 million in the first six months of 1997. Payments made in
1997 were primarily severance payments related to discontinued
operations.
Cash used in investing activities was $768 million in the first six
months of the year, compared to $623 million in the same period last
year. Capital expenditures for the first six months of 1998 were
$712 million, an increase of 8.5 percent compared with the same
period last year.
Treasury stock repurchases for the first six months of 1998 were $377
million, compared with repurchases in the same period last year of
$501 million. Financing activities for both short-term and long-term
debt provided net cash inflows of $583 million, compared with net
cash inflows of $199 million in the first six months last year.
The company repurchased about 4.2 million shares of common stock in
the first six months of 1998, compared with 5.8 million shares in the
same period last year. In November 1997, the Board of Directors
authorized the repurchase of up to 25 million shares of 3M common
stock through December 31, 1998. As of June 30, 1998, 18.3 million
shares remained authorized for repurchase. Stock repurchases are
made to support employee stock purchase plans and for other corporate
purposes.
Cash dividends paid to shareholders totaled $445 million in the first
half of this year, compared with $441 million in the same period last
year. In February 1998, the quarterly dividend was increased to 55
cents a share.
Legal proceedings are discussed in the Legal Proceedings section in
Part II, Item 1, of this Form 10-Q. There can be no certainty that
the company may not ultimately incur charges, whether for
governmental proceedings and claims, products liability claims,
environmental proceedings or other actions, in excess of presently
established accruals. While such future charges could have a
material adverse impact on the company's net income in the
quarterly period in which they are recorded, the company believes
that such additional charges, if any, would not have a material
adverse effect on the consolidated financial position or annual
results of operations of the company. (NOTE: The preceding sentence
applies to all legal proceedings involving the company except the
breast implant litigation. See discussion of breast implant
litigation in Legal Proceedings, Part II, Item 1.)
Minnesota Mining and Manufacturing Company and Subsidiaries
PART II. Other Information
Item 1. Legal Proceedings
The company and certain of its subsidiaries are named as defendants
in a number of actions, governmental proceedings and claims,
including environmental proceedings and products liability claims
involving products now or formerly manufactured and sold by the
company. In some actions, the claimants seek damages as well as
other relief, which, if granted, would require substantial
expenditures. The company has accrued certain liabilities, which
represent reasonable estimates of its probable liabilities for these
matters. The company also has recorded receivables for the probable
amount of insurance recoverable with respect to these matters.
Some of these matters raise difficult and complex factual and legal
issues, and are subject to many uncertainties, including, but not
limited to, the facts and circumstances of each particular action,
the jurisdiction and forum in which each action is proceeding and
differences in applicable law. Accordingly, the company is not
always able to estimate the amount of its possible future
liabilities with respect to such matters.
There can be no certainty that the company may not ultimately incur
charges, whether for governmental proceedings and claims, products
liability claims, environmental proceedings or other actions, in
excess of presently established accruals. While such future charges
could have a material adverse impact on the company's net income in
the quarterly period in which they are recorded, the company
believes that such additional charges, if any, would not have a
material adverse effect on the consolidated financial position or
annual results of operations of the company. (NOTE: The preceding
sentence applies to all legal proceedings involving the company
except the breast implant litigation, which is discussed separately
in the next section).
Breast Implant Litigation
As of June 30, 1998, the company had been named as a defendant,
often with multiple co-defendants, in 7,420 lawsuits and 132 claims
in various courts, all seeking damages for personal injuries from
allegedly defective breast implants. These claims and lawsuits
purport to represent 23,242 individual claimants. It is not yet
certain how many of these lawsuits and claims involve products
manufactured and sold by the company, as opposed to other
manufacturers. The company entered the business of manufacturing
breast implants in 1977 by purchasing McGhan Medical Corporation.
In 1984, the company sold the business to a corporation that also
was named McGhan Medical Corporation.
The typical claim or lawsuit alleges the individual's breast
implants caused one or more of a wide variety of ailments and local
complications, including, but not limited to, non-specific
autoimmune disease, scleroderma, lupus, rheumatoid arthritis,
fibromyalgia, mixed connective tissue disease, Sjogren's Syndrome,
dermatomyositis, polymyositis and chronic fatigue.
