================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 2001 COMMISSION FILE NUMBER: 1-3285
-----------------------
MINNESOTA MINING AND MANUFACTURING COMPANY
41-0417775
State of Incorporation: Delaware I.R.S. Employer Identification No.
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 March 31, 2001, there were 395,914,197 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
March 31
-------------------------
2001 2000
---------- ----------
Net sales $ 4,170 $ 4,075
---------- ----------
Operating expenses
Cost of sales 2,196 2,091
Selling, general and
administrative expenses 959 956
Research, development and
related expenses 278 263
Other expense (income) -- (50)
---------- ----------
Total 3,433 3,260
---------- ----------
Operating income 737 815
---------- ----------
Other income and expense
Interest expense 38 26
Interest and other income (12) (6)
---------- ----------
Total 26 20
---------- ----------
Income before income taxes
and minority interest 711 795
Provision for income taxes 238 282
Minority interest 20 26
---------- ----------
Net income $ 453 $ 487
========== ==========
Weighted average common
shares outstanding - basic 396.3 397.7
Earnings per share - basic $ 1.14 $ 1.22
========== ==========
Weighted average common
shares outstanding - diluted 402.4 401.9
Earnings per share - diluted $ 1.13 $ 1.21
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
2
Minnesota Mining and Manufacturing Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
March 31, December 31,
2001 2000
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 575 $ 302
Accounts receivable - net 2,948 2,891
Inventories
Finished goods 1,220 1,231
Work in process 694 663
Raw materials and supplies 427 418
---------- ----------
Total inventories 2,341 2,312
Other current assets 961 874
---------- ----------
Total current assets 6,825 6,379
Investments 274 310
Property, plant and equipment 14,226 14,170
Less accumulated depreciation (8,373) (8,347)
---------- ----------
Property, plant and equipment - net 5,853 5,823
Other assets 2,412 2,010
---------- ----------
Total $ 15,364 $ 14,522
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt $ 2,302 $ 1,866
Accounts payable 1,162 1,081
Payroll 384 382
Income taxes 593 462
Other current liabilities 993 963
---------- ----------
Total current liabilities 5,434 4,754
Long-term debt 955 971
Other liabilities 2,502 2,266
Stockholders' equity
Common stock, $.01 par value,
472,016,528 shares issued 5 5
Capital in excess of par value 291 291
Retained earnings 11,703 11,517
Treasury stock, at cost (4,120) (4,065)
March 31, 2001: 76,102,331 shares
December 31, 2000: 75,931,180 shares
Unearned compensation (299) (303)
Accumulated other comprehensive income (loss)
Cumulative translation - net (1,071) (885)
Minimum pension liability adjustments - net (58) (58)
Debt and equity securities, unrealized gain - net 9 29
Cash flow hedging instruments - net 13 --
---------- ----------
Total accumulated other comprehensive loss (1,107) (914)
---------- ----------
Stockholders' equity - net 6,473 6,531
---------- ----------
Total $ 15,364 $ 14,522
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
3
Minnesota Mining and Manufacturing Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Three months ended
March 31
--------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 453 $ 487
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 247 228
Deferred income tax provision 21 31
Implant litigation - net (3) 21
Changes in assets and liabilities
Accounts receivable (77) (79)
Inventories (21) (109)
Other current assets (51) (155)
Other assets - net of amortization 47 (40)
Income tax payable 139 115
Accounts payable and other current liabilities (24) 94
Other liabilities (23) (11)
Other - net 7 (1)
- --------------------------------------------------------------------------------------
Net cash provided by operating activities 715 581
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (281) (271)
Proceeds from sale of property, plant and equipment 9 33
Acquisitions of businesses (191) --
Proceeds from sale of businesses 8 --
Purchase of investments (3) (10)
Proceeds from sale of investments 18 15
- --------------------------------------------------------------------------------------
Net cash used in investing activities (440) (233)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt - net 415 (32)
Repayment of other short-term and long-term debt (179) (16)
Proceeds from other short-term and long-term debt 208 --
Purchases of treasury stock (342) (341)
Reissuances of treasury stock 123 60
Dividends paid to stockholders (239) (231)
- --------------------------------------------------------------------------------------
Net cash used in financing activities (14) (560)
Effect of exchange rate changes on cash 12 39
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 273 (173)
Cash and cash equivalents at beginning of year 302 387
- --------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 575 $ 214
======================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
4
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
consolidated 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 acquisitions in the first quarter of 2001,
and the termination of a product distribution agreement in the first quarter of
2000. The results of operations for any interim period are not necessarily
indicative of results for the full year. The interim consolidated financial
statements and notes are presented as permitted by the requirements for
Quarterly Reports on Form 10-Q and do not contain certain information included
in the company's annual consolidated financial statements and notes. This
Quarterly Report on Form 10-Q should be read in conjunction with the company's
consolidated financial statements and notes included in its 2000 Annual Report
on Form 10-K.
