Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
Common Stock, Par Value $.50 Per Share New York Stock Exchange
Pacific Exchange
Chicago Stock Exchange
Note: The common stock of the registrant is also traded on the Swiss
stock exchange.
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X . No .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by
nonaffiliates of the registrant, based on the closing price of $93.63 per
share as reported on the New York Stock Exchange-Composite Index on January
31, 2000, was $37.3 billion.
Shares of common stock outstanding at January 31, 2000: 398,589,389.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by
reference in Parts III and IV of this Form 10-K: (1) Proxy Statement for
registrant's 2000 annual meeting, (2) Form 10-Q for period ended June 30,
1987; Form 8-K dated November 20, 1996; Form 8-K dated June 30, 1997, (3)
Registration Nos. 33-48089 and 333-30689.
This document contains 62 pages.
The exhibit index is set forth on page 57.
2
MINNESOTA MINING AND MANUFACTURING COMPANY
FORM 10-K
For the Year Ended December 31, 1999
PART I
Item 1. Business.
Minnesota Mining and Manufacturing Company was incorporated in 1929
under the laws of the State of Delaware to continue operations, begun
in 1902, of a Minnesota corporation of the same name. As used herein,
the term "3M" or "company" includes Minnesota Mining and Manufacturing
Company and subsidiaries unless the context otherwise indicates.
General
3M is an integrated enterprise characterized by substantial
intercompany cooperation in research, manufacturing and marketing of
products. 3M's business has developed from its research and technology
in coating and bonding for coated abrasives, the company's original
product. Coating and bonding is the process of applying one material
to another, such as abrasive granules to paper or cloth (coated
abrasives), adhesives to a backing (pressure-sensitive tapes), ceramic
coating to granular mineral (roofing granules), glass beads to plastic
backing (reflective sheeting), and low-tack adhesives to paper
(repositionable notes).
3M is among the leading manufacturers of products for many of the
markets it serves. In all cases, 3M products are subject to direct or
indirect competition. Most 3M products involve expertise in product
development, manufacturing and marketing, and are subject to
competition from products manufactured and sold by other technically
oriented companies.
At December 31, 1999, the company employed 70,549 people.
Business Segments
Financial information and other disclosures relating to 3M's six
business segments and operations in various geographic areas are
provided in the Notes to Consolidated Financial Statements. 3M's six
business segments bring together common or related 3M technologies,
enhancing the development of innovative products and services and
providing for efficient sharing of business resources. These segments
have worldwide responsibility for virtually all 3M product lines.
Certain small businesses and staff-sponsored products, as well as
various corporate assets and unallocated corporate expenses, are not
assigned to the segments.
Industrial Markets: Industrial products include a wide variety of
coated and nonwoven abrasives, adhesives, pressure-sensitive tapes, and
specialty products. Industry-specialized organizations include
distribution and key account management, converter channels, automotive
aftermarkets, aerospace, marine and recreational vehicles.
Major product lines include vinyl, polyester, foil and specialty
industrial tapes and adhesives; Scotch brand masking, filament and
packaging tapes; packaging equipment; 3M brand VHB brand bonding tapes;
conductive, low surface energy, hot melt,
3
spray and structural adhesives; reclosable fasteners; label materials for
durable goods; coated, nonwoven and microstructured surface finishing and
grinding abrasives; and products for maintaining and repairing vehicles,
boats, airplanes and other vehicles.
Transportation, Graphics and Safety Markets: This segment provides
reflective sheeting, high-performance graphics, respirators, automotive
components, security products and optical films.
In transportation, 3M provides reflective sheetings used on highway
signs, vehicle license plates, construction workzone devices, trucks
and other vehicles. Major commercial graphic products include
equipment, films, inks and related products used to produce graphics
for vehicles and signs. The company also sells maintenance-free and
reusable respirators. Major automotive products include body side-
molding and trim; functional and decorative graphics; corrosion-
resistant and abrasion-resistant films; tapes for attaching nameplates,
trim and moldings; and fasteners for attaching interior panels and
carpeting. Safety and security products include reflective materials
that are widely used on apparel, footwear and accessories, enhancing
visibility in low-light situations. Optical products include brightness
enhancement films for electronic displays. Other products include spill-
control sorbents, Thinsulate brand and Lite Loft brand Insulations,
traffic control devices, electronic surveillance products, and films
that protect against counterfeiting. On August 15, 1997, the company
sold National Advertising Company, an outdoor and mall advertising
subsidiary that was part of this segment.
Health Care Markets: Major product categories include skin health,
medical/surgical supplies, infection prevention, microbiology, health
care information systems, pharmaceuticals, drug delivery systems,
dental products and closures for disposable diapers.
In skin health, 3M is a supplier of medical tapes, dressings and wound
closures. In infection prevention, 3M markets a variety of surgical
drapes, masks and preps, as well as sterilization assurance equipment.
3M also provides microbiology products, which make it faster and easier
for food processors to test for microbiological quality of food. In
health information systems, 3M markets computer software for hospital
coding and data classification, as well as related consulting services.
The health care segment also provides medical supplies and some
devices, including orthopedic casting materials, electrodes and
stethoscopes.
This segment also serves the pharmaceutical and dental markets, as well
as manufacturers of disposable diapers. Among ethical pharmaceuticals
are immune response modifiers, and respiratory and women's health
products. Other products include drug-delivery systems, such as
metered-dose inhalers, transdermal skin patches and related components.
Dental products include restoratives, adhesives, finishing and
polishing products, crowns, impression material, preventive sealants,
professional tooth whitening, prophylaxis and orthodontic appliances.
Other products include tape closures for disposable diapers, and
reclosable fastening systems and other diaper components that help
diapers fit better. In the second quarter of 1999, the company sold
the assets of its cardiovascular systems business.
4
Consumer and Office Markets: Major consumer and office products
include Scotch brand tapes; Post-it brand Note products, such as flags,
memo pads, labels, pop-up notes and dispensers; home care products,
including Scotch-Brite brand Scouring, Sponge and High Performance
Products, O-Cel-O brand Sponges and Scotchgard brand Fabric Protectors;
energy control products; nonwoven abrasive materials for floor maintenance
and commercial cleaning; floor matting; and home improvement products,
including surface-preparation and wood-finishing materials, and
Filtrete brand Filters for furnaces and air conditioners. Visual
communication products serve the world's office and education markets
with overhead projectors and transparency films, plus equipment and
materials for electronic and multimedia presentations.
Electro and Communications Markets: This segment serves the
electronic, telecommunications and electrical markets. Major electronic
and electrical products include packaging and interconnection devices;
insulating materials, including pressure-sensitive tapes and resins;
and related items. These products are used extensively by manufacturers
of electronic and electrical equipment, as well as in the construction
and maintenance segments of the electric utility, telephone and other
industries. 3M brand Microflex Circuits utilize electronic packaging
and interconnection technology, providing more connections in less space,
and are used in inkjet print cartridges, cell phones and other
electronic devices. Telecommunications products serve the world's
telephone companies with a wide array of products for fiber-optic and
copper-based telephone systems. These include many innovative
connecting, closure and splicing systems; maintenance products; and
test equipment.
