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, 1999
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 September 30, 1999, there were 401,333,680 shares of the
Registrant's common stock outstanding.
This document contains 34 pages.
The exhibit index is set forth on page 31.
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 Nine months ended
September 30 September 30
1999 1998 1999 1998
Net sales $3,997 $3,766 $11,636 $11,236
Operating expenses
Cost of goods sold 2,253 2,190 6,603 6,448
Restructuring charge -
inventory -- 29 -- 29
Total cost of goods sold 2,253 2,219 6,603 6,477
Selling, general and
administrative expenses 1,009 947 2,845 2,838
Restructuring charge - other (26) 303 (26) 303
Total 3,236 3,469 9,422 9,618
Operating income 761 297 2,214 1,618
Other income and expense
Interest expense 26 37 83 106
Investment and other
income - net (7) (11) (22) (33)
Gain on divestiture - net -- (10) -- (10)
Total 19 16 61 63
Income before income taxes
and minority interest 742 281 2,153 1,555
Provision for income taxes 260 96 776 552
Minority interest 23 7 58 39
Net income $ 459 $ 178 $ 1,319 $ 964
Weighted average common
shares outstanding - basic 402.1 402.7 402.5 403.7
Earnings per share - basic $ 1.14 $ .44 $ 3.28 $ 2.39
Weighted average common
shares outstanding - diluted 406.8 406.7 406.5 408.7
Earnings per share - diluted $ 1.13 $ .44 $ 3.25 $ 2.36
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)
(Unaudited)
September 30, December 31,
1999 1998
Assets
Current assets
Cash and cash equivalents $ 302 $ 211
Other securities 188 237
Accounts receivable - net 2,848 2,666
Inventories
Finished goods 1,088 1,161
Work in process 525 613
Raw materials and supplies 438 445
Total inventories 2,051 2,219
Other current assets 1,194 985
Total current assets 6,583 6,318
Investments 436 623
Property, plant and equipment 13,227 13,397
Less accumulated depreciation (7,767) (7,831)
Property, plant and equipment - net 5,460 5,566
Other assets 1,426 1,646
Total $13,905 $14,153
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 975 $ 868
Payroll 414 487
Income taxes 600 261
Short-term debt 640 1,492
Other current liabilities 1,236 1,278
Total current liabilities 3,865 4,386
Other liabilities 2,120 2,217
Long-term debt 1,550 1,614
Stockholders' equity
Common stock, $.50 par value,
472,016,528 shares issued 236 236
Capital in excess of par value 60 60
Retained earnings 10,536 9,980
Treasury stock, at cost (3,584) (3,482)
September 30, 1999: 70,682,848 shares
December 31, 1998: 70,092,280 shares
Unearned compensation - ESOP (327) (350)
Accumulated other comprehensive income (loss)
Cumulative translation - net (658) (518)
Debt and equity securities,
unrealized gain - net 107 10
Total accumulated other comprehensive loss (551) (508)
Stockholders' equity - net 6,370 5,936
Total $13,905 $14,153
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)
Nine months ended
September 30
1999 1998
Cash Flows from Operating Activities
Net income $1,319 $ 964
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 669 644
Implant litigation - net 44 (209)
Asset impairment - restructuring (31) 190
Working capital and other changes - net 411 (91)
Net cash provided by operating activities 2,412 1,498
Cash Flows from Investing Activities
Capital expenditures (727) (1,056)
Proceeds from divestitures 248 9
Other changes - net (43) (77)
Net cash used in investing activities (522) (1,124)
Cash Flows from Financing Activities
Change in short-term debt - net (786) 145
Repayment of long-term debt (113) (52)
Proceeds from long-term debt 2 556
Purchases of treasury stock (478) (606)
Reissuances of treasury stock 293 245
Payment of dividends (677) (666)
Other (49) (19)
Net cash used in financing activities (1,808) (397)
Effect of exchange rate changes on cash 9 (3)
Net increase (decrease) in cash and cash equivalents 91 (26)
Cash and cash equivalents at beginning of year 211 230
Cash and cash equivalents at end of period $ 302 $ 204
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 consolidated 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, except for non-recurring items relating to
divestitures, litigation and restructuring activities recorded in
third and fourth quarters of 1998 and in the second and third
quarters of 1999. 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 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 1998 Annual Report on Form 10-K.
Divestitures:
On June 30, 1999, the company closed on the sale of Eastern Heights
Bank, a subsidiary banking operation, and the sale of the assets of
its Cardiovascular Systems business. These divestitures generated
cash proceeds of $203 million and, net of an investment valuation
adjustment, resulted in a pre-tax gain of $104 million ($55 million
after tax) in the second quarter of 1999. 3M also recorded a pre-tax
gain of $43 million ($26 million after tax) related to divestitures,
mainly in the Health Care area, in the third quarter of 1999. These
pre-tax gains are recorded as a reduction of selling, general and
administrative expenses.
Pending Acquisition of Dyneon Minority Interest:
In October, 1999, 3M signed a letter of intent to acquire the
outstanding minority interest in its consolidated joint venture,
Dyneon, for approximately $330 million in cash. 3M expects to
finalize the acquisition by year-end after completing due diligence,
final agreements, and approvals.
Supplemental Cash Flow Information:
In 1999, 3M exchanged assets used in the business, but not held for
sale, with a fair market value of $61 million plus cash of $12
million, for similar assets having a fair market value of $73
million. No gain was recognized on this non-monetary exchange of
productive assets.