BUSINESS COMBINATIONS
During the first quarter of 2001, 3M completed three notable business
combinations. 3M acquired MicroTouch Systems Inc., a touch screen manufacturer,
for $158 million in cash, net of cash acquired. 3M acquired Robinson Nugent, a
telecommunications supplier, in exchange for 1,124,135 shares of 3M common stock
that had a fair market value of $127 million as of the acquisition date. 3M also
combined its German dental business (3M Inter-Unitek GmbH, an existing 3M
subsidiary) with ESPE Dental AG, a dental products manufacturer. 3M Inter-Unitek
GmbH acquired 100 percent of the outstanding shares of ESPE Dental AG (ESPE) in
exchange for 43 percent ownership in 3M Inter-Unitek and $25 million, net of
cash acquired. Upon completion of the ESPE transaction, 3M holds a 57 percent
controlling interest in Inter-Unitek GmbH and consolidates it with a provision
for the minority interest that does not have participating rights. Each
transaction was accounted for using the purchase method of accounting.
The preliminary estimated fair values of assets acquired and liabilities assumed
relating to the 2001 business combinations are summarized in the table below:
Millions Asset (Liability)
Accounts receivable $63
Inventories 69
Other working capital - net (112)
Property, plant and equipment 126
Purchased intangible assets 468
Interest bearing debt (15)
Minority interest liability (244)
Other long-term liabilities (38)
----
Net assets acquired $317
----
5
The $468 million of purchased intangible assets, including goodwill, are being
amortized on a straight-line basis over the periods benefited, ranging from 4 to
40 years. In-process research and development charges associated with these
acquisitions were not material. 3M entered into put/call option agreements with
certain former shareholders of ESPE Dental AG. Under these agreements, 3M may
either be required or, if not required, may choose to purchase the 43 percent
minority interest in Inter-Unitek GmbH from certain former shareholders in ESPE.
These option agreements expire on June 30, 2004. Pro forma information related
to these acquisitions is not provided because the impact of these acquisitions
on the company's results of operations is not considered to be material.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS
Effective January 1, 2001, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138. This new accounting standard requires
that all derivative instruments be recorded on the balance sheet at fair value
and establishes criteria for designation and effectiveness of hedging
relationships. The effect of adopting this standard was not material to the
company's consolidated financial statements.
The company enters into contractual derivative arrangements in the ordinary
course of business to manage foreign currency exposure, interest rate risks and
commodity price risks. A financial risk management committee, composed of senior
management, provides oversight for risk management and derivative activities.
This committee determines the company's financial risk policies and objectives,
and provides guidelines for derivative instrument utilization. This committee
also establishes procedures for control and valuation, risk analysis,
counterparty credit approval, and ongoing monitoring and reporting.
The company uses interest rate swaps, currency swaps, and forward and option
contracts to manage risks generally associated with foreign exchange rate,
interest rate and commodity market volatility. All hedging instruments are
designated and effective as hedges, in accordance with U.S. generally accepted
accounting principles. Instruments that do not qualify for hedge accounting are
marked to market with changes recognized in current earnings. The company does
not hold or issue derivative financial instruments for trading purposes and is
not a party to leveraged derivatives.
Foreign Currency Forward and Option Contracts: The company enters into forward
contracts and swaps to hedge certain inter-company financing transactions, and
purchases options to hedge against the effect of exchange rate fluctuations on
cash flows denominated in foreign currencies. These transactions are designated
as cash flow hedges. At March 31, 2001, the company had various open foreign
exchange forward and option contracts, the majority of which have maturities of
one year or less. The amounts at risk are not material because the company has
the ability to generate offsetting foreign currency cash flows. The company also
uses multiple forward and option contracts designated as cash flow hedges to
hedge intercompany receivables/payables.
6
For cash flow hedges, the net gain recognized in cost of sales during the
current quarter was $6 million, with the impact offset by underlying hedged
items. The amount of hedge ineffectiveness (which represents the option's time
value gain or loss), was not material for the quarter ended March 31, 2001. The
time value component of the option is excluded from the assessment for hedge
effectiveness. The settlement or extension of these derivatives will result in
reclassifications to earnings in the period during which the hedged transactions
affect earnings (from other comprehensive income). Within the next 12 months the
company expects to reclassify to earnings a majority of the amount of cash flow
hedging instruments shown in other comprehensive income at March 31, 2001, with
the impact largely offset by underlying hedged items. The maximum length of time
over which 3M is hedging its exposure to the variability in future cash flows
for a majority of the forecasted transactions, excluding those forecasted
transactions related to the payment of variable interest on existing financial
instruments, is 12 months. No cash-flow hedges were discontinued during the
quarter.
Interest Rate & Currency Swaps: The company manages interest expense using a mix
of fixed, floating and variable rate debt. To help manage borrowing costs, the
company may enter into interest rate swaps. Under these arrangements, the
company agrees to exchange, at specified intervals, the difference between fixed
and floating interest amounts calculated by reference to an agreed-upon notional
principal amount. The company uses interest rate and currency swaps to manage
interest rate risk related to borrowings. These instruments generally mature in
relationship to their underlying debt. The current outstanding instruments have
maturities of one year or less, but generally the maturity will match the term
of the debt when issued, which is generally greater than one year. Unrealized
gains and losses and exposure to changes in market conditions were not material
at March 31, 2001, for interest rate and currency swaps.
The company uses interest rate swaps (fixed to floating rate) designated as fair
value hedges. The company also uses cross currency interest rate swaps (fixed to
floating) to hedge foreign currency and interest rates designated as fair value
hedges. For these hedges, the net gain/loss relating to any hedge
ineffectiveness is reported in the income statement as a decrease or increase in
interest expense. Hedge ineffectiveness was not material in the first quarter of
2001. No interest rate swap hedges were discontinued or became disqualified
during the quarter ended March 31, 2001.