Specialty Material Markets: Major specialty materials include
protective materials for furniture, fabrics and paper products;
firefighting agents; fluoroelastomers for seals, tubes and gaskets in
engines; engineering fluids; and high-performance fluids used in the
manufacture of computer chips, and for electronic cooling and
lubricating of computer hard disk drives. Other products include
natural and color-coated mineral granules for asphalt shingles. In
December, 1999, 3M finalized the acquisition of the outstanding
minority interest in Dyneon LLC.
Discontinued Operations
In November 1995, the Board of Directors approved a plan to launch the
company's data storage and imaging businesses as an independent,
publicly owned company and to discontinue 3M's audio and video
business. In June 1996, the Board of Directors approved the tax-free
distribution by 3M of the common stock of Imation Corp. (Imation) as a
special dividend of one share of Imation common stock for every 10
shares of outstanding 3M common stock held of record as of June 28,
1996. The company recorded the special dividend of Imation common
stock by reducing retained earnings by $1.008 billion, which
represented the carrying value of the net assets underlying the common
stock distributed.
Distribution
3M products are sold directly to users and through numerous
wholesalers, retailers, jobbers, distributors and dealers in a wide
variety of trades in many countries around the world. Management
believes that the confidence of wholesalers, retailers, jobbers,
distributors and dealers in 3M and its
5
products, developed through long association with skilled marketing
and sales representatives, has contributed significantly to 3M's
position in the marketplace and to its growth. 3M has 230 sales
offices and distribution centers worldwide, including nine major
branch offices located in principal cities throughout the United States.
3M operates 26 sales offices and distribution centers in the United States.
Internationally, 3M has 204 sales offices and distribution centers.
Research, Patents and Raw Materials
Research and product development constitute an important part of 3M's
activities. Products resulting from research and development have been
a major driver of 3M's growth. Research, development and related
expenses totaled $1.038 billion, $1.016 billion and $1.002 billion in
1999, 1998 and 1997, respectively. Research and development, covering
basic scientific research and the application of scientific advances to
the development of new and improved products and their uses, totaled
$688 million, $648 million and $634 million in 1999, 1998 and 1997,
respectively. Related expenses primarily include technical support
provided by the laboratory for existing products.
Corporate research laboratories support research efforts of division
and market laboratories. These corporate laboratories also engage in
research not directly related to existing 3M product lines. Most major
operating divisions have their own laboratories to improve existing
products and develop new products. Research staff groups provide
specialized services in instrumentation, engineering and process
development. 3M also maintains an organization for technological
development not sponsored by other units of the company.
3M is the owner of many domestic and foreign patents derived primarily
from its research activities. 3M's business as a whole is not
materially dependent upon any one patent, license or trade secret, or
upon any group of related patents, licenses or trade secrets.
The company experienced no significant or unusual problems in the
purchase of raw materials during 1999. It is impossible to predict
future shortages of raw materials or the impact such shortages would
have.
Executive Officers
Following is a list of the executive officers of 3M, their ages,
present positions, the years elected to their present positions and
other positions held within 3M during the past five years. All of
these officers have been employed full time by 3M or a subsidiary of 3M
for more than five years. All 3M officers are elected by the Board of
Directors at its annual meeting, with vacancies and new positions
filled at interim meetings. No family relationships exist among any of
the executive officers named, nor is there any arrangement or
understanding pursuant to which any person was selected as an officer.
6
Executive Officers (continued)
Year Elected
to Present
Name Age Present Position Position Other Positions Held During 1995-2000
Livio D. DeSimone 63 Chairman of the Board 1991
and Chief Executive Officer
Harry C. Andrews 56 Executive Vice President, 1999 Vice President, Corporate Enterprise
Electro and Communications Development, 1996-1999
Markets Managing Director, Southern Europe
Region, 1996
Managing Director, 3M Italy,
1993-1996
Ronald O. Baukol 62 Executive Vice President, 1995 Vice President, Asia Pacific,
International Operations Canada and Latin America, 1994-1995
John W. Benson 55 Executive Vice President, 1998 Group Vice President, Industrial
Health Care Markets Markets Group, 1996-1997
Group Vice President, Abrasive,
Chemical and Film Products Group, 1995
Division Vice President, Abrasive
Systems Division, 1995
Managing Director, 3M United Kingdom PLC,
and Managing Director, 3M Ireland Ltd.,
1992-1995
Robert J. Burgstahler 55 Vice President, Finance 2000 President and General Manager,
and Administrative 3M Canada, 1998-2000
Services Staff Vice President, Taxes, 1995-1998
Executive Director, Taxes, 1994-1995
William E. Coyne 63 Senior Vice President, 1996 Vice President, Research and
Research and Development Development, 1994-1995
M. Kay Grenz 53 Vice President, 1998 Staff Vice President, Human Resources
Human Resources Consulting and Resource Services,
1996-1998
Staff Vice President, Human Resources
Corporate Services, 1992-1996
Charles E. Kiester 63 Senior Vice President, 1999 Senior Vice President, Engineering,
Engineering, Manufacturing Quality and Manufacturing Services,
and Logistics 1993-1999
Moe S. Nozari 57 Executive Vice President, 1999 Group Vice President, Consumer and
Consumer and Office Markets Office Markets Group, 1996-1999
Division Vice President, Consumer
Markets, 1993-1996
David W. Powell 58 Vice President, Marketing 1999 Division Vice President, Stationery
and Office Supplies Division,
1996-1999
Division Vice President, Commerical
Office Supply Division, 1996
Marketing Director, 3M France, 1995-1996
Managing Director and CEO, 3M Australia
Pty., Ltd. And Managing Director,
Australia/New Zealand Region, 1993-1995
7
Executive Officers (continued)
Year Elected
to Present
Name Age Present Position Position Other Positions Held During 1995-2000
Charles Reich 57 Executive Vice President, 1999 Group Vice President, Specialty Material
Specialty Material Markets Markets Group, 1999
Group Vice President, Chemical Markets
Group, 1998
Division Vice President, Occupational
Health and Environmental Safety
Division, 1997-1998
Division Vice President, Dental Products
Division, 1990-1997
Raymond C. Richelsen 58 Executive Vice President, 1999 Executive Vice President, Transportation,
Transportation, Graphics and Safety and Specialty Material Markets,
Safety Markets 1999
Executive Vice President, Transportation,
Safety and Chemical Markets, 1998
Group Vice President, Traffic and
Personal Safety Markets Group, 1997
Vice President and General Manager,
National Advertising Company and
Media Networks, Inc., 1996
Group Vice President, Audio and
Video Products Group, 1995-1996
Group Vice President, Memory
Technologies Group, 1991-1995
John J. Ursu 60 Senior Vice President, 1997 Vice President, Legal Affairs and
Legal Affairs and General Counsel, 1993-1996
General Counsel
Harold J. Wiens 53 Executive Vice President, 1999 Executive Vice President, Industrial
Industrial Markets and Electro Markets, 1999
Executive Vice President, Industrial
and Consumer Markets, 1998-1999
Executive Vice President, Sumitomo
3M Limited, 1995-1997
Division Vice President, Data Storage
Tape Technology Division, 1994-1995
8
Item 2. Properties.