Restructuring Charge:
In the third and fourth quarters of 1998, the company recorded a
restructuring charge of $493 million ($313 million after tax), which
is discussed in the 1998 Form 10-K. In the third quarter of 1999,
the company recorded a change in estimate that reduced the
restructuring charge by $26 million. During the nine months ended
September 30, 1999, the company terminated 2,274 employees under the
plan. Because certain employees can defer receipt of termination
benefits for up to 12 months, cash payments relate to both current
and previous terminations. The remaining restructuring liability as
of September 30, 1999, totaled $89 million. Selected information
relating to the restructuring follows.
Restructuring Employee Write-down of
Charge Termination Property, Plant
(Millions) Benefits and Equipment Inventory Other Total
Restructuring charge
Third quarter 1998 $102 $161 $29 $40 $332
Fourth quarter 1998 169 -- 10 -- 179
Fourth quarter 1998
change in estimate -- (18) -- -- (18)
Total year 1998 $271 $143 $39 $40 $493
Third quarter 1999
change in estimate 4 (31) -- 1 (26)
Total restructuring charge $275 $112 $39 $41 $467
Restructuring Employee
Liability Termination
(Millions) Benefits Other Total
September 30, 1998 liability $102 $40 $142
Fourth quarter 1998 employee
termination benefits charge 169 -- 169
Fourth quarter 1998 cash payments (39) (8) (47)
December 31, 1998 liability $232 $32 $264
Cash payments
First quarter 1999 (65) (1) (66)
Second quarter 1999 (69) (2) (71)
Third quarter 1999 (37) (6) (43)
Third quarter 1999 change in estimate 4 1 5
September 30, 1999 liability $ 65 $24 $89
Business Segments:
In the third quarter of 1999, the company reorganized its management
reporting structure into six segments, from the four segments
reported in the second quarter of 1999. Prior period amounts have
been restated for this change. 3M net sales and operating income by
segment for the first three quarters and nine months of 1999 and 1998
follow. Third quarter 1999 operating income includes a $43 million
gain related to divestitures, mainly in the Health Care area, and
Corporate and Unallocated includes $73 million in litigation expense
partially offset by a $26 million change in estimate that reduced the
restructuring charge. Second quarter 1999 operating income includes
one-time net gains, primarily related to divestitures, of $30 million
in Health Care and $74 million in Corporate and Unallocated. Third
quarter 1998 includes restructuring charges of $332 million in
Corporate and Unallocated.
Business
Segment Nine Nine Third Third Second Second First First
Information Months Months Qtr Qtr Qtr Qtr Qtr Qtr
(Millions) 1999 1998 1999 1998 1999 1998 1999 1998
Net sales
Industrial $2,529 $2,518 $ 851 $ 826 $ 836 $ 840 $ 842 $ 852
Health Care 2,329 2,302 768 759 793 784 768 759
Transportation,
Graphics & Safety 2,409 2,279 826 761 806 780 777 738
Consumer & Office 1,988 1,920 712 676 638 625 638 619
Electro &
Communications 1,461 1,308 534 431 485 442 442 435
Specialty Material 882 829 298 271 292 279 292 279
Corporate &
Unallocated 38 80 8 42 13 20 17 18
Total Company $11,636 $11,236 $3,997 $3,766 $3,863 $3,770 $3,776 $3,700
Operating income
Industrial $ 466 $ 414 $ 163 $ 126 $ 154 $ 135 $ 149 $ 153
Health Care 533 428 192 134 196 143 145 151
Transportation,
Graphics & Safety 514 423 193 136 172 151 149 136
Consumer & Office 320 289 133 112 98 87 89 90
Electro &
Communications 298 201 123 58 92 73 83 70
Specialty Material 169 154 53 48 60 49 56 57
Corporate &
Unallocated* (86) (291) (96) (317) 32 3 (22) 23
Total Company $ 2,214 $1,618 $ 761 $ 297 $ 804 $ 641 $ 649 $ 680
Business segments (continued):
Due to the management reporting structure change, total year 1998,
1997 and 1996 business segment information has been restated as
follows.
Business
Segment Depr. Capital
Information Net Operating and Expendi-
(Millions) Sales Income Assets** Amort. tures
Industrial 1998 $ 3,360 $ 561 $ 2,394 $199 $276
1997 3,419 544 2,366 186 283
1996 3,297 529 2,245 207 210
Health Care 1998 3,086 571 2,168 161 221
1997 3,004 521 2,042 183 217
1996 2,897 545 2,012 160 216
Transportation, 1998 3,021 532 2,652 170 331
Graphics & Safety 1997 3,112 585 2,368 191 363
1996 2,966 592 2,306 188 296
Consumer & Office 1998 2,613 398 1,614 136 178
1997 2,616 438 1,561 105 131
1996 2,472 425 1,486 104 121
Electro & 1998 1,741 263 1,177 111 222
Communications 1997 1,739 327 1,103 114 167
1996 1,608 240 1,040 114 99
Specialty Material 1998 1,105 194 1,112 66 186
1997 1,090 192 928 70 200
1996 930 189 823 82 149
Corporate & 1998 95 (480) 3,036 23 16
Unallocated* 1997 90 68 2,870 21 45
1996 66 (29) 3,452 28 18
Total Company 1998 $15,021 $2,039 $14,153 $866 $1,430
1997 15,070 2,675 13,238 870 1,406
1996 14,236 2,491 13,364 883 1,109
*Corporate and Unallocated operating income principally includes
corporate investment gains and losses, certain derivative gains and
losses, insurance-related gains and losses, banking operations
(divested June 30, 1999), certain litigation, restructuring charges
and other miscellaneous items. Because this category includes a
variety of miscellaneous items, it is subject to fluctuation on a
quarterly and annual basis. Operating income for 1998 includes a
$493 million restructuring charge.