Net Investment Hedging: The company uses foreign currency debt and forwards to
hedge the company's net investments in foreign operations. For hedges that meet
the effectiveness requirements, the net gains/losses are recorded in cumulative
translation within other comprehensive income, with any ineffectiveness recorded
in cost of sales. In the first quarter of 2001, a gain of $20 million was
recorded in cumulative translation. Hedge ineffectiveness was not material in
the first quarter of 2001.
7
Commodity Price Management: The company manages commodity price risks through
negotiated supply contracts, price protection swaps and forward physical
contracts. The company uses commodity price swaps as cash flow hedges of
forecasted transactions to manage price volatility. The related mark-to-market
gain or loss on qualifying hedges is included in other comprehensive income to
the extent effective (100 percent effective), and reclassified into cost of
sales in the period during which the hedged transaction affects earnings. 3M has
hedged its exposure to the variability of future cash flows for certain
forecasted transactions through 2005. No cash flow commodity hedges were
discontinued during the quarter ending March 31, 2001. Commodity hedging
activity is not material to the company's financial statements.
RECLASSIFICATIONS
Due to reclassifications at year-end 2000, certain prior period amounts have
been reclassified to conform with the current year presentation.
BUSINESS SEGMENTS
3M's net sales and operating income by segment for the first quarter of 2001 and
2000 follow.
- -------------------------------------------------
BUSINESS
SEGMENT First First
INFORMATION Qtr Qtr
(MILLIONS) 2001 2000
- -------------------------------------------------
NET SALES
Industrial $ 865 $ 915
Transportation,
Graphics and Safety 893 874
Health Care 829 769
Consumer and Office 695 690
Electro and
Communications 606 507
Specialty Material 281 314
Corporate and
Unallocated 1 6
- -------------------------------------------------
Total Company $ 4,170 $ 4,075
- -------------------------------------------------
OPERATING INCOME
Industrial $ 170 $ 185
Transportation,
Graphics and Safety 177 209
Health Care 165 193
Consumer and Office 113 105
Electro and
Communications 68 89
Specialty Material 48 51
Corporate and
Unallocated (4) (17)
- -------------------------------------------------
Total Company $ 737 $ 815
=================================================
8
First quarter 2001 operating income includes non-recurring costs of $23 million
recorded in cost of sales. These non-recurring costs (primarily increased
valuation of acquired inventories) totaled $10 million in Health Care; $7
million in Transportation, Graphics and Safety; and $6 million in the Electro
and Communications segment. First quarter 2000 operating income includes a $50
million benefit relating to the termination of a product distribution agreement
in the Health Care segment.
DEBT ISSUANCE
In February 2001, the company completed a 40-year, $56 million, floating rate
note with a coupon rate based on a floating LIBOR index (4.53 percent at March
31, 2001).
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
periods ended March 31, 2001 and 2000. Certain MSOP options outstanding at March
31, 2001 and 2000, were not included in the computation of diluted earnings per
share because they would not have had a dilutive effect (25 thousand shares of
common stock for the three months ended March 31, 2001; 15.0 million shares of
common stock for the three months ended March 31, 2000).
COMPREHENSIVE INCOME
The components of total comprehensive income are shown below. Income tax effects
for cumulative translation are not material because no tax provision has been
made for the translation of foreign currency financial statements into U.S.
dollars. Reclassification adjustments were not material.
- --------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME Three months ended
March 31
(Millions) 2001 2000
- --------------------------------------------------------------------------------
Net income $ 453 $ 487
- -------------------------------------------------------------------------------
Other comprehensive income (loss)
Cumulative translation - net (186) (54)
Debt and equity securities,
unrealized gain (loss) - net of $13 million
tax benefit and $17 million tax provision (20) 28
Cash flow hedging instruments - net of
$8 million tax provision 13 --
- --------------------------------------------------------------------------------
Total comprehensive income $ 260 $ 461
================================================================================
OTHER
Discussion of legal matters is cross-referenced to this Quarterly Report on Form
10-Q, Part II, Item 1, Legal Proceedings, and should be considered an integral
part of the interim consolidated financial statements.
PricewaterhouseCoopers LLP, the company's independent auditors, have performed
reviews of the unaudited interim consolidated financial
9
statements included herein, and their review report thereon accompanies this
filing. Pursuant to Rule 436(e) of the Securities Act of 1933 ("Act") their
report on these reviews should not be considered a part of any registration
statement prepared or certified within the meaning of Sections 7 and 11 of the
Act.
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 March 31, 2001, and the related
consolidated statements of income and of cash flows for the three-month periods
ended March 31, 2001 and 2000. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying interim consolidated financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited, in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2000, and the related consolidated statements of income, of changes in
stockholders' equity and comprehensive income, and of cash flows for the year
then ended (not presented herein); and in our report dated February 12, 2001, 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, 2000, 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
April 23, 2001
10
Minnesota Mining and Manufacturing Company and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Quarter
Worldwide sales for the first quarter totaled $4.170 billion, up 2.3 percent
from the same quarter last year. Volume increased nearly 7 percent from the
first quarter last year. Selling prices were unchanged, versus a decline of 1.6
percent in 2000 in total. Currency, driven by a stronger U.S dollar, reduced
worldwide sales by 4.5 percent. Acquisitions provided about 4 percentage points
of growth on a global basis.