3M's general offices, corporate research laboratories, some division
laboratories and certain manufacturing facilities are located in St.
Paul, Minnesota. In the United States, 3M has 26 sales offices and
distribution centers in 19 states and operates 58 manufacturing
facilities in 24 states. Internationally, 3M has 204 sales offices and
distribution centers. The company operates 78 manufacturing and
converting facilities in 39 countries outside the United States.
3M owns substantially all of its physical properties. 3M's physical
facilities are highly suitable for the purposes for which they were
designed.
Item 3. 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 antitrust laws. On October 8, 1999,
the jury awarded LePage's damages of $22.8 million, which will be
automatically trebled 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
recognition of this 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, annual results of
operations, or cash flows of the company. (NOTE: The preceding
sentence applies to all legal proceedings involving the company except
breast implant litigation, which is discussed separately in the next
section).
9
Breast Implant Litigation
As of December 31, 1999, the company had been named as a defendant,
often with multiple co-defendants, in 3,671 lawsuits and 56 claims in
various courts, all seeking damages for personal injuries from
allegedly defective breast implants. These claims and lawsuits purport
to represent 12,210 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 (defined later). The company has
confirmed that approximately 540 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 the 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
10
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 mandatory
class action status has been granted.
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.
11
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 which expired 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 December 31, 1999, the company has paid $289 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.
12
In the first quarter of 1994, the company took a pre-tax charge of $35
million ($22 million after tax) in recognition of its best estimate at
the time 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 $1.114
billion as of December 31, 1999, for defense and other costs and
settlements with litigants and claimants, the company had accrued
liabilities of $86 million.
The company has substantial primary and excess products liability
occurrence insurance coverage and claims-made products liability
insurance coverage, which it believes provides 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 having 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 continue through February 2000, at which time a verdict
is expected.
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)
13
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 will ultimately 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 December 31, 1999, the company had accrued receivables for
insurance recoveries of $622 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 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 earlier) 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
14
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, annual results of operations, or
cash flows 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 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.
15
Item 4. Submission of Matters to a Vote of Security Holders.
None in the quarter ended December 31, 1999.
Part II
Item 5. Market Price of 3M's Common Stock and Related Security Holder
Matters.
At January 31, 2000, there were 132,877 shareholders of record. 3M's
stock is listed on the New York, Pacific, Chicago and Swiss stock
exchanges. Stock price comparisons are provided in the Quarterly Data
section in the Notes to Consolidated Financial Statements.
Item 6. Selected Financial Data.
(Dollars in millions, except per-share amounts)
Years ended December 31: 1999 1998 1997 1996 1995
Net sales........................ $15,659 $15,021 $15,070 $14,236 $13,460
Income from continuing operations...1,763* 1,213* 2,121* 1,516 1,306**
Per share of common stock:
Continuing operations - basic........4.39* 3.01* 5.14* 3.63 3.11**
Continuing operations - diluted......4.34* 2.97* 5.06* 3.59 3.09**
Cash dividends declared and paid..$ 2.24 $ 2.20 $ 2.12 $ 1.92 $ 1.88
At December 31:
Total assets ...................$13,896 $14,153 $13,238 $13,364 $14,183**
Long-term debt (excluding portion due
within one year)..................1,480 1,614 1,015 851 1,203
*As discussed in the Notes to Consolidated Financial Statements, 1999
includes a net gain of $100 million ($52 million after tax), or 13 cents per
diluted share, relating to gains on divestitures, litigation expense,
an investment valuation adjustment, and a change in estimate that reduced
the 1998 restructuring charge. 1998 includes a restructuring charge of $493
million ($313 million after tax), or 77 cents per diluted share. 1997
includes a gain of $803 million ($495 million after tax), or $1.18 per
diluted share, on the sale of National Advertising Company.
**1995 includes a restructuring charge of $79 million ($52 million
after tax), or 12 cents per diluted share. 1995 total assets include net
assets of discontinued operations.
16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Operating Results
Sales: Sales in 1999 totaled $15.659 billion, compared with $15.021
billion in 1998 and $15.070 billion in 1997. In 1999, volume grew 5
percent, with the stronger U.S. dollar reducing sales by about 1
percent. In 1998, local currency growth was offset by the stronger
U.S. dollar.
In the United States, sales in 1999 totaled $7.478 billion, up 3
percent (up about 4 percent adjusted for acquisitions and
divestitures). In 1998, sales rose about 2 percent adjusted for the
1997 sale of the outdoor advertising business.
Internationally, sales totaled $8.181 billion, up 5 percent from 1998.
International volume increased 7 percent and selling prices were up 1
percent. The stronger U.S. dollar reduced international sales by 3
percent. In 1998, flat sales reflected negative currency effects and a
difficult economic backdrop in Japan and many developing countries.
Components of Sales Change
1999 1998
U.S. Intl. W.W. U.S. Intl. W.W.
Volume 4% 7% 5% 0% 4% 2%
Price (1) 1 0 0 2 1
Translation - (3) (1) - (6) (3)
Total 3% 5% 4% 0% 0% 0%
Non-recurring items: Non-recurring items in 1999 include a net gain of
$147 million ($81 million after tax) related to gains on the
divestitures of Eastern Heights Bank and certain health care
businesses, net of an investment valuation adjustment. 1999 also
includes a charge of $73 million ($46 million after tax) relating to an
adverse jury verdict and legal fees associated with a lawsuit filed by
LePage's, Inc. 3M believes the jury's decision ultimately will be
overturned, but that it is prudent to recognize a liability at this
time. This combined pre-tax gain of $74 million is recorded as a
reduction of selling, general and administrative expenses. In the third
quarter of 1999, the company recorded a change in estimate that reduced
the 1998 restructuring charge by $26 million ($17 million after tax).
In 1998, 3M recorded a $493 million ($313 million after tax)
restructuring charge. The inventory portion of the restructuring
charge was recorded in cost of goods sold. Details are discussed in the
Notes to Consolidated Financial Statements. In 1998, the company also
refinanced debt relating to its Employee Stock Ownership Plan,
replacing the debt with a new bond that carries a significantly lower
interest rate. This resulted in a $38 million after-tax charge, or 9
cents per diluted share. This is reported as an extraordinary loss from
early extinguishment of debt.
In 1997, the company realized a gain of $803 million ($495 million
after tax) on the sale of National Advertising Company. This is
discussed in the Notes to Consolidated Financial Statements.
17
The following table shows amounts for non-recurring items in 1999, 1998
and 1997, and totals excluding these items.