Plaintiffs in these cases typically seek monetary damages, often in
unspecified amounts, and also may seek certain types of equitable
relief, including requiring the company to fund the costs associated
with removal of the breast implants.
A number of breast implant claims and lawsuits seek to impose
liability on the company under various theories for personal
injuries allegedly caused by breast implants manufactured and sold
by manufacturers other than the company. These manufacturers
include, but are not limited to, McGhan Medical Corporation and
manufacturers that are no longer in business or that are insolvent,
whose breast implants may or may not have been used in conjunction
with implants manufactured and sold by the company. These claims
raise many difficult and complex factual and legal issues that are
subject to many uncertainties, including the facts and circumstances
of each particular claim, the jurisdiction in which each suit is
brought, and differences in applicable law and insurance coverage.
A number of breast implant lawsuits seek to recover punitive
damages. Any punitive damages that may be awarded against the
company may or may not be covered by certain insurance policies
depending on the language of the insurance policy, applicable law
and agreements with insurers.
In addition to individual suits against the company, a class action
on behalf of all women with breast implants filed against all
manufacturers of such implants has been conditionally certified and
is pending in the United States District Court for the Northern
District of Alabama (the "Court")(DANTE, ET AL., V. DOW CORNING, ET
AL., U.S.D.C., N. Dist., Ala., 92-2589; part of IN RE: SILICONE GEL
BREAST IMPLANT PRODUCT LIABILITY LITIGATION, U.S.D.C., N. Dist.
Ala., MDL 926, U.S.D.C., N. Dist. Ala., CV 92-P-10000-S; now held in
abeyance pending settlement proceedings in the settlement class
action LINDSEY, ET AL., V. DOW CORNING CORPORATION, ET AL.,
U.S.D.C., N. Dist., Ala., CV 94-P-11558-S). Class actions, some of
which have been certified, are pending in various state courts,
including, among others, Louisiana, Florida and Illinois, and in the
British Columbia courts in Canada. The Louisiana state court action
(SPITZFADEN, ET AL., v. DOW CORNING CORPORATION, ET AL., Dist. Ct.,
Parish of Orleans, 92-2589) has been decertified by the trial court.
Plaintiffs' writ for an emergency appeal from the decertification
has been denied by the Louisiana Supreme Court. A normal appeal
remains pending.
The company also has been served with a purported class action
brought on behalf of children allegedly exposed to silicone in utero
and through breast milk. (FEUER, ET AL., V. MCGHAN, ET AL.,
U.S.D.C., E. Dist. NY, 93-0146.) The suit names all breast implant
manufacturers as defendants and seeks to establish a medical-
monitoring fund.
On December 22, 1995, the Court approved a revised class action
settlement program for resolution of claims seeking damages for
personal injuries from allegedly defective breast implants (the
"Revised Settlement Program"). The Revised Settlement Program is a
revision of a previous settlement pursuant to a Breast Implant
Litigation Settlement Agreement (the "Settlement Agreement") reached
on April 8, 1994, and approved by the Court on September 1, 1994.
The Court ordered that, beginning after November 30, 1995, members
of the plaintiff class may choose to participate in the Revised
Settlement Program or opt out, which would then allow them to
proceed with separate products liability actions.
The Revised Settlement Program as supplemented now includes both
foreign and domestic class members with implants manufactured by
certain manufacturer defendants, including Baxter International,
Bristol Meyers-Squibb, the company and McGhan Medical Corporation.
The company's obligations under the Revised Settlement Program are
limited to eligible claimants with implants manufactured by the
company or its predecessors ("3M implants") or manufactured only by
McGhan Medical Corporation after its divestiture from the company on
August 3, 1984 ("Post 8/84 McGhan implants"). With respect to
foreign claimants and claimants with only Post 8/84 McGhan implants
(or only Post 8/84 McGhan implants plus certain other manufacturers'
implants), the benefits are more limited than for domestic claimants
with 3M implants. Post 8/84 McGhan implant benefits are payable by
the company, Union Carbide Corporation and McGhan Medical
Corporation.