**Segment assets primarily include accounts receivable; inventory;
property, plant and equipment - net; and other miscellaneous assets.
Assets included in Corporate and Unallocated principally are cash
and cash equivalents; other securities; insurance receivables;
deferred income taxes; certain investments and other assets; and
certain unallocated property, plant and equipment.
Comprehensive Income:
The components of total comprehensive income are shown below. The
September 30, 1999, balance of $107 million for the net unrealized
gain on debt and equity securities (reported as a component of
accumulated other comprehensive income) is recorded net of $66
million of deferred income taxes.
Total Comprehensive Income Three months ended Nine months ended
September 30 September 30
(Millions) 1999 1998 1999 1998
Net income $ 459 $ 178 $1,319 $ 964
Other comprehensive income (loss)
Cumulative translation - net 70 71 (140) (6)
Debt and equity securities,
unrealized gain (loss) - net 49 (3) 97 (3)
Total comprehensive income $ 578 $ 246 $1,276 $ 955
Earnings Per Share:
The difference in the weighted average common shares outstanding for
calculating basic and diluted earnings per share is attributable to
the assumed exercise of the Management Stock Ownership Program (MSOP)
stock options for the three-month and nine-month periods ended
September 30, 1999 and 1998. Certain MSOP options outstanding at
September 30, 1999, were not included in the computation of diluted
earnings per share because they would not have had a dilutive effect
(5.2 million shares of common stock at an average price of $95.00 for
the three months ended September 30, 1999; and 16.0 million shares of
common stock at an average price of $93.02 for the nine months ended
September 30, 1999).
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 interim consolidated financial statements.
PricewaterhouseCoopers LLP, the company's independent auditors, have
performed a review of the unaudited interim consolidated financial
statements included herein, and their review report thereon
accompanies this filing.
Review Report of Independent Auditors
To the Stockholders and Board of Directors of Minnesota Mining and
Manufacturing Company:
We have reviewed the accompanying consolidated balance sheet of
Minnesota Mining and Manufacturing Company and Subsidiaries as of
September 30, 1999, and the related consolidated statements of income
for the three-month and nine-month periods ended September 30, 1999
and 1998, and cash flows for the nine-month periods ended September
30, 1999 and 1998. 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 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,
1998, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for the
year then ended (not presented herein); and in our report dated
February 8, 1999, 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, 1998, 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
November 1, 1999
Minnesota Mining and Manufacturing Company and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Third Quarter
Worldwide sales for the third quarter totaled $3.997 billion, up 6.1
percent from the third quarter last year, with volume gains
accounting for all of the sales increase. The impact of slightly
negative currency translation was offset by selected increases in
international selling prices. Currency, while positive in the Asia
Pacific area, was negative in Europe and Latin America.
In the United States, sales increased about 3 percent to $1.951
billion, driven by volume gains. In 3M's largest segment, Industrial
Markets, U.S. volume increased about 3 percent, a pickup from recent
quarters. Driving this improvement were industrial tapes and
products for the automotive aftermarket. In Electro and
Communications, volume increased 20 percent, helped by the
acquisition of a telecommunication product line in late 1998. All
major businesses in this segment posted good growth. In Consumer and
Office Markets, U.S. unit sales increased 7 percent, consistent with
recent quarterly growth rates. In Transportation, Graphics and
Safety, volume rose 6 percent, with 3M's reflective sheeting business
posting solid growth. In Specialty Materials, volume also increased
6 percent, continuing a good performance there. In Health Care, U.S.
volumes decreased 4 percent, but were up slightly after adjusting for
divestitures. Health Care experienced good growth in medical
products, but pharmaceutical volumes declined due to the continued
impact of generic alternatives to a branded 3M analgesic.
Internationally, sales totaled $2.046 billion. Volume abroad
increased 9 percent, 3M's best increase in seven quarters. Negative
currency translation was offset by selling price increases. European
volume increased about 6 percent, a pickup from growth registered in
the past few quarters. Dollar sales in Europe, affected by weaker
European currencies, were basically flat. In the Asia Pacific area,
volume increased more than 15 percent, marking the company's third
consecutive quarter of solid volume gains. Dollar sales in the Asia
Pacific area, aided by the stronger yen, increased more than 30
percent. In Japan, unit sales increased about 6 percent, with growth
led by new 3M products. In Asia outside Japan, volume rose about 35
percent, driven by rebounding economies and demand for new 3M
products. In Latin America, volumes were up about 7 percent. While
unit sales declined in Argentina and Venezuela, Mexico continued to
register strong gains, and volume growth resumed in Brazil. Currency
reduced Latin American sales by about 20 percent, with about one-
third of this impact offset through selling price increases. In
Canada, volume increased about 2 percent.
Worldwide, all market segments showed sales and operating income
growth. Sales growth was led by increases in the company's Electro
and Communications; Transportation, Graphics and Safety; Consumer and
Office; and Specialty Material businesses.
Cost of goods sold, which includes manufacturing, research and
development, and engineering, was 56.4 percent of sales, down 1.7
percentage points from the third quarter last year, excluding the
restructuring charge relating to inventory in 1998. Gross margins
benefited from solid volume gains, lower raw material costs and the
company's restructuring actions.
In 1998, the company recorded a restructuring charge of $332 million
($214 million after tax) in the third quarter and $161 million ($99
million after tax) in the fourth quarter, for a total of $493 million
($313 million after tax). During the third quarter of 1999, 3M
recorded a gain of $26 million ($17 million after-tax) related to
changes in estimates that reduced certain restructuring charges
recorded in the second half of 1998. Details of the restructuring
charge are discussed in the Notes to Consolidated Financial
Statements.