Supplemental Consolidated Statement of Income Information
Years ended December 31
Total (Excluding
(Millions, except Non-recurring Items Non-recurring Items)
per-share amounts) 1999 1998 1997 1999 1998 1997
Operating
income (loss) $100 $(493) $ -- $2,856 $2,532 $2,675
Other (income) expense -- -- (803) 76 87 38
Income (loss) before
income taxes, minority
interest and
extraordinary loss 100 (493) 803 2,780 2,445 2,637
Provision (benefit)
for income taxes 48 (180) 308 984 865 933
Effective tax rate 47.8% 36.5% 38.4% 35.4% 35.4% 35.4%
Minority interest -- -- -- 85 54 78
Extraordinary loss,
net of tax -- (38) -- -- -- --
Net income (loss) $ 52 $(351) $ 495 $1,711 $1,526 $1,626
Per share - diluted .13 (.86) 1.18 4.21 3.74 3.88
The following discussion excludes the impact of non-recurring items in
all years, except where indicated.
Costs: Cost of goods sold was 56.6 percent of sales, down 1.3
percentage points from 1998. In 1999, gross margins benefited from
solid volume gains and the company's restructuring actions. In both
1999 and 1998, gross margins benefited from slightly lower raw material
costs, but were negatively affected by the stronger U.S. dollar. Cost
of goods sold includes manufacturing; research, development and related
expenses; and engineering expenses.
Selling, general and administrative expenses were 25.2 percent of sales
in both 1999 and 1998, and 25.3 percent in 1997. In 1999, this
spending benefited from accelerated sales growth and productivity gains
related to restructuring actions, offset by increased investments in
advertising and other areas. In 1998, tight expense controls had a
positive effect on SG&A spending.
(Percent of sales) 1999 1998 1997
Cost of goods sold 56.6 57.9 57.0
Selling, general and administrative expenses 25.2 25.2 25.3
Operating income 18.2 16.9 17.7
Operating income: Operating income totaled $2.856 billion, up 12.9
percent from 1998. Operating income was 18.2 percent of sales, up from
16.9 percent in 1998 and 17.7 percent in 1997. In 1999, good unit
volume growth and solid productivity gains helped results. During 1998,
economic contractions in many international markets, softness in a few
key U.S. markets and negative currency
18
effects impacted operating profit margins. The company estimates
that currency effects reduced operating income slightly in 1999 and by
about $235 million in 1998.
In the United States, operating income increased 1 percent and profit
margins were down four-tenths of a percentage point. In 1998,
operating income decreased 8 percent and profit margins were down 1.4
percentage points.
Internationally, operating income increased 23 percent and profit
margins increased by 3 percentage points. In 1998, operating income
decreased about 3 percent and profit margins declined by four-tenths of
a percentage point. Currency effects in 1998 reduced international
profits by 17 percent and profit margins by 1.8 percentage points.
Other income and expense: Interest expense was $109 million, compared
with $139 million in 1998 and $94 million in 1997. The 1999 decrease
reflected lower debt balances due to increased operating cash flow and
reduced capital expenditures. The 1998 increase reflected the
company's strategy to lower its cost of capital by moderately
increasing financial leverage.
Investment and other income was $33 million, compared with $42 million
in 1998 and $56 million in 1997, with the decline due to lower interest
income.
Provision for income taxes: The worldwide effective income tax rate
was 35.4 percent in 1999, 1998 and 1997. Including non-recurring items,
3M's effective tax rate was 35.8 percent in 1999, compared with 35.1
percent in 1998 and 36.1 percent in 1997.
Minority interest: Minority interest was $85 million, compared with
$54 million in 1998 and $78 million in 1997. Minority interest
represents the elimination of the non-3M ownership interests, primarily
in Sumitomo 3M Limited and Dyneon LLC. These companies' results are
fully consolidated in 3M's financial statements, and then partially
eliminated on the minority interest line to reflect 3M's net position.
The 1999 increase in minority interest was driven by higher profits in
these companies, while the 1998 decrease was driven by lower profits.
In December 1999, 3M finalized the acquisition of the outstanding
minority interest in Dyneon LLC. This acquisition is discussed in the
Notes to Consolidated Financial Statements.
Net income: Net income totaled $1.711 billion, or $4.21 per diluted
share, compared with $1.526 billion, or $3.74 per diluted share, in
1998, and $1.626 billion, or $3.88 per diluted share, in 1997. Per-
share income was up 12.6 percent in 1999 after decreasing 3.6 percent
in 1998.
In 1999, 1998 and 1997, changes in the value of the U.S. dollar reduced
net income by an estimated $23 million, $141 million and $112 million,
respectively. On a per-share basis, currency effects reduced net
income by 6 cents per share, 35 cents per share and 27 cents per share
for 1999, 1998 and 1997, respectively. These estimates include the
effect of translating profits from local currencies into U.S. dollars;
the impact of currency fluctuations on the value of goods transferred
between 3M operations in the United States and abroad; and transaction
gains and losses in countries not considered to be highly inflationary.
19
Other indices: Economic profit totaled $855 million, up from $604
million in 1998 and $720 million in 1997. Return on invested capital
was 18.6 percent in 1999, 15.9 percent in 1998 and 18.0 percent in
1997. Both economic profit and return on invested capital exclude the
impact of non-recurring items. Economic profit equals after-tax
operating income less a charge for operating capital employed in 3M's
businesses. Return on invested capital is after-tax operating income
divided by average operating capital.
At December 31, 1999, employment totaled 70,549 people, a decrease of
about 3,000 from year-end 1998, and down more than 5,000 from mid-1998.
The decline was due both to the company's restructuring actions and
attrition. Sales per employee in local currencies increased about 10
percent in 1999, following a 3 percent increase in 1998. From 1994
through 1997, 3M's productivity increased an average of about 9 percent
a year.
Performance by Business Segment
Disclosures relating to 3M's six business segments are provided in this
Form 10-K, Item 1, Business Segments. Financial information and other
disclosures, including discussion about non-recurring items, are
provided in the Notes to Consolidated Financial Statements.
Industrial Markets (22 percent of consolidated sales):
Sales totaled $3.394 billion, up 1.0 percent from 1998. Operating
income increased 9.3 percent to $613 million. Operating income was 18.1
percent of sales, compared with 16.7 percent in 1998. Results were
driven by improved manufacturing efficiency and other cost
improvements.
This market continued to broaden its product offerings in 1999 with the
introduction of advanced adhesives, tapes and abrasives for
electronics, transportation and other industries. Sales coverage was
expanded both in the United States and internationally, including
China and Eastern Europe. E-commerce capabilities also were expanded,
including a new Internet site for professional woodworkers that provides
information about a range of 3M products and access to an online store.
This market also formed joint ventures to further expand its line of
packaging systems while also enhancing competitiveness. New business
organizations were established to maximize opportunities for
superabrasive and microfinishing products, and for 3M products serving
the aerospace/aircraft maintenance and appliance markets.