In general, the amounts payable to individual current claimants (as
defined in the Court's order) under the Revised Settlement Program,
and the company's obligations to make those payments, will not be
affected by the number of class members electing to opt out of the
Revised Settlement Program or the number of class members making
claims under the Revised Settlement Program. In addition to certain
miscellaneous benefits, the Revised Settlement Program provides for
two compensation options for current claimants with 3M implants.
Under the first option, denominated as Fixed Amount Benefits,
current claimants with 3M implants who satisfy disease criteria
established in the prior Settlement Agreement will receive amounts
ranging from $5,000 to $100,000, depending on disease severity or
disability level; whether the claimant can establish that her
implants have ruptured; and whether the claimant also has had
implants manufactured by Dow Corning. Under the second option,
denominated as Long-Term Benefits, current claimants with 3M
implants who satisfy more restrictive disease and severity criteria
specified under the Revised Settlement Program can receive benefits
ranging from $37,500 to $250,000.
In addition, current claimants with 3M implants are eligible for (a)
a one-time payment of $3,000 upon removal of 3M implants during the
course of the class settlement, and (b) an advance payment of $5,000
against the above referenced benefits upon proof of having 3M
implants and upon waiving or not timely exercising the right to opt
out of the Revised Settlement Program. Current claimants with only
Post 8/84 McGhan implants (or only Post 8/84 McGhan implants plus
certain other manufacturers' implants) are eligible only for
benefits ranging from $10,000 to $50,000.
Eligible participants with 3M implants who did not file current
claims but are able to satisfy the more restrictive disease and
severity criteria during an ongoing period of 15 years will be
eligible for the Long-Term Benefits, subject to certain funding
limitations. Such participants also will be eligible for an advance
payment of $1,000 upon proof of having 3M implants and upon waiving
or not timely exercising the right to opt out of the Revised
Settlement Program or, as an elective option expiring on June 15,
1999, a payment of $3,500 in full settlement of all breast implant
claims including any claim for Long-Term Benefits under the Revised
Settlement Program. Benefit levels for eligible participants who
are not current claimants and have only Post 8/84 McGhan implants
(or only Post 8/84 McGhan implants plus certain other manufacturers'
implants) or who are current foreign claimants will range from
$10,000 to $50,000. A benefit payment of $3,500 for foreign
registrants other than current foreign claimants, so called Other
Registrants, has been agreed to by the Company and the Foreign
Claimants Committee. This benefit thus completes the foreign
claimant aspects of the Revised Settlement Program. A notice to
foreign registrants has been approved by the Court.
As of the date of this filing, the company believes that
approximately 90% of the registrants, including those claimants who
filed current claims, have elected to participate in the Revised
Settlement Program. It is still unknown as to what disease criteria
all claimants have satisfied, and what options they have chosen. As
a result, the total amount and timing of the company's prospective
payments under the Revised Settlement Program cannot be determined
with precision at this time. As of June 30, 1998 the company has
paid $230 million into the court-administered fund as a reserve
against costs of claims payable by the company under the Revised
Settlement Program (including a $5 million administrative
assessment). Additional payments will be made as necessary. Payments
to date have been consistent with the company's estimates of the
total liability for these claims.
In the first quarter of 1994, the company took a pre-tax charge of
$35 million ($22 million after tax) in recognition of its then best
estimate of its probable liabilities and associated expenses, net of
the probable amount of insurance recoverable from its carriers. In
the second quarter of 1998, the company increased its estimate of
the minimum probable liabilities and associated expenses by $109
million to approximately $1.1 billion. This amount represents the
company's best estimate of the cost and expense of the Revised
Settlement Program and the cost and expense of resolving opt-out
claims and recovering insurance proceeds. After subtracting payments
of $886 million as of June 30, 1998, for defense and other costs and
settlements with litigants and claimants, the company had accrued
liabilities of $214 million.