In the United States, sales totaled $1.885 billion, with sales down 2 percent on
a reported basis and down about 4 percent excluding acquisitions, impacted by
the effects of the weak economy.
Internationally, sales totaled $2.285 billion, up about 6 percent in dollars.
Volume increased over 14 percent on a reported basis and 8 percent excluding
acquisitions. In the Asia Pacific area, volume increased 13 percent, with unit
sales up 11 percent in Japan and 17 percent in the rest of Asia. In Europe,
volume increased 18 percent on a reported basis and more than 6 percent
excluding acquisitions. In Latin America, volume increased about 8 percent.
Volume also increased about 8 percent in Canada. Currency reduced international
sales by 8 percent, driven by negative translation of 10 percent in the Asia
Pacific area and 7 percent in both Europe and Latin America.
Cost of sales includes non-recurring costs of $23 million, primarily the
increased valuation of inventory acquired in two acquisitions and a joint
venture completed during the quarter. Excluding these costs, cost of sales was
52.1 percent of sales, up eight-tenths of a percentage point from the first
quarter last year. Gross margins were negatively affected by soft U.S. market
demand and by higher energy and raw material costs. Cost of sales includes
manufacturing, engineering expenses, and freight costs.
Selling, general and administrative (SG&A) expenses were 23.0 percent of sales,
down nearly 1.5 percentage points from the fourth quarter of 2000 and down
five-tenths of a percentage point from the first quarter last year, benefiting
from aggressive cost-control actions. 3M held SG&A dollar spending basically
flat compared with the first quarter of 2000, and reduced this spending by $50
million from the fourth quarter of 2000. This spending was reduced by over $60
million excluding the SG&A added as a result of two first-quarter acquisitions
and a joint venture.
SG&A also includes amortization of intangibles, which has been increasing due to
recent 3M acquisitions. Goodwill amortization, which is a component of
intangible amortization, totaled about $10 million for the first quarter of
2001, compared with approximately $26 million for the year 2000, or an average
of about $6.5 million per quarter.
11
Goodwill amortization, after tax, totaled about $9 million in the first quarter
of 2001, or 2 cents per share, compared with $21 million in the year 2000, or 5
cents per share. It is estimated that goodwill amortization will impact earnings
by about 3 cents per share in each of the remaining quarters of 2001, excluding
the impact of any additional acquisitions. The Financial Accounting Standards
Board is currently deliberating over the accounting treatment for goodwill and
other intangibles.
Operating income in the first quarter of 2000 reflects a pre-tax benefit of $50
million, or 8 cents per share, associated with the termination of a product
marketing and distribution agreement in the health care segment.
Supplemental Unaudited Consolidated Statement of Income Information
(Dollars in millions, except per-share amounts)
Three months ended Three months ended
March 31, 2001 March 31, 2000
---------------------------- ----------------------------
Excluding Excluding
non- Non- non- Non-
recurring recurring Reported recurring recurring Reported
items items total items items total
--------- ------- -------- -------- -------- --------
Operating
income (loss) $ 760 $ (23) $ 737 $ 765 $ 50 $ 815
Other expense 26 -- 26 20 -- 20
Income (loss) before
income taxes and
minority interest $ 734 $ (23) $ 711 $ 745 $ 50 $ 795
Provision (benefit)
for income taxes 245 (7) 238 263 19 282
Effective tax rate 33.5% 33.5% 35.3% 35.5%
Minority interest 22 (2) 20 26 -- 26
Net income (loss) $ 467 $ (14) $ 453 $ 456 $ 31 $ 487
Per share-diluted $1.16 $(.03) $1.13 $1.13 $ .08 $1.21
The following discussion excludes the impact of first quarter 2001 and 2000
non-recurring items.
Operating income was 18.2 percent of sales, compared with 18.8 percent in the
first quarter last year. Worldwide operating income benefited from good
international volume growth and the company's aggressive actions to reduce SG&A
spending, but was negatively affected by soft U.S. market demand and by higher
energy and raw material costs.
First-quarter interest expense of $38 million was $12 million higher than the
same quarter last year, reflecting higher borrowings. Investment and other
income was $12 million, compared with $6 million in the same quarter last year,
reflecting higher interest income.
The worldwide effective income tax rate for the quarter was 33.5 percent, down
from 35.3 percent in the first quarter last year and 34.5 percent for total year
2000. 3M's tax rate continues to benefit from lower overall international tax
rates.
12
Minority interest was $22 million, compared with $26 million in the first
quarter of 2000. The decrease is primarily due to lower profits in Sumitomo 3M
Limited.
Net income for the first quarter of 2001 totaled $467 million, or $1.16 per
diluted share, compared with $456 million, or $1.13 per diluted share, in the
first quarter of 2000. The company estimates that changes in the value of the
U.S. dollar decreased earnings for the quarter by about 7 cents per share
compared with the first quarter of 2000. This estimate includes the effect of
translating profits from local currencies into U.S. dollars; the impact of
currency fluctuations on the transfer of goods between 3M operations in the
United States and abroad; and transaction gains and losses, including derivative
instruments designed to reduce exchange rate risks.
PERFORMANCE BY BUSINESS SEGMENT
Following is a discussion of the global operating results of the company's six
business segments in the first quarter of 2001.
In the Industrial Markets segment, a leader in tapes and abrasives, volume
declined close to 3 percent, reflecting the weakness in the manufacturing part
of the economy. Operating income margins were down five-tenths of a percentage
point from the first quarter last year, but were up 1.5 percentage points
compared with total year 2000.