This market expects solid profit growth again in 2000, driven by new
products, key-account efforts, entry into fast-growing markets, and
continued operational efficiencies. Important new products such as
Scotch brand Automotive Refinish Masking Tape 233+ and 3M brand
Perfect-It brand III Paint Finishing System should bolster its position
in the automotive aftermarket. 3M Trizact brand Abrasives, used for fine
finishing of metals, are entering high-tech markets for semiconductor
wafer planarization and glass memory disk polishing. New films and
adhesives improve the performance and reliability of electronic
products. In the transportation and construction industries, proprietary
3M adhesives and tapes simplify the assembly of plastics and metals by
eliminating rivets, screws and bolts.
20
Transportation, Graphics and Safety Markets (21 percent of consolidated
sales):
Sales totaled $3.228 billion, up 6.9 percent from 1998. Operating
income increased 27.7 percent to $679 million. Operating income was
21.0 percent of sales, compared with 17.6 percent in 1998. Results in
1999 were driven by solid international sales growth, important new
products and aggressive cost control initiatives.
In 1999, this market experienced sharp increases in demand for optical
films that make displays brighter for computers and other electronic
devices. Significant growth was also achieved in products that serve
the digital printing industry, automotive products, and in products
that make traffic signs more visible, such as 3M brand Scotchlite brand
Diamond Grade brand Fluorescent Sheeting. This market forged an e-business
initiative with VerticalNet, Inc., a premier electronic publisher and
creator of market-oriented web communities, which will provide industrial
health and safety customers an online marketplace for 3M products
and information.
In 2000, this market expects to sustain solid growth through innovative
new products, improving international economies and continued
operational efficiencies. In the United States, sales of reflective
sheeting should continue to accelerate due to a new line of fluorescent
materials and increased government expenditures to repair and upgrade
America's roadways. Internationally, where this market derives about 60
percent of its sales, improving economic conditions should aid growth,
especially in safety and graphics. This market also expects another
strong year in brightness enhancement films.
Health Care Markets (20 percent of consolidated sales):
Sales totaled $3.118 billion, up 1.0 percent from 1998 (up more than 4
percent adjusted for divestitures). In 1999, operating income included
gains of $62 million related to divestitures of certain businesses.
Excluding these gains, operating income increased 9.2 percent to $623
million, and was 20.0 percent of sales, compared with 18.5 percent in
1998. Results in 1999 were helped by portfolio adjustments in medical
businesses to concentrate on core businesses and growth opportunities.
In 1999, this market introduced new products on a global basis,
providing entry into new segments of skin health, infection prevention,
dental and pharmaceutical markets. Aldara brand (imiquimod) cream, the
first in a new family of 3M immune response modifier compounds, was
launched in many international countries with results that
exceeded expectations. Health Information Systems' position was
strengthened in the fast-growing information technology market through
new products and customers, international growth and new consulting
services.
In 2000, this market will focus on growing its core businesses, while
maintaining close attention to costs. New products will remain an
important source of growth, particularly Aldara brand (imiquimod) cream;
gauze, tapes and bandages for the consumer market; and oil-absorbing
microporous cosmetic sheets for face oil removal. 3M's dental business
should continue to grow through new products and entry into new
segments, as well as through strengthened
21
e-commerce focus. This market anticipates excellent gains in health
information systems and is significantly accelerating investments to
move new indications for its immune response modifier compounds through
clinical studies, as well as to step up research efforts in
bioanalytics.
Consumer and Office Markets (17 percent of consolidated sales):
Sales totaled $2.688 billion, up 2.9 percent from 1998. Operating
income increased 2.6 percent to $408 million. Operating income was 15.2
percent of sales in both 1999 and 1998.
This market continued to bring new-to-the-world products into the
marketplace. For example, the new Scotch-Brite brand High Performance
Cloth uses unique microfibers to wipe up dust, oils and water all at the
same time. This market also extended well-known brands with products
such as new Post-it brand Pop-up Notes and dispensers, translucent Post-it
brand Note organizers, Scotch brand Pop-up Magic brand Tape for the office
market, and O-Cel-O brand Sponges in fun designs and vibrant colors.
This market anticipates solid growth in 2000, led by innovative new
products, strong alliances with customers, and increased advertising
and merchandising efforts. The Scotch-Brite brand High Performance Cloth
is expected to provide strong sales gains in Europe and the United States,
with rollouts planned in Asia and Latin America. New varieties of Post-
it brand Flags and Scotch brand Pop-up Tape also are expected to drive
global growth. This segment continues to help customers with state-of-the-art
co-managed inventory and e-commerce capabilities. Internationally, our
new manufacturing facility in Shanghai, China, will supply Scotch-Brite
brand Sponges and Scouring Products and Nomad brand Floor Matting
throughout Asia.
Electro and Communications Markets (13 percent of consolidated sales):
Sales totaled $2.014 billion, up 15.7 percent from 1998 (up about 12
percent after adjusting for acquisitions). Operating income increased
54.3 percent to $406 million. Operating income was 20.1 percent of
sales, compared with 15.1 percent in 1998. Results were strong both in
the United States and internationally.
This market experienced continued robust demand for 3M brand Microflex
Circuits in inkjet print cartridges. In telecommunications, this market
strengthened its position in the outside-plant segment through
successful integration of the PSI Telecom acquisition, and it continued
to penetrate the on-premise market segment of data communications with
the 3M brand Volition brand Fiber Optic Cabling System. Other
innovative new products include high-performance sockets and test
contactors, Super 33+ tape, electrical wire connectors, and corrosion
protection materials.
In 2000, this segment expects to grow unit volume through serving
several large and fast-growing markets, although price decreases in
this market are expected to limit operating income growth. In
electronics, sales should ramp up quickly for new microflex circuit
applications in hard disk drive assemblies and integrated circuit
packaging. This market also is introducing advanced materials that
shield electronic devices from electomagnetic interference. In
telecommunications, 3M is capitalizing on increased demand for
established 3M
22
telecom products as telephone service providers refurbish their
copper-based systems to be more competitive with fiber optics and cable.
New products include new fiber-based products, such as parallel optical
interconnects; specialty optical fibers; and microscopic 3M Bragg
Gratings, which allow more information to be transmitted over each
fiber. For infrastructure development, new aluminum metal matrix
composites increase electrical power line efficiency and a
leading-edge additive material improves concrete performance on roads,
bridges and other structures.
Specialty Material Markets (7 percent of consolidated sales):
Sales totaled $1.166 billion, up 5.4 percent from 1998. Operating
income decreased 3.3 percent to $188 million. Operating income was 16.1
percent of sales, compared with 17.6 percent in 1998. Results in 1999
were impacted by the acquisition of Celanese's minority interest in the
Dyneon LLC joint venture and the resulting acquisition-related costs.
Dyneon LLC manufactures and markets fluoropolymers for transportation,
electronics and other high-growth industries.