Selling, general and administrative expense in the third quarter of
1999 included two non-recurring items amounting to a net expense of
$30 million. A pre-tax charge of $73 million was recorded relating
to an adverse jury verdict and attorneys' fees and costs in a lawsuit
filed by LePage's. 3M believes the jury's decision ultimately will
be overturned, but believes it is prudent to recognize a liability at
this time. 3M also recorded a pre-tax gain of $43 million related to
divestitures, mainly in Health Care. Selling, general and
administrative expenses, adjusted for $30 million of non-recurring
items, were 24.4 percent of sales, down eight-tenths of a percentage
point from the same quarter last year. This ratio improvement
reflected an acceleration of sales growth and productivity gains
related to restructuring actions.
The impact of non-recurring items and restructuring on 3M's
Consolidated Statement of Income follow.
Supplemental Consolidated Statement of Income Information (Unaudited)
(Millions, except per-share amounts)
Three months ended
September 30, 1999 September 30, 1998
Excluding Excluding
non- Non- restruc- Restruc-
recurring recurring Reported turing turing Reported
items items total charge charge total
Operating
income(loss) $ 765 $ (4) $ 761 $ 629 $ (332) $ 297
Other income and
expense 19 -- 19 16 -- 16
Income (loss) before
income taxes and
minority interest $ 746 $ (4) $ 742 $ 613 $ (332) $ 281
Provision (benefit)
for income taxes 261 (1) 260 214 (118) 96
Effective tax rate 35.0% 27.3% 35.0% 35.0% 35.5% 34.3%
Minority interest 23 -- 23 7 -- 7
Net income (loss) $ 462 $ (3) $ 459 $ 392 $ (214) $ 178
Earnings (loss) per
share - diluted $ 1.14 $ (.01) $ 1.13 $ .97 $ (.53) $ .44
Worldwide operating income was 19.0 percent of sales. Excluding non-
recurring items and the restructuring, operating income was 19.2
percent of sales, up 2.5 percentage points from the third quarter
last year. In dollars, operating income, excluding the non-recurring
items and the restructuring, increased 21.9 percent from the same
quarter last year.
Third-quarter interest expense of $26 million was down $11 million
from the same quarter last year, reflecting lower debt levels. Net
investment and other income was $7 million, in line with recent
quarters. The third quarter of 1998 reflects a $10 million
adjustment to finalize the accounting for the 1997 divestiture of
National Advertising Company.
The worldwide effective income tax rate for the quarter was 35.0
percent, the same as in the third quarter last year, excluding the
restructuring charge. Including the restructuring charge, the total
combined effective tax rate was 34.3 percent for the third quarter of
1998.
Net income for the third quarter of 1999 totaled $459 million, or
$1.13 per diluted share, compared with $178 million, or $.44 per
diluted share, in the third quarter of 1998. Excluding non-recurring
items and the restructuring, net income totaled $462 million, or
$1.14 per diluted share, compared with net income of $392 million or
$.97 per diluted share in the year-earlier quarter. The company
estimates that changes in the value of the U.S. dollar decreased
earnings for the quarter by about one cent per share compared with
the third quarter of 1998. 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.
First Nine Months
Worldwide sales for the first nine months of 1999 totaled $11.636
billion, up 3.6 percent from the same period last year. Volume
increased about 4 percent. Negative currency translation was offset
by selling price increases.
In the United States, sales increased about 2 percent to $5.572
billion, driven by volume increases. Internationally, sales totaled
$6.064 billion. Volume abroad increased about 5 percent, while
selling prices were up about 2 percent, resulting in overall local-
currency sales gains of about 7 percent. Currency translation reduced
international sales by about 2 percent.
Cost of goods sold, which includes manufacturing, research and
development, and engineering, was 56.8 percent of sales, down five-
tenths of a percentage point from the first nine months of last year,
excluding the restructuring charge impact. Gross margins benefited
from lower raw material costs and the company's restructuring
actions.
In the second quarter of 1999, the company realized a net pre-tax
gain for one-time items of $104 million ($55 million after tax).
These items related to gains on the divestitures of two businesses,
net of an investment valuation adjustment. This pre-tax gain was
recorded as a reduction of selling, general and administrative
expenses. The impact of this net gain, in addition to the
restructuring and non-recurring items cited in the prior third
quarter discussion, on 3M's Consolidated Statement of Income follows.
Supplemental Consolidated Statement of Income Information (Unaudited)
(Millions, except per-share amounts)
Nine months ended
September 30, 1999 September 30, 1998
Excluding Excluding
non- Non- restruc- Restruc-
recurring recurring Reported turing turing Reported
items items total charge charge total
Operating
Income (loss) $2,114 $ 100 $2,214 $ 1,950 $ (332) $ 1,618
Other income and
expense 61 -- 61 63 -- 63
Income (loss) before
income taxes and
minority interest $2,053 $ 100 $2,153 $ 1,887 $ (332) $ 1,555
Provision (benefit)
for income taxes 728 48 776 670 (118) 552
Effective tax rate 35.5% 47.8% 36.0% 35.5% 35.5% 35.5%
Minority interest 58 -- 58 39 -- 39
Net income (loss) $1,267 $ 52 $1,319 $ 1,178 $ (214) $ 964
Earnings (loss) per
share - diluted $ 3.12 $ .13 $ 3.25 $ 2.88 $ (.52) $ 2.36
Selling, general and administrative expenses were 24.4 percent of
sales. Excluding non-recurring items, this spending totaled 25.0
percent of sales, down from 25.3 percent in the same period last
year.