In the Transportation, Graphics and Safety segment, volume grew 4 percent
excluding acquisitions. Operating income margins were down due to soft overall
sales and acquisition impacts. Optical films for liquid-crystal displays for
computers, electronic organizers, mobile phones and other electronic devices
continued to register strong growth, and overall growth in this product line was
further boosted by two recent acquisitions. The occupational health and
environmental safety businesses showed good sales increases. The reflective
sheeting business showed a small local currency sales increase, while the
automotive and commercial graphics businesses experienced lower local currency
sales.
In the Health Care segment, volume grew about 7 percent after adjusting for
acquisitions. This segment showed strong growth in pharmaceuticals, health
information systems and dental products. Health care profits, excluding a $50
million pre-tax benefit in 2000 and $10 million of one-time acquisition costs in
2001, were up more than 20 percent from the same quarter last year.
In the Consumer and Office segment, volume increased about 3 percent. Operating
income margins were up about 1 percentage point from both the first quarter and
total year 2000. Profits rose 8 percent in dollars from the first quarter last
year.
In the Electro and Communications segment, volume increased about 7 percent
after adjusting for acquisitions. This market experienced strong growth in
telecommunications product lines,
13
but experienced weakness in product lines serving the electronics manufacturing
and semiconductor industries. Operating margins of the segment were negatively
impacted by slowing sales, acquisition impacts and a less favorable product mix.
In the Specialty Material Markets segment, volume declined nearly 7 percent,
impacted by the product line phase out of perfluorooctanyl chemistry announced
in May 2000. Tight cost control resulted in operating income margins increasing
by six-tenths of a percentage point. However, due to the decline in sales,
operating income dollars decreased about 7 percent from the first quarter last
year.
FINANCIAL CONDITION AND LIQUIDITY
The company's financial condition and liquidity remain strong. Working capital
totaled $1.391 billion at March 31, 2001, down from $1.625 billion at year-end
2000. The accounts receivable average days' sales outstanding was 58 days, down
from 60 days at year-end. The company's inventory index was 3.4 months, the same
as at year-end. The company's current ratio was 1.3, also the same as at
year-end.
Total debt increased $420 million from year-end 2000 to $3.257 billion,
primarily reflecting short-term borrowing relating to acquisitions and treasury
stock repurchases. As of March 31, 2001, 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. At March 31, 2001, the company had available short-term
lines of credit totaling about $734 million.
Net cash provided by operating activities totaled $715 million in the first
three months of the year, up $134 million from the same period last year. Most
of the company's implant liabilities have been paid; accordingly, receipt of
related insurance recoveries will increase future cash flows. For a more
detailed discussion, refer to Part II, Item 1, Legal Proceedings, of this
Quarterly Report on Form 10-Q.
Cash used in investing activities totaled $440 million in the first three months
of the year, compared with $233 million in the same period last year. Capital
expenditures for the first three months of 2001 were $281 million, an increase
of $10 million from the same period last year. The primary increase in investing
activities was due to cash used for acquisitions of businesses that totaled $191
million in the first quarter of 2001, reflecting three notable business
combinations. 3M acquired MicroTouch Systems Inc., a touch screen manufacturer,
for $158 million in cash, net of cash acquired. 3M acquired Robinson Nugent, a
telecommunications supplier, in exchange for 1,124,135 shares of 3M common
stock. 3M also combined its German dental business (3M Inter-Unitek GmbH, an
existing 3M subsidiary) with ESPE Dental AG, a dental products manufacturer. 3M
Inter-Unitek GmbH acquired 100 percent of the outstanding shares of ESPE Dental
AG in exchange for 43 percent ownership in 3M Inter-Unitek and $25 million, net
of cash acquired.
14
Financing activities in the first three months of 2001 for both short-term and
long-term debt included net cash inflows of $444 million, compared with net cash
outflows of $48 million in the same period last year. The change in net
short-term debt of $415 million includes the portion of short-term debt with
original maturities of 3 months or less. Repayment of other short-term and
long-term debt of $179 million includes $113 million of commercial paper having
original maturities greater than 3 months. Proceeds from other short-term and
long-term debt of $208 million includes $152 million of commercial paper having
original maturities greater than 3 months.
Treasury stock repurchases for the first three months of 2001 were $342 million,
compared with $341 million in the same period last year. The company repurchased
about 3.1 million shares of common stock in the first three months of 2001,
compared with about 3.9 million shares in the same period last year. In November
2000, the Board of Directors authorized the repurchase of up to 10 million
shares of 3M common stock through December 31, 2001. As of March 31, 2001, 6.9
million shares remained authorized for repurchase. Stock repurchases are made to
support the company's stock-based compensation plans, its employee stock
purchase plans and for other corporate purposes.
Cash dividends paid to shareholders totaled $239 million in the first three
months of this year, compared with $231 million in the same period last year. In
February 2001, the quarterly dividend was increased to 60 cents per share.
FUTURE OUTLOOK
The company is intensely focused on driving down costs to deliver positive
earnings growth in an uncertain global economic environment. Unusually
unpredictable market and currency trends produce an estimated range of $4.75 to
$5.00 per share for 2001 earnings in total (excluding non-recurring items), with
3M expecting the negative market and currency trends to be more than offset in
any scenario by 3M's aggressive cost plan.