This market experienced excellent sales growth in products for the food
packaging industry, driven by new applications for oil and grease
barriers in convenience food packaging, as well as market share gains
in pet food packaging. This market also experienced strong growth in
roofing granules, due to expansion of its customer base and strong re-
roofing and new construction markets. The economic recovery in Asia
helped the electronics and semiconductor manufacturing markets.
This market anticipates solid growth in 2000, driven by new products,
expanded applications for existing products and strong alliances with
customers. Among important new innovations are high-purity Dyneon
brand Fluoropolymers for wire and cable, aerospace and semiconductor
processing applications, and 3M brand Specialty Gases, which help
semiconductor manufacturers reduce costs, increase efficiency and lower
emissions. In Japan and other Asian markets, 3M brand Novec Engineered
Fluids should produce strong sales gains as they replace ozone-
depleting chlorofluorocarbons and expand into new applications for
electronics manufacturing. In Europe and Latin America, specialty
additive products for the oil exploration and mining markets should
help make oil extraction easier and more efficient. New and improved
Scotchgard brand Protectors for home furnishing, flooring and many
other markets are also being introduced.
Performance by Geographic Area
Financial information relating to 3M operations in various geographic
areas, including discussion of non-recurring items, is provided in the
Notes to Consolidated Financial Statements.
United States (48 percent of consolidated sales):
Sales in the United States totaled $7.478 billion, up about 3 percent
from 1998. Unit sales increased 4 percent, while selling prices
decreased slightly. Operating income, excluding non-recurring items,
was up about 1 percent. In 1999, good unit volume growth and solid
productivity gains helped results, but increased investments in
advertising held back overall profit growth. Operating income was 16.0
percent of sales, down from 16.4 percent in 1998.
23
Europe and Middle East (24 percent of consolidated sales):
Sales in Europe and the Middle East totaled $3.800 billion, down about
1 percent from 1998. Local-currency sales increased about 5 percent,
while currency translation reduced sales by about 6 percent. Operating
income was 15.1 percent of sales, up from 13.4 percent in 1998. This
margin improvement was driven by good local-currency sales growth,
together with streamlining of operations. In 2000, the company expects
a pickup in unit sales.
Asia Pacific (18 percent of consolidated sales):
Sales in Asia Pacific totaled $2.887 billion, up about 22 percent from
1998. Unit sales in the Asia Pacific area increased about 13 percent
in 1999. Selling prices decreased more than 1 percent, while currency
translation increased sales by about 10 percent. Operating income was
26.6 percent of sales, up from 21.6 percent in 1998, led by volume
growth and productivity gains. In Japan, home of 3M's largest
international company, volume increased about 6 percent. Unit sales in
Asia outside Japan increased about 26 percent in 1999. In 2000, the
company expects continued solid volume gains in the Asia Pacific area.
Latin America, Canada and Africa (9 percent of consolidated sales):
Sales in Latin America, Canada and Africa combined totaled $1.467
billion, down about 5 percent from 1998. In Latin America, unit sales
increased 4 percent. Currency reduced Latin America sales by about 19
percent, with price increases offsetting about one-third of this
impact. In Canada, unit sales increased about 5 percent. In Africa,
volume decreased about 2 percent. Operating income for Latin America,
Canada and Africa was 23.7 percent of sales, up from 22.1 percent in
1998. In 2000, Latin America unit sales are expected to improve.
Financial Condition and Liquidity
3M's financial condition remained strong in 1999, and working capital
remained well-controlled. The company's key inventory index was 3.1
months, down about 9 percent from year-end 1998. The accounts
receivable index was 61 days, the same as year-end 1998. The current
ratio was 1.6, up from 1.5 at the end of 1998.
Total debt was $2.610 billion, down from $3.106 billion at year-end
1998, helped by increased operating cash flow and reduced capital
expenditures. Total debt was 29 percent of total capital, compared with
34 percent in 1998. Of debt outstanding at the end of 1999, $359
million represented a guarantee of debt of the 3M Employee Stock
Ownership Plan.
Various assets and liabilities, including cash and short-term debt, can
fluctuate significantly from month to month depending on short-term
liquidity needs. Investments decreased $136 million since year-end
1998, driven by investment decreases of about $350 million related to
divestitures, partially offset by increases in the value of marketable
equity securities classified as available-for-sale. Divestitures also
contributed to the decline in other current liabilities and other
liabilities shown on the Consolidated Balance Sheet.
During 1999, cash flows provided by operating activities totaled $3.038
billion, up from $2.374 billion in 1998. The increase in net income,
along with
24
good working capital management, drove the improvement. Inventories
declined about $190 million, or 9 percent, compared with year-end 1998.
Working capital and other changes in 1999 include a $205 million use
of cash for the impact of employee termination benefits paid in
connection with restructuring activities.
Operating cash flows in 1999 included net inflows of $93 million
related to breast implant litigation, compared with net outflows of
$255 million in 1998. A decrease in the noncurrent portion of breast
implant receivables contributed to the decline in other assets in 1999.
Asset impairment charges of $182 million in 1998 represent the write-
down of certain assets to net realizable value. In both 1999 and 1998,
cash flows benefited from effective asset management.
Purchases of property, plant and equipment totaled $1.039 billion, a
decrease of about 27 percent from 1998. This followed increases of 2
percent in 1998 and 27 percent in 1997. These investments are helping
to meet global demand for new products and increase manufacturing
efficiency.
Cash used for acquisitions of businesses totaled $374 million, $200
million and $8 million in 1999, 1998 and 1997, respectively. 1999
includes about $340 million related to the acquisition of the
outstanding minority interest in Dyneon LLC. Acquisitions in 1998 were
primarily in the occupational health and safety, and telecommunications
areas.
Cash proceeds from the sale of businesses totaled $249 million, $57
million and $1.030 billion in 1999, 1998 and 1997, respectively. The
company received cash proceeds in 1999 related to divestitures of
Eastern Heights Bank, cardiovascular systems and other health care
businesses. In 1997, cash proceeds from the sale of National
Advertising Company totaled $1.0 billion, with net after-tax cash
proceeds of nearly $700 million. Related to this, 1997 operating cash
flows were negatively impacted by $308 million of income taxes paid
related to the gain on the sale of National Advertising Company.
Purchases of investments totaled $67 million, $65 million and $32
million in 1999, 1998 and 1997, respectively. These purchases include
patents, and equity and cost method investments.
Cash dividends paid to stockholders totaled $901 million, or $2.24 per
share. 3M has paid dividends since 1916. In February 2000, the Board
of Directors increased the quarterly dividend on 3M common stock to 58
cents per share, equivalent to an annual dividend of $2.32 per share.
This marks the 42nd consecutive year of dividend increases.
Repurchases of 3M common stock totaled $825 million in 1999, compared
with $618 million in 1998 and $1.693 billion in 1997. Repurchases were
made to support employee stock purchase plans and for other corporate
purposes. In 1999, a reduction in shares outstanding resulted in a
benefit to earnings of 2 cents per diluted share. In 1998, the
combination of a reduction in average shares outstanding and higher
interest expense resulted in a net benefit to earnings of 3 cents per
diluted share. In 1997, net proceeds from the National Advertising
Company divestiture were used primarily to repurchase shares.