The company has substantial primary and excess products liability
occurrence insurance coverage and claims-made products liability
insurance coverage, which it believes provide coverage for
substantially all of its current exposure for breast implant claims
and defense costs. Most insurers have alleged reservations of rights
to deny all or part of the coverage for differing reasons, including
each insurer's obligations in relation to the other insurers (i.e.
allocation) and which claims trigger both the various occurrence and
claims-made insurance policies. Some insurers have resolved and
paid, or committed to, their policy obligations. The company
believes the failure of many insurers to voluntarily perform as
promised subjects them to the company's claims for excess liability
and damages for breach of the insurers' obligation of good faith.
On September 22, 1994, three excess coverage occurrence insurers
initiated in the courts of the State of Minnesota a declaratory
judgment action against the company and numerous insurance carriers
seeking adjudication of certain coverage issues and allocation among
insurers. On December 9, 1994, the company initiated an action
against its occurrence insurers in the Texas State Court in and for
Harrison County, seeking a determination of responsibility among the
company's various occurrence insurers with applicable coverages. The
state of Texas has the most implant claims. This action has since
been removed to the U.S. District Court, Eastern District of Texas,
and stayed pending resolution of the litigation in the Minnesota
courts.
The insurers that are parties to these actions generally acknowledge
that they issued products liability insurance to the company and
that breast implant claims are products liability claims. The trial
in Minnesota to resolve the company's insurance coverage and the
financial responsibility of occurrence insurers for breast implant
claims and defense costs began on June 4, 1996, and is continuing in
phases with the next trial phase scheduled for January 4, 1999.
In mid-October 1995, the occurrence insurers that are parties to the
litigation in Minnesota filed more than 30 motions for summary
judgment or partial summary judgment. The insurers, through these
motions, attempted to shift all or a portion of the responsibility
for those claims the company believes fall within the period of
occurrence-based coverage (before 1986) into the period of claims-
made coverage (from and after 1986). The trial court denied the
insurers' motions, ruling that the key issues of trigger and
allocation raised in these motions would be resolved at trial. In
the trial's first phase in 1996, the court granted 3M partial
declaratory judgment on the question of when insurance coverage is
"triggered." The court also granted the insurers' motion for
partial declaratory judgment on the question of the allocation
method to be applied in the case. In July 1997 the trial court ruled
further on the trigger issue and on the general allocation method.
That ruling was consistent with and further supported the company's
opinion as stated in the following paragraph. In November 1997,
upon reconsideration, the court reversed a portion of its July
ruling and reinstated a portion of its previous ruling. The company
believes that conflicting rulings now exist that need to be
clarified by the court and reconciled with applicable law. Motions
to clarify the allocation methodology of triggered policies under
these rulings are pending. Court options include clarification,
further trial followed by additional rulings or certification for
interlocutory (while the case is still pending) appeal.
The company believes it ultimately will prevail in this insurance
litigation. The company's belief is based on an analysis of its
insurance policies; court decisions on these and similar issues;
reimbursement by insurers for these types of claims; and
consultation with outside counsel who are experts in insurance
coverage matters. If, however, the occurrence insurers ultimately
prevail in this insurance litigation, the company could be
effectively deprived of significant and potentially material
insurance coverage for breast implant claims. (See discussion of
the accrued receivables for insurance recoveries below.)
As of June 30, 1998, the company increased its accrued receivables
for insurance recoveries by $109 million (corresponding to the same
increase in the minimum probable liabilities and associated
expenses) to $773 million, substantially all of which is contested
by the insurance carriers. Various factors could affect the timing
and amount of proceeds to be received under the company's various
insurance policies, including (i) the timing of payments made in
settlement of claims; (ii) the outcome of occurrence insurance
litigation in the courts of Minnesota (as discussed above) and
Texas; (iii) potential arbitration with claims-made insurers; (iv)
delays in payment by insurers; and (v) the extent to which insurers
may become insolvent in the future. There can be no absolute
assurance that the company will collect all amounts accrued as being
probable of recovery from its insurers.