The range of 2001 earnings is based on a model that, on the top end of the
range, assumes organic volume growth of about 3 percent, similar to 3M's
first-quarter growth rate. This scenario assumes some U.S. economic recovery in
the latter part of 2001, offset by slowdown in growth abroad. The low end of the
earnings range cited assumes 1 percent organic sales growth for 2001 in total,
which would mean virtually no growth during the balance of 2001. This scenario
is based on a U.S economy that remains weak, and assumes that international
economic growth declines rapidly for the rest of 2001. In both scenarios, it is
assumed that exchange rates will stay at current levels.
3M is developing a plan to consolidate operations and streamline the
organization to increase speed and productivity. This strategic and selective
restructuring is expected to reduce 3M's global workforce by about 5,000
positions, or about 7 percent, over the next 12 months. About half of the
employment reductions are expected to occur outside the United States.
15
Business units, functional groups and geographic areas across the company will
drive the restructuring. In particular, much of the streamlining will be
targeted at parts of the company facing the greatest economic challenges, and
where the greatest opportunities exist to eliminate unnecessary structure and
improve productivity, efficiency and the supply chain. This action is consistent
with 3M's resolve to achieve solid growth, make the whole organization faster,
and advance 3M to an even higher level.
The company expects to incur non-recurring charges of approximately $600 million
over the next few quarters as a result of this action. The restructuring is
expected to provide annual pre-tax savings of approximately $300 million upon
completion of the plan. Not included in the charge are previously recorded
liabilities related to elimination of some jobs stemming from the ongoing
integration of recently acquired businesses.
3M continues its significant investment in technology and product development.
The company also has launched five initiatives, including a major Six Sigma
push, to drive long-term growth, profitability and cash flow. 3M believes it is
well-positioned to resume strong growth once economic conditions improve.
The company estimates, based on currency rates as of March 31, 2001, that
currency would reduce earnings for the year by about 25 cents per share. The
company expects raw material costs to be slightly lower for the total year, with
the benefits weighted towards the second half of the year. The company expects
to maintain the 33.5 percent worldwide tax rate throughout the year, helped by
lower overall international tax rates. Capital expenditures are expected to
total less than $1 billion for total year 2001.
THE EURO CONVERSION
There have not been any significant new developments relating to the euro
conversion since year-end 2000. Refer to the 2000 Form 10-K for a complete
discussion of the euro conversion.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements may be identified by the use of words like "plan," "expect," "aim,"
"believe," "project," "anticipate," "intend," "estimate," "will," "should,"
"could" and other expressions that indicate future events and trends. All
statements that address expectations or projections about the future, including
statements about the company's strategy for growth, product development, market
position, expenditures and financial results, are forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of
future events that are subject to risks and uncertainties. Actual future results
and trends may differ materially from historical results or those projected in
any such forward-looking statements depending on a variety of factors, including
but not limited to the following:
16
* THE EFFECTS OF, AND CHANGES IN, WORLDWIDE ECONOMIC CONDITIONS. The company
operates in more than 60 countries and derives more than half of its revenues
from outside the United States. The company's business may be affected by
factors in other countries that are beyond its control, such as downturns in
economic activity in a specific country or region (the economic difficulties
that occurred in Asia in 1998 as an example); social, political or labor
conditions in a specific country or region; or potential adverse foreign tax
consequences.
* FOREIGN CURRENCY EXCHANGE RATES AND FLUCTUATIONS IN THOSE RATES MAY AFFECT THE
COMPANY'S ABILITY TO REALIZE PROJECTED GROWTH RATES IN ITS SALES AND NET
EARNINGS AND ITS RESULTS OF OPERATIONS. Because the company derives more than
half its revenues from outside the United States, its ability to realize
projected growth rates in sales and net earnings and results of operations could
be adversely affected if the United States dollar strengthens significantly
against foreign currencies.
* THE COMPANY'S GROWTH OBJECTIVES ARE LARGELY DEPENDENT ON THE TIMING AND MARKET
ACCEPTANCE OF ITS NEW PRODUCT OFFERINGS. The company's growth objectives are
largely dependent on its ability to renew its pipeline of new products and to
bring those products to market. This ability may be adversely affected by
difficulties or delays in product development, such as the inability to:
identify viable new products; successfully complete clinical trials and obtain
regulatory approvals; obtain adequate intellectual property protection; or gain
market acceptance of new products.
* THE COMPANY'S FUTURE RESULTS ARE SUBJECT TO FLUCTUATIONS IN THE COSTS OF
PURCHASED COMPONENTS AND MATERIALS DUE TO MARKET DEMAND, CURRENCY EXCHANGE
RISKS, SHORTAGES AND OTHER FACTORS. The company depends on various components
and materials for the manufacturing of its products. Although the company has
not experienced any difficulty in obtaining components and materials, it is
possible that any of its supplier relationships could be terminated in the
future. Any sustained interruption in the company's receipt of adequate supplies
could have a material adverse effect on it. In addition, while the company has a
process to minimize volatility in component and material pricing, no assurance
can be given that the company will be able to successfully manage price
fluctuations due to market demand, currency risks, or shortages or that future
price fluctuations will not have a material adverse effect on it.