25
In November 1999, the Board of Directors authorized the repurchase of
up to 12 million of the company's shares. This share repurchase
authorization extends through December 31, 2000. Under a preceding
authorization, the company purchased about 9 million shares.
The company's strong credit rating provides ready and ample access to
funds in global capital markets. At year-end 1999, the company had
available short-term lines of credit totaling about $661 million.
Timing differences between payment of implant liabilities and receipt
of related insurance recoveries could affect future cash flows. This
is discussed in Part I, Item 3, Legal Proceedings, of this Form 10-K.
Future Outlook
3M expects to achieve solid sales and profits in 2000. 3M's focus on
growth, productivity and competitiveness will drive results. 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.
3M expects worldwide sales growth in 2000 of 6 to 7 percent in local
currencies, excluding potential acquisitions, with volume being the
main growth driver. Sales are expected to grow close to 6 percent in
the United States. Internationally, the company expects to increase
sales in local currencies 7 to 8 percent.
The company expects that selling prices overall will have minimal
impact in 2000. Pricing varies by market segment. In the Electro and
Communications Markets segment, price decreases are expected to limit
operating income growth.
The Telecom Systems division announced on February 1, 2000, its
intention to purchase Quante AG, a manufacturer of telecommunications
products and systems. The purchase method of accounting will be used.
Sales in 1999 were more than $350 million. The transaction is
dependent on approval from the European Commission. 3M also is
considering other acquisitions in markets such as health care and light
management.
The company expects capital spending to total $1.0 billion to $1.1
billion in 2000. The company does not expect a significant change in
its tax rate in 2000.
Restructuring charge: To reduce costs and improve productivity, the
company initiated a restructuring program in the second half of 1998 to
streamline corporate structure, consolidate manufacturing operations
and exit certain product lines. As discussed in the restructuring
charge section in the Notes to Consolidated Financial Statements, these
product lines, discontinued primarily in 1998, had combined annual
sales of less than $100 million. In 1999, as part of its restructuring
plan, the company also divested Eastern Heights Bank, cardiovascular
systems and other health care businesses that together had annual sales
of approximately $200 million.
The company recorded a restructuring charge in 1998, and subsequently
recorded a change in estimate that reduced the restructuring charge in
1999. As of the
26
end of 1999, the restructuring program was substantially complete.
The company experienced a net reduction of about 2,200 positions
in the second half of 1998, with a total net reduction of more than
5,000 positions by December 31, 1999. This decline was due to both
restructuring actions and attrition. Of the employment reductions,
about one-third were in the United States and about one-third were in
Europe, with the remainder split about equally between the Asia Pacific
geographic area and the Latin America, Africa and Canada geographic
area. Each business segment of the company was affected by this
restructuring plan.
The restructuring plan is expected to provide annual pre-tax savings of
about $250 million upon completion of the plan. The incremental benefit
in the year 2000 versus 1999 is expected to be about $60 million,
primarily in the first half. If the company does not generate adequate
sales growth, normal increases in payroll and other costs will create
offsets to the annual savings. Implementation costs associated with
this restructuring plan totaled about $30 million in 1999. These
costs, which are not included in the restructuring charge, included
expenses for relocating employees, inventory and equipment; unfavorable
overhead variances; and other expenses.
Financial Instruments
The company enters into contractual arrangements (derivatives) 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 enters into forward contracts and swaps to hedge certain
intercompany financing transactions, and purchases options to hedge
against the effect of exchange rate fluctuations on cash flows
denominated in foreign currencies. 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 manages commodity price risks through negotiated supply
contracts, price protection swaps and forward physical contracts.
A variance/co-variance value-at-risk model was used to test the
company's exposure to changes in currency and interest rates. An
historical value-at-risk model was used to assess commodity risks. All
models used a 95 percent confidence level over a one month time
horizon. The Riskmetrics dataset was used for the variance/co-variance
analysis. Six years of historical data were used for the commodity
risk analysis. Both models assessed the risk of loss in market value
of outstanding financial instruments and derivatives. Based on a value-
at-risk analysis of the company's foreign exchange, interest rate and
commodity derivative instruments outstanding at December 31, 1999,
probable near-term changes in exchange rates, interest rates or
commodity prices would not materially affect the company's consolidated
financial position, results of operations or cash flows. However, over
a one-year period, exchange rates can
27
significantly impact results. In 1998, currency effects reduced net
income by an estimated $141 million, or 35 cents per diluted share.
Year 2000 Update
In November 1996, the company created a corporate-wide Year 2000
project team representing all company business and staff units. The
team's objective was to ensure an uninterrupted transition to the year
2000 by assessing, testing and modifying information technology (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 included (i) IT, such as software
and hardware; (ii) non-IT systems or embedded technology, such as
microcontrollers 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 company also prepared contingency plans specifying what the company
would do if failures occurred in IT and non-IT systems, or if important
third parties were not Year 2000 Compliant. The process included
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.
From inception of the company's efforts on the Year 2000 issue through
December 31, 1999, the company spent $66.5 million related to the Year
2000 readiness issue. These costs included external consultants,
professional advisors, and software and hardware. The company's process
for tracking internal costs did not capture all of the costs incurred
for each of the teams working on the Year 2000 project. Such internal
costs were principally the related payroll costs for its information
systems group and other employees working on the Year 2000 project. The
company expensed as incurred all costs related to the assessment and
remediation of the Year 2000 issue. These costs were funded through
operating cash flows.
From December 31, 1999, to January 14, 2000, the company operated
global information centers to monitor the company's facilities and
operations. No material problems were reported in any of the company's
facilities or operations during this period. As of the date of this
filing, the company had not experienced any material Year 2000 problems
with its IT or non-IT systems or products, nor had the company
experienced any material problems with any of its key customers or
suppliers.
28
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 noncash
transactions.
Local currencies will remain legal tender until December 31, 2001.
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 on about December 31, 2001. By no later
than July 1, 2002, participating countries will withdraw all bills and
coins denominated in local currencies.
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 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 24 percent of consolidated sales and 20
percent of consolidated operating income, excluding non-recurring
items, in 1999. The participating countries accounted for 61 percent of
the company's sales in the European market in 1999. 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 net long-term impact of the euro introduction on the
company.
The company has 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 so the euro adoption does
not jeopardize the company's operations.
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
29
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 December 31, 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 has modified
systems to track derivatives in euros. 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 Annual Report on
Form 10-K 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 several identified here that 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: the effects of, and changes in,
worldwide economic conditions; foreign exchange rates and fluctuations
in those rates; the timing and market acceptance of new product
offerings; raw materials, including shortages and increases in the
costs of key raw materials; and legal proceedings (see discussion of
Legal Proceedings in Part I, Item 3 of this Form 10-K).