Worldwide operating income was 19.0 percent of sales. Excluding non-
recurring items and the restructuring, operating income was 18.2
percent, compared with 17.4 percent of sales in the first nine months
last year. In dollars, operating income, excluding non-recurring
items and the restructuring, increased 8.4 percent from the same
period last year.
Interest expense of $83 million in the first nine months of 1999 was
down $23 million from the same period last year, reflecting lower
debt levels. Net investment and other income was $22 million, in line
with recent trends.
Excluding non-recurring items and the restructuring, the worldwide
effective income tax rate for the first nine months of 1999 was 35.5
percent, unchanged from the same period last year. Including non-
recurring items, the total combined effective tax rate was 36.0
percent for the first nine months of 1999.
Net income for the first nine months of 1999 totaled $1.319 billion,
or $3.25 per diluted share, compared with $964 million, or $2.36 per
diluted share, in the first nine months of 1998. Excluding non-
recurring items and the restructuring, net income totaled $1.267
billion, or $3.12 per diluted share, compared with $1.178 million, or
$2.88 per diluted share, in the first nine months of 1998. The
company estimates that changes in the value of the U.S. dollar
decreased earnings for the first nine months of 1999 by about 5 cents
per share compared with the same period of 1998.
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong.
Working capital totaled $2.718 billion at September 30, 1999,
compared with $1.932 billion at year-end 1998. The company's
inventory index was 3.1 months, down from 3.4 months at year-end. The
accounts receivable average days' sales outstanding was 59 days, down
slightly from year-end. The company's current ratio was 1.7, up from
1.4 at year-end.
Total debt decreased $916 million from year-end 1998 to $2.190
billion. As of September 30, 1999, total debt was 26 percent of total
capital.
The company's strong credit rating provides ready and ample access to
funds in global capital markets. At September 30, 1999, the company
had available short-term lines of credit totaling about $658 million.
Net cash provided by operating activities totaled $2.412 billion in
the first nine months of the year, up $914 million from the same
period last year. The increase in net income and good working
capital management drove the improvement. Inventories declined about
$375 million, or 15 percent, compared with September 30, 1998.
Working capital and other changes in 1999 include a $171 million use
of cash for the impact of employee termination benefits paid in
connection with restructuring activities. Net cash inflows from
mammary implant litigation were $44 million in the first nine months
of 1999, compared with $209 million in net cash outflows in the same
period last year. A decrease in the non-current portion of mammary
implant receivables has contributed to the decline in "Other Assets"
since year-end 1998. Asset impairment charges of $190 million in the
third quarter of 1998 represent the write-down of certain assets to
net realizable value. In 1999, due to a change in estimate, a
reduction in these charges of $31 million was recorded.
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.
Cash used in investing activities was $522 million in the first nine
months of the year, compared with $1.124 billion in the same period
last year. Capital expenditures for the first nine months of 1999
were $727 million, a decrease of 31 percent from the same period last
year.
The company received cash proceeds in the third quarter of 1999 of
$45 million related to divestitures, mainly in Health Care. The
company received cash proceeds in the second quarter of 1999 totaling
$203 million related to its divestitures of Eastern Heights Bank and
the Cardiovascular Systems business. Investments have decreased $187
million since year-end 1998, driven by investment decreases of about
$350 million relating to these divestitures, but partially offset by
increases in the value of available-for-sale equity investments.
Divestitures also contributed to the decline in "other current
liabilities" and "other liabilities" shown on the Consolidated
Balance Sheet.
Treasury stock repurchases for the first nine months of 1999 were
$478 million, compared with $606 million in the same period last
year. Financing activities in the first nine months of 1999 for both
short-term and long-term debt included net cash outflows of $897
million, compared with net cash inflows of $649 million in the same
period last year.
The company repurchased about 5.3 million shares of common stock in
the first nine months of 1999, compared with 7.3 million shares in
the same period last year. In February 1999, the Board of Directors
authorized the repurchase of up to 12 million shares of 3M common
stock through December 31, 1999. As of September 30, 1999, 6.9
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 $677 million in the first
nine months of this year, compared with $666 million in the same
period last year. In February 1999, the quarterly dividend was
increased to 56 cents per share.
Legal proceedings are discussed in the Legal Proceedings section in
Part II, Item 1, of this Form 10-Q.
FUTURE OUTLOOK
The company encountered a difficult set of challenges in 1998 - large
negative currency effects, economic contractions in many
international markets, and softness in a few key U.S. markets. To
improve productivity and reduce costs, the company has been exiting
certain product lines, consolidating manufacturing operations, and
eliminating lower-value activities in corporate service functions.
Relating to these actions, the company recorded a restructuring
charge in the second half of 1998. This charge is discussed in the
1998 Form 10-K.
The company announced in mid-1998, as part of its restructuring plan,
its intent to reduce about 4,500 positions by December 31, 1999. As
of September 30, 1999, employment has declined by approximately 5,000
people due both to the restructuring and attrition when compared to
March 31, 1998.
When fully implemented by the end of 1999, the restructuring plan is
expected to provide annual pre-tax savings of about $250 million. The
company anticipates implementation costs associated with this
restructuring plan to be about $35 million in 1999. These costs, not
included in the 1998 restructuring charge, include expenses for
relocating employees, inventory and equipment; unfavorable overhead
variances; and other expenses. If the company does not generate
adequate sales growth, normal increases in salaries and wages and
additional depreciation from capital expenditures will create offsets
to the annual savings.
The company expects continued solid earnings growth in the fourth
quarter of 1999, led by new products and ongoing productivity
improvement.