* THE POSSIBILITY THAT ACQUISITIONS, DIVESTITURES AND STRATEGIC ALLIANCES MAY
NOT MEET SALES AND/OR PROFIT EXPECTATIONS. As part of the company's strategy for
growth, the company has made and may continue to make acquisitions, divestitures
and strategic alliances. However, there can be no assurance that these will be
completed or beneficial to the company.
* THE COMPANY IS THE SUBJECT OF VARIOUS LEGAL PROCEEDINGS. For a more detailed
discussion of the legal proceedings involving the company, see the discussion of
"Legal Proceedings" in Part II, Item 1 of this Quarterly Report on Form 10-Q.
17
Minnesota Mining and Manufacturing Company and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
General
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 recorded 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.
While the company currently believes that the ultimate outcome of these
proceedings and claims, individually and in the aggregate, will not have a
material adverse effect on the consolidated financial position, results of
operations, or cash flows of the company, there can be no absolute certainty
that the company may not ultimately incur charges, whether for governmental
proceedings and claims, products liability claims, or other actions, in excess
of presently recorded liabilities.
While the company currently believes that a material adverse impact on its
consolidated financial position, results of operations, or cash flows from any
such future charges is remote, due to the inherent uncertainty of litigation,
there exists the remote possibility that a future adverse ruling could result in
future charges that could have a material adverse impact on the company. The
current estimate of the potential impact on the company's consolidated financial
position for the above legal proceedings could change in the future.
Breast Implant Litigation
The company and certain other companies have been named as defendants in a
number of claims and lawsuits alleging damages for personal injuries of various
types resulting from breast implants formerly manufactured by the company or a
related company. The 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.
18
As of March 31, 2001, the company is currently named as a defendant, often with
multiple co-defendants, in 847 lawsuits and 27 claims in various courts, all
seeking damages for personal injuries from allegedly defective breast implants.
These lawsuits and claims purport to represent 2,228 individual claimants.
3M has confirmed that 35 of the 2,228 claimants have opted out of the Revised
Settlement Program (discussed below) and have 3M implants. Most of the claimants
in these confirmed cases have alleged an unspecified amount of damages above the
jurisdictional limit of the courts in which the cases were filed.
The company believes that most of the remaining 2,228 claimants will be
dismissed either because the claimants did not have 3M implants or the claimants
accepted benefits under the Revised Settlement Program. Most of these claimants
have filed lawsuits that either do not allege a specific amount of damages or
allege an unspecified amount of damages above the jurisdictional limit of the
court. The rest of these claimants allege damages, including both actual and
punitive damages, aggregating approximately $100 million in their lawsuits.
Approximately 150 claimants have filed lawsuits in state and federal courts in
New York alleging damages in excess of $20 million each. 3M expects that
virtually all of these New York cases will be dismissed without payment for the
reasons stated above. The company continues to work to clarify the status of
these lawsuits and claims.
Based on 3M's experience in resolving thousands of these lawsuits, 3M believes
that the amount of damages alleged in complaints is not a reliable or meaningful
measure of the potential liability that 3M may incur in the breast implant
litigation. Investors should place no reliance on the amount of damages alleged
in breast implant lawsuits against 3M.
On December 22, 1995, the United States District Court for the Northern District
of Alabama 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 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 product liability actions.
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 March
31, 2001, the company had paid $302 million into the court-administered fund as
a reserve against costs of claims payable by the company under the Revised
Settlement
19
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 claims under the Revised
Settlement Program.
Under the Revised Settlement Program, additional opt outs are expected to be
minimal since the opt-out deadline has passed for virtually all U.S. class
members. The company's remaining obligations under the Revised Settlement
Program are limited since (i) most payments to current claimants have already
been made, (ii) no additional current claims may be filed without court
approval, and (iii) late registrants are limited by the terms of the Revised
Settlement Program.
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 (from inception of the litigation
through March 31, 2001) is $1.2 billion. After subtracting cumulative payments
of $1.187 billion as of March 31, 2001, for defense and other costs and
settlements with litigants and claimants, the company had remaining liabilities
for the breast implant litigation of $13 million.
The company's insurers initiated a declaratory judgment action in Ramsey County
Minnesota against the company seeking adjudication of certain coverage and
allocation issues. The jury trial phase of this action finished on February 24,
2000. The jury returned a verdict favorable to the company by rejecting all of
the insurers' remaining defenses to coverage for breast implant liabilities and
costs. The court has considered additional remedies requested by the company and
the insurers including eliminating, limiting or extending allocation among the
insurers providing occurrence-based coverage (before 1986), pre- and
post-judgment interest, attorneys' fees and further equitable relief.
The court's rulings in post verdict motions are considered to be generally
favorable to the company. The court awarded the company prejudgment interest on
amounts owing by insurers including reasonable attorney fees. However, the court
has yet to determine the amount of attorneys' fees recoverable by the company.
The court has indicated a formula to be used for this calculation that would
result in the company being reimbursed for less than all of its fees. Exact
amounts cannot yet be determined. The court filed the judgment on April 16, 2001
and the company expects entry of that judgment to occur during the second
quarter of 2001.
As of March 31, 2001, the company had receivables for insurance recoveries of
$502 million, representing settled but yet to be received amounts as well as
amounts contested by the insurance carriers. During the first quarter of 2001,
the company received payments from its occurrence carriers. Various factors
could affect
20
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 recorded as being probable
of recovery from its insurers.