The company's current estimate of the probable liabilities,
associated expenses and probable insurance recoveries related to the
breast implant claims is based on the facts and circumstances
existing at this time. New developments may occur that could affect
the company's estimates of probable liabilities (including
associated expenses) and the probable amount of insurance
recoveries. These developments include, but are not limited to, (i)
the ultimate Fixed Amount Benefit distribution of claimants in the
Revised Settlement Program; (ii) the success of and costs to the
company in defending opt-out claims, including claims involving
breast implants not manufactured or sold by the company; (iii) the
outcome of the occurrence insurance litigation in the courts of
Minnesota and Texas; and (iv) the outcome of potential arbitration
with claims-made insurers.
The company cannot determine the impact of these potential
developments on the current estimate of probable liabilities
(including associated expenses) and the probable amount of insurance
recoveries. Accordingly, the company is not able to estimate its
possible future liabilities and recoveries beyond the current
estimates of probable amounts. As new developments occur, these
estimates may be revised, or additional charges may be necessary to
reflect the impact of these developments on the costs to the company
of resolving breast implant litigation, claims and insurance
recoveries. Such revisions or additional future charges could have a
material adverse impact on the company's net income in the quarterly
period in which they are recorded. Although the company considers it
unlikely, such revisions or additional future charges could also
have a material adverse effect on the consolidated financial
position or annual results of operations of the company.
The company conducts ongoing reviews, assisted by outside counsel,
to determine the adequacy and extent of insurance coverage provided
by its occurrence and claims-made insurers. The company believes,
based on these ongoing reviews and the bases described in the fourth
preceding paragraph, it is probable that the collectible coverage
provided by its applicable insurance policies is sufficient to cover
substantially all of its current exposure for breast implant claims
and defense costs. Based on the availability of this insurance
coverage, the company believes that its uninsured financial exposure
has not materially changed since the first quarter of 1994.
Therefore, no recognition of additional charges has been made.
Environmental Matters
The company also is involved in a number of environmental
proceedings by governmental agencies and by private parties
asserting liability for past waste disposal and other alleged
environmental damage. The company conducts ongoing investigations,
assisted by environmental consultants, to determine accruals for the
probable, estimable costs of remediation. The remediation accruals
are reviewed each quarter and changes are made as appropriate.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The registrant held its Annual Meeting of Stockholders on May
12, 1998.
(b) Proxies for the meeting were solicited pursuant to Regulation
14; there was no solicitation in opposition to management's nominees
as listed in the Proxy Statement and all such nominees were elected.
Three directors were elected to the year 2001 Class (Edward A.
Brennan, Livio D. DeSimone and F. Alan Smith) and one director to
the year 1999 Class (Allen E. Murray).
Directors whose terms continue after the meeting were Ronald O.
Baukol, Edward R. McCracken, W. George Meredith, Ronald A. Mitsch,
Aulana L. Peters, Rozanne L. Ridgway, Frank Shrontz and Louis W.
Sullivan.
(c) The ratification of the appointment of Coopers & Lybrand L.L.P.
(on July 1, 1998, Coopers & Lybrand L.L.P. merged with Price
Waterhouse LLP to form PricewaterhouseCoopers LLP), independent
auditors, to audit 3M's books and accounts for the year 1998.
For 339,624,251
Against 781,109
Abstain 1,280,162
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this
Report.
(12) A statement regarding the calculation of the ratio of
earnings to fixed charges. Page 25.
(15) A letter from the company's independent auditors
regarding unaudited interim financial statements.
Page 26.
(27) Financial data schedule (EDGAR filing only).
(b) Reports on Form 8-K:
The company filed a report on Form 8-K dated June 15, 1998.
In a press release dated June 15, 1998, the company announced that it
expected second-quarter earnings to be below those in the same
quarter last year. The news release also contained forward-looking
statements relating to 1998 and the second-half of 1998. The news
release was attached as Exhibit 99 to the Form 8-K.
None of the other item requirements of Part II of Form 10-Q are
applicable to the company for the quarter ended June 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MINNESOTA MINING AND MANUFACTURING COMPANY
(Registrant)
Date: August 4, 1998
/s/ Giulio Agostini
Giulio Agostini, Senior Vice President and
Chief Financial Officer
(Mr. Agostini is the Principal Financial
and Accounting Officer and has been duly
authorized to sign on behalf of the
registrant.)