The company is not able to project what the consequences will be from
the dynamic economies around the world. The company is monitoring
business conditions closely and is prepared to make adjustments in
costs, pricing and investments as appropriate.
Based on currency rates as of September 30, 1999, the company
estimates that currency would have a slight negative impact on
fourth quarter 1999 earnings.
Capital spending totaled $1.430 billion in 1998, and is expected to
total $1.0 to $1.1 billion for 1999. Excluding the restructuring and
non-recurring items, the company does not expect a significant change
in its tax rate in 1999.
3M has signed a letter of intent to purchase Hoechst's interest in
the Dyneon joint venture for approximately $330 million in cash. 3M
expects the acquisition will be largely financed by borrowing. 3M
already owns 54 percent of the venture and expects to finalize the
acquisition by year-end after completing due diligence, final
agreements and approvals. The purchase method of accounting will be
used for this acquisition. Dyneon's assets, liabilities, revenues and
expenses are currently fully consolidated in 3M's financial
statements and Hoechst's 46 percent share is eliminated as a minority
interest.
YEAR 2000 READINESS
The Year 2000 issue is the result of using only the last two digits
to indicate the year in computer hardware and software programs and
embedded technology such as micro-controllers. As a result, these
programs do not properly recognize a year that begins with "20"
instead of the familiar "19." If uncorrected, such programs will be
unable to interpret dates beyond the year 1999, which could cause
computer system failure or other errors disrupting normal business
operations.
The company recognizes the importance of readiness for the Year 2000
and has given 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 to the year 2000 by assessing, testing
and modifying IT and non-IT systems (defined below) and date-
sensitive company products so that (a) they will perform as intended,
regardless of the date (before, during and after December 31, 1999),
and (b) dates (before, during and after December 31, 1999 and
including February 29, 2000) can be processed with expected results
("Year 2000 Compliant"). The scope of the Year 2000 compliance effort
includes (i) information technology ("IT") such as software and
hardware; (ii) non-IT systems or embedded technology such as micro-
controllers contained in various manufacturing and laboratory
equipment; environmental and safety systems, facilities and
utilities, (iii) date-sensitive company products; and (iv) the
readiness of key third parties, including suppliers and customers,
with whom the company has material business relationships.
The Year 2000 project team has taken an inventory of IT and non-IT
systems and date-sensitive company products that might malfunction or
fail as a result of using only the last two digits to indicate the
year. The project teams then categorized the potential date component
failures into three categories: "Vital" (stops the business operation
and no short-term solution is available); "Critical" (inconvenient to
the business operation and a short-term solution is available); and
"Marginal" (inconsequential to the business operation).
IT Systems - The company is using both internal and external
resources to remediate and test millions of lines of application
software code. As of September 30, 1999, approximately 99 percent of
the core central IT application systems (e.g., general ledger,
payroll, procurement and order management), central IT infrastructure
systems (e.g., telecommunications, electronic mail, databases, data
centers, and system software), and the other IT systems (e.g.,
systems that support business and staff organizations) located in the
United States that are deemed "Vital" or "Critical" are believed to
be Year 2000 Compliant. As of September 30, 1999, approximately 99
percent of the IT systems in subsidiaries outside the United States
that are deemed "Vital" or "Critical" are believed to be Year 2000
Compliant.
Non-IT Systems - The company has more than 100 manufacturing and
laboratory locations worldwide with varying degrees of non-IT systems
(such as programmable logic controllers, gauging guidance and
adjustment systems and testing equipment). Assessment and testing of
non-IT systems for Year 2000 compliance has proven much more
difficult than assessing compliance of IT systems because testing of
non-IT systems often requires shutdown of the manufacturing
operations.
As a result, the company has approached assessment and testing of non-
IT systems that are common to many of the company's facilities by (i)
contacting the suppliers of these non-IT systems and obtaining
statements that the systems are Year 2000 Compliant, and (ii) testing
components of non-IT systems when they are shut down for normal
maintenance. The company has also shut down manufacturing lines in
three of its facilities and tested non-IT systems that are common to
many of the company's facilities. These tests demonstrate that "time
intervals" instead of "dates" are used almost exclusively in these
non-IT systems and support the company's belief that potential
disruptions of such systems due to the Year 2000 issue should be
minimal.
As of September 30, 1999, approximately 99 percent of the non-IT
systems located in the United States that are deemed "Vital" or
"Critical" and approximately 99 percent of the non-IT systems in
subsidiaries outside the United States that are deemed "Vital" or
"Critical" are believed to be Year 2000 Compliant.
Company Products - The vast majority of the company's products are
not date-sensitive. The company has collected information on current
and discontinued date-sensitive products. The company's website
(http://www.3M.com) contains a section dedicated to communicating
year 2000 information to its customers. This website includes a
search feature to enable customers to determine whether certain 3M
products are Year 2000 compliant.
Material Third Party Relationships - In addition to internal Year
2000 IT and non-IT remediation activities, the company is in contact
with key suppliers, contract manufacturers and electronic commerce
customers to minimize potential disruptions in the relationships
between the company and these important third parties related to the
Year 2000 issue. The assessment process includes (i) initial survey,
(ii) risk assessment and contingency planning, and (iii) follow-up
reviews.
The company has also categorized supplies purchased from vendors into
three categories: "Vital" (disruption of supply stops the business
operation and no short-term solution is available); "Critical"
(disruption of supply is inconvenient to the business operation and a
short-term solution is available); and "Marginal" (disruption of
supply is inconsequential to the business operation). The company has
focused its efforts on those vendors that supply goods or services
deemed "Vital" to the company's business. The company has received
responses to its initial year 2000 readiness survey from most of its
Vital suppliers indicating that the suppliers are working on the year
2000 issue. While the company cannot guarantee compliance by third
parties, the company has developed contingency plans with its key
suppliers that includes the availability of appropriate inventories
of supplies in the event the supplier is not Year 2000 Compliant.