While the company currently believes that the ultimate outcome of these
proceedings and claims, individually and in the aggregate, will not have a
material adverse effect on the consolidated financial position, results of
operations, or cash flows of the company, there can be no absolute certainty
that the company may not ultimately incur charges for breast implant claims in
excess of presently recorded liabilities.
While the company currently believes that a material adverse impact on its
consolidated financial position, results of operations, or cash flows from any
such future charges is remote, due to the inherent uncertainty of litigation,
there exists the remote possibility that a future adverse ruling could result in
future charges that could have a material adverse impact on the company. The
current estimate of the potential impact on the company's consolidated financial
position for breast implant litigation could change in the future.
Environmental Matters
The company's operations are subject to environmental laws and regulations
enforceable by foreign, federal, state, local authorities and private parties in
the United States and abroad, including those pertaining to air emissions,
wastewater discharges, toxic substances, and the handling and disposal of solid
and hazardous wastes. These laws and regulations provide under certain
circumstances for the remediation of contamination, as well as personal injury
and property damage claims. The company has incurred, and will continue to
incur, costs and capital expenditures in complying with these laws and
regulations, defending potential personal injury and property damage claims, and
modifying its business operations in light of its environmental
responsibilities. In its effort to carry out its environmental responsibilities
and comply with environmental laws and regulations, the company has established,
and periodically updates, policies relating to environmental standards of
performance for its operations worldwide.
Under certain environmental laws, including the United States Comprehensive
Environmental Response, Compensation and Liability Act of 1980 and similar state
laws, the company may be jointly and severally liable for the costs of
environmental contamination at current or former facilities and at off-site
locations. The company has identified numerous locations, most of which are in
the United States, at which it may have some liability for remediating
contamination. Amounts expensed for environmental remediation activities were
not material at these locations nor have there
21
been material changes in the recorded liabilities for environmental matters.
Liabilities for estimated costs of environmental remediation are, depending on
the site, based primarily upon internal or third-party environmental studies,
and estimates as to the number, participation level and financial viability of
any other potentially responsible parties, the extent of the contamination and
the nature of required remedial actions. Recorded liabilities are adjusted as
further information develops or circumstances change. The amounts recorded in
the company's consolidated financial statements for environmental liabilities
are the gross amount of such liabilities, without deductions for insurance or
third party indemnity claims. The company expects that the amounts recorded will
be paid out over the periods of remediation for the applicable sites, currently
ranging from approximately 5 to 30 years.
It is often difficult to estimate the cost of environmental compliance and
remediation and potential claims given the uncertainties regarding the
interpretation and enforcement of applicable environmental laws and regulations,
the extent of environmental contamination and the existence of alternate cleanup
methods. The company records an environmental liability when it is probable that
the company has incurred a liability and the amount of the liability can be
reasonably estimated. Where no amount within a range of estimates is more
likely, the minimum is recorded. Otherwise, the most likely cost to be incurred
is recorded.
The company's current assessment of the probable liabilities and associated
expenses related to environmental matters is based on the facts and
circumstances known at this time. New developments may occur that could affect
the company's assessment. These developments include, but are not limited to,
(i) changes in the information available regarding the environmental impact of
the company's operations and products; (ii) changes in environmental regulations
or enforcement policies; (iii) new and evolving analytical and remediation
techniques; (iv) success in allocating liability to other potentially
responsible parties; and (v) financial viability of other potentially
responsible parties and third-party indemnitors.
While the company currently believes that the ultimate outcome of these
environmental matters, individually and in the aggregate, will not have a
material adverse effect on the consolidated financial position, results of
operations, or cash flows of the company, there can be no absolute certainty
that the company may not ultimately incur charges for capital expenditures,
litigation and other costs in excess of presently established liabilities.
While the company currently believes that a material adverse impact on its
consolidated financial position, results of operations, or cash flows from any
such future charges is remote, due to the inherent uncertainty of environmental
matters or were an unfavorable development to occur (discussed above), there
exists the remote
22
possibility that a future adverse ruling or development could result in future
charges that could have a material adverse impact on the company. The current
estimate of the potential impact on the company's consolidated financial
position for the above environmental matters could change in the future.
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 25.
(15) A letter from the company's independent auditors regarding
unaudited interim consolidated financial statements. Page 26.
(b) Reports on Form 8-K:
3M filed a Form 8-K on April 23, 2001, and filed four Form 8-K's for the quarter
ended March 31, 2001.
The Form 8-K dated April 23, 2001, reported 3M's unaudited consolidated
financial results for the first quarter of 2001.
The Form 8-K dated February 23, 2001, provided the opinion and consent of
general counsel in connection with the offering of certain debt securities due
in the year 2040.
The Form 8-K dated January 24, 2001, contained unaudited consolidated financial
information for the quarters and years 2000 and 1999. This filing did not
contain certain information included in the company's 2000 Annual Report on Form
10-K.
The Form 8-K dated January 17, 2001, reported 3M's unaudited consolidated
financial results for the fourth quarter of 2000.
The Form 8-K dated January 11, 2001, announced completion of the MicroTouch
Systems, Inc. tender offer.
None of the other item requirements of Part II of Form 10-Q are applicable to
the company for the quarter ended March 31, 2001.
23
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: April 30, 2001
------------------
/s/ Robert J. Burgstahler
Robert J. Burgstahler, Vice President and
Chief Financial Officer
(Mr. Burgstahler is the Principal Financial
and Accounting Officer and has been duly
authorized to sign on behalf of the
registrant.)
24