As with suppliers, the readiness of customers to deal with year 2000
issues may affect their operations and their ability to order and pay
for products. Certain business units of the company have surveyed
their major direct customers about their year 2000 readiness in
critical areas of their operations. The responses have been generally
positive in favor of readiness. The company cannot determine at this
time how year 2000 issues may affect customer order patterns. As
customers prepare their businesses for the year 2000, they may either
delay or accelerate purchases of products from the company. As a
result, changes in customer order patterns in preparation for the
year 2000 may affect the company's future revenues and revenue
patterns. At this time, the company believes the greatest likelihood
of accelerated purchases of products is in the Health Care segment.
In other segments, early indications are that most customers are not
building inventories in anticipation of the year 2000.
Risks and Worst Case Scenarios - The company believes that its most
reasonably likely worst case scenarios regarding the year 2000 issue
involve the IT and non-IT systems of third parties rather than the IT
and non-IT systems and products of the company. Because the company
has far less control over assessing the year 2000 readiness of
certain third parties, the company believes the risks are greatest
outside the United States with suppliers of electrical,
telecommunications, and transportation services, and in some areas,
smaller business organizations that supply the company with goods or
services. Contingency planning regarding the failure of such services
involves maintaining appropriate inventories of key raw materials and
products.
Contingency Planning - The company is preparing contingency plans
specifying what the company will do if failures occur in IT and non-
IT systems, or important third parties are not Year 2000 Compliant.
The process includes identifying and prioritizing risks, assessing
the business impact of those risks, creating notification procedures,
and preparing written contingency plans for those failures with the
greatest risk to the company. As of September 30, 1999, the company's
contingency plans were 100 percent complete for its IT and non-IT
systems and other high risk areas and 100 percent complete for its
key suppliers.
Costs - Since inception of the company's efforts on the year 2000
issue through September 30, 1999, the company had spent approximately
$64 million out of a total estimate of $77 million related to the
Year 2000 readiness issue. These costs include the costs incurred for
external consultants and professional advisors and the costs for
software and hardware. The company's process for tracking internal
costs does not capture all of the costs incurred for each of the
teams working on the Year 2000 project. Such internal costs are
principally the related payroll costs for its information systems
group and other employees working on the Year 2000 project. 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 current estimates of the 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, such as skilled IT personnel and infrastructure
(e.g., electrical supply and water and sewer service);
telecommunications, transportation supply chains, critical suppliers
of materials; and Year 2000 modification plans and implementation
success by key third-parties. New developments could affect the
company's estimates of the amount of time and costs needed to modify
and test its IT and non-IT systems for Year 2000 compliance and,
depending on the year 2000 readiness of certain third parties, could
affect the company's ability to conduct its business. 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 date-sensitive code in both IT and
non-IT systems; (iii) unanticipated failures in IT and non-IT
systems; (iv) the planning and Year 2000 compliance success that key
customers and suppliers attain; (v) failure or collapse of
infrastructure (e.g., disruptions of electrical supply and water and
sewer service), telecommunications, transportation supply chains, and
critical suppliers of materials, particularly those suppliers of such
services and goods located outside the United States; and (vi)
unforeseen product shortages due to hoarding of critical raw
materials.
The company cannot determine the impact of these potential
developments on the current estimate of probable costs of making its
products and IT and non-IT systems Year 2000 Compliant or the
financial impact on the company. Accordingly, the company is not able
to estimate possible future costs beyond the current estimates. As
new developments occur, these cost estimates may be revised to
reflect the impact of these developments on the costs to the company
of making its products and IT and non-IT systems Year 2000 Compliant.
Such cost revisions 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
could also have a material adverse effect on the consolidated
financial position or annual results of operations of the company.
Various of the company's disclosures and announcements concerning its
products and year 2000 programs are intended to constitute "Year 2000
Readiness Disclosures" as defined in the recently enacted Year 2000
Information and Readiness Disclosure Act. The Act provides added
protection from liability for certain public and private statements
concerning an entity's year 2000 readiness and the year 2000
readiness of its products and services. The Act also potentially
provides added protection from liability for certain types of year
2000 disclosures made after January 1, 1996 and before the date of
enactment of the Act.
THE EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European
Union (EU) established fixed conversion rates through the European
Central Bank (ECB) between existing local currencies and the euro,
the EU's new single currency. The participating countries had agreed
to adopt the euro as their common legal currency on that date. From
that date, the euro has been traded on currency exchanges and
available for non-cash transactions.
Following introduction of the euro, local currencies will remain
legal tender until December 31, 2001. During this transition period,
goods and services may be paid for with the euro or the local
currency under the EU's "no compulsion, no prohibition" principle. If
cross-border payments are made in a local currency during this
transition period, the amount will be converted into euros and then
converted from euros into the second local currency at rates fixed by
the ECB. The participating countries will issue new euro-denominated
bills and coins for use in cash transactions at about December 31,
2001. By no later than July 1, 2002, participating countries will
withdraw all bills and coins denominated in local currencies, making
the euro conversion complete.
In February 1997, the company created a European Monetary Union (EMU)
Steering Committee and project teams representing all company
business and staff units in Europe. The common objective of these
teams is to ensure a smooth transition to EMU for the company and its
constituencies. The scope of the teams' efforts includes (i)
assessing the euro's impact on the company's business and pricing
strategies for customers and suppliers, and (ii) ensuring that the
company's business processes and information technology (IT) systems
can process transactions in euros and local currencies during the
transition period and achieve the conversion of all relevant local
currency data to the euro by December 31, 2001, in the participating
countries.
The European market contributed 26 percent of consolidated sales and
20 percent of consolidated operating income, excluding the
restructuring charge, in 1998. The participating countries accounted
for 64 percent of the company's sales in the European market in 1998.
The company believes that the euro will, over time, increase price
competition for the company's products across Europe due to cross-
border price transparency. The company also believes that the adverse
effects of increased price competition will be offset somewhat by new
business opportunities and efficiencies. The company, however, is not
able to estimate the anticipated net long-term impact of the euro
introduction on the company.
The company has, in preparation for EMU, made significant investments
in IT systems in Europe and these investments already enable the
company to manage customer orders, invoices, payments and accounts in
euros and in local currencies according to customer needs. The
company anticipates spending approximately $35-50 million to complete
the conversion of all its IT systems in Europe to the euro by
December 31, 2001. The company is developing appropriate contingency
plans in order that the euro adoption does not jeopardize the
operations of the company.
The euro introduction is not expected to have a material impact on
the company's overall currency risk. Although the company engages in
significant trade within the EU, the impact to date of changes in
currency exchange rates on trade within the EU has not been material.
The company anticipates the euro will simplify financial issues
related to cross-border trade in the EU and reduce the transaction
costs and administrative time necessary to manage this trade and
related risks. The company believes that the associated savings will
not be material to corporate results.
The company has derivatives outstanding beyond September 30, 1999, in
several European currencies. Under the EU's "no compulsion, no
prohibition" principle, the outstanding derivative positions will
either mature as local currency contracts or convert to euro
contracts at no additional economic cost to the company. The company
believes that systems used to monitor derivative positions can be
appropriately modified for these changes. The company believes the
impact of the euro introduction on the company's derivative positions
will not be material.
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 here, 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
that 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; the timing and market acceptance of
new product offerings; 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).
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.
In one such matter, LePage's Incorporated filed a lawsuit against the
company in June 1997 in the United States District Court for the
Eastern District of Pennsylvania alleging that certain marketing
practices of the company violated the antitrust laws. On October 8,
1999, the jury awarded LePage's damages of $22.8 million, which will
be automatically tripled under the law. The company recorded a pre-
tax charge of $73 million in the third quarter of 1999 related to the
adverse jury verdict and attorneys' fees and costs. However, the fact
that the company recognized the liability does not change the
company's belief that the jury verdict will be ultimately overturned.
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 September 30, 1999, the company had been named as a defendant,
often with multiple co-defendants, in 4,087 lawsuits and 68 claims in
various courts, all seeking damages for personal injuries from
allegedly defective breast implants. These claims and lawsuits
purport to represent 13,795 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, or how many of these lawsuits and claims involve
individuals who accepted benefits under the Revised Settlement
Program (as defined later). The company has confirmed that
approximately 590 of the above individual claimants have opted out of
the class action and have 3M implants. 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. The
Louisiana Supreme Court has denied plaintiffs' writ for an emergency
appeal from the decertification. 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 includes domestic class members with
implants manufactured by certain manufacturer defendants, including
Baxter International, Bristol-Myers Squibb Company, 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 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
claimants with 3M implants. Post 8/84 McGhan implant benefits are
payable in fixed shares by the company, Union Carbide Corporation and
McGhan Medical Corporation. McGhan Medical Corporation has defaulted
on its fixed share obligation (which does not affect 3M's obligation
to pay its share) and has a request for a mandatory class action
recently approved by the Court.
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, are not
affected by the number of class members who have elected 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) will range from $10,000 to $50,000.
On June 10, 1998, the Court approved the terms of a settlement
program offered by Baxter International, Bristol-Myers Squibb Company
and the company to eligible foreign implant recipients (the "Foreign
Settlement Program"). Notices and claim forms were mailed on June
15, 1998. Benefits to eligible foreign claimants range from $3,500
to $50,000.
As of the date of this filing, the company believes that
approximately 90 percent 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 September 30,
1999, the company has paid $281 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 third quarter of 1999, the company increased its estimate of the
probable liabilities and associated expenses to approximately $1.2
billion, with an offsetting increase in the probable amount of
insurance recoveries. This amount represents the company's current
best estimate of the amount to cover 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 $1.093 billion as of September 30, 1999, for defense and
other costs and settlements with litigants and claimants, the company
had accrued liabilities of $107 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. A phase III jury trial on the company's claim of breach and
consequential damages and insurer defenses to coverage began on
October 25, 1999 and is expected to go into the new year.
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 January 1, 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 believed
that conflicting rulings existed that needed to be clarified by the
court and reconciled with applicable law. Motions to clarify the
allocation methodology of triggered policies under these rulings were
filed and have been ruled upon by the Court. While the Court
clarified certain aspects of these rulings it also ruled that there
would be no allocation from and after January 1, 1986. This ruling is
consistent with the company's position on the allocation issue.
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 September 30, 1999, the company had accrued receivables for
insurance recoveries of $692 million, substantially all of which is
contested by the insurance carriers. During the first quarter of 1999
the company executed a settlement agreement with its lead occurrence
underwriter. Payments of settlement dollars of this and other
agreements were received in the second and third quarters of 1999.
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 to 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 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 33.
(15) A letter from the company's independent auditors
regarding unaudited interim consolidated
financial statements. Page 34.
(27) Financial data schedule (EDGAR filing only).
None of the other item requirements of Part II of Form 10-Q are
applicable to the company for the quarter ended September 30, 1999.
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: November 4, 1999
/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.)