30
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Reference (pages)
Form 10-K
Data submitted herewith:
Report of Independent Auditors ............................... 31
Consolidated Statement of Income for the years ended
December 31, 1999, 1998 and 1997 ........................... 32
Consolidated Balance Sheet at December 31, 1999 and
1998 ....................................................... 33
Consolidated Statement of Changes in Stockholders'
Equity and Comprehensive Income for the years ended
December 31, 1999, 1998 and 1997............................ 34
Consolidated Statement of Cash Flows
for the years ended December 31,
1999, 1998 and 1997 ........................................ 35
Notes to Consolidated Financial Statements ................. 36-55
31
Report of Independent Auditors
To the Stockholders and Board of Directors of Minnesota Mining and
Manufacturing Company:
In our opinion, the consolidated financial statements as listed in Item
8 of this Form 10-K present fairly, in all material respects, the
consolidated financial position of Minnesota Mining and Manufacturing
Company and Subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Paul, Minnesota
February 14, 2000
32
Consolidated Statement of Income
Minnesota Mining and Manufacturing Company and Subsidiaries
Years ended December 31
(Amounts in millions, except per-share amounts) 1999 1998 1997
Net sales $15,659 $15,021 $15,070
Operating expenses
Cost of goods sold 8,852 8,705 8,580
Restructuring charge - inventory -- 39 --
Total cost of goods sold 8,852 8,744 8,580
Selling, general and administrative expenses 3,879 3,784 3,815
Restructuring charge (credit) - other (28) 454 --
Total 12,703 12,982 12,395
Operating income 2,956 2,039 2,675
Other income and expense
Interest expense 109 139 94
Investment and other income - net (33) (42) (56)
Gain on National Advertising Company divestiture - net -- (10) (803)
Total 76 87 (765)
Income before income taxes,
minority interest and extraordinary loss 2,880 1,952 3,440
Provision for income taxes 1,032 685 1,241
Minority interest 85 54 78
Income before extraordinary loss 1,763 1,213 2,121
Extraordinary loss from early extinguishment
of debt - net of income taxes -- (38) --
Net income $ 1,763 $ 1,175 $ 2,121
Weighted average common shares outstanding - basic 402.0 403.3 412.7
Earnings per share - basic
Income before extraordinary loss $ 4.39 $ 3.01 $ 5.14
Extraordinary loss -- (.10) --
Net income $ 4.39 $ 2.91 $ 5.14
Weighted average common shares outstanding - diluted 406.5 408.0 418.7
Earnings per share - diluted
Income before extraordinary loss $ 4.34 $ 2.97 $ 5.06
Extraordinary loss -- (.09) --
Net income $ 4.34 $ 2.88 $ 5.06
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
33
Consolidated Balance Sheet
Minnesota Mining and Manufacturing Company and Subsidiaries
At December 31
(Dollars in millions) 1999 1998
Assets
Current assets
Cash and cash equivalents $ 387 $ 211
Other securities 54 237
Accounts receivable - net 2,778 2,666
Inventories 2,030 2,219
Other current assets 817 886
Total current assets 6,066 6,219
Investments 487 623
Property, plant and equipment - net 5,656 5,566
Other assets 1,687 1,745
Total $13,896 $14,153
Liabilities and Stockholders' Equity
Current liabilities
Short-term debt $ 1,130 $ 1,492
Accounts payable 1,008 868
Payroll 361 487
Income taxes 464 261
Other current liabilities 856 1,114
Total current liabilities 3,819 4,222
Long-term debt 1,480 1,614
Other liabilities 2,308 2,381
Stockholders' equity - net 6,289 5,936
Shares outstanding - 1999: 398,710,817
1998: 401,924,248
Total $13,896 $14,153
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
34
Consolidated Statement of Changes in
Stockholders' Equity and Comprehensive Income
Minnesota Mining and Manufacturing Company and Subsidiaries
Common Accumulated
Stock and Unearned Other
Capital in Compen- Compre-
(Dollars in millions, Excess Retained Treasury sation hensive
except per-share amounts) Total of Par Earnings Stock ESOP Income
Balance at December 31, 1996 $6,284 $296 $8,756 $(2,193) $(412) $(163)
Net income 2,121 2,121
Cumulative translation adjustment - net (369) (369)
Debt and equity securities,
unrealized gain - net (7) (7)
Total comprehensive income 1,745
Dividends paid ($2.12 per share) (876) (876)
Amortization of unearned compensation 33 33
Reacquired stock (18.7 million shares) (1,693) (1,693)
Issuances pursuant to stock option
and benefit plans (6.6 million shares) 433 (153) 586
Balance at December 31, 1997 $5,926 $296 $9,848 $(3,300) $(379) $(539)
Net income 1,175 1,175
Cumulative translation adjustment - net 29 29
Debt and equity securities,
unrealized gain - net 2 2
Total comprehensive income 1,206
Dividends paid ($2.20 per share) (887) (887)
Amortization of unearned compensation 29 29
Reacquired stock (7.4 million shares) (618) (618)
Issuances pursuant to stock option
and benefit plans (4.6 million shares) 280 (156) 436
Balance at December 31, 1998 $5,936 $296 $9,980 $(3,482) $(350) $(508)
Net income 1,763 1,763
Cumulative translation adjustment - net (176) (176)
Minimum pension liability adjustment - net (30) (30)
Debt and equity securities,
unrealized gain - net 126 126
Total comprehensive income 1,683
Dividends paid ($2.24 per share) (901) (901)
Amortization of unearned compensation 23 23
Reacquired stock (9.0 million shares) (825) (825)
Issuances pursuant to stock option
and benefit plans (5.7 million shares) 373 (101) 474
Balance at December 31, 1999 $6,289 $296 $10,741 $(3,833) $(327) $(588)
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
35
Consolidated Statement of Cash Flows
Minnesota Mining and Manufacturing Company and Subsidiaries
Years ended December 31 1999 1998 1997
(Dollars in millions)
Cash Flows from Operating Activities
Net income $1,763 $1,175 $2,121
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation 822 798 800
Amortization 78 68 70
Asset impairment charges (credits) - restructuring (31) 182 --
Implant litigation - net 93 (255) 35
Gain on National Advertising Company divestiture - net -- (6) (495)
Income tax paid relating to divestiture -- (4) (308)
Discontinued operations -- -- (112)
Accounts receivable (186) (160) (149)
Inventories 96 195 (295)
Other - net 403 381 39
Net cash provided by operating activities 3,038 2,374 1,706
Cash Flows from Investing Activities
Purchases of property, plant and equipment (1,039) (1,430) (1,406)
Proceeds from sale of property, plant and equipment 108 25 38
Acquisitions of businesses (374) (200) (8)
Proceeds from sale of businesses 249 57 1,030
Purchases of investments (67) (65) (32)
Proceeds from sale of investments 9 41 21
Net cash used in investing activities (1,114) (1,572) (357)
Cash Flows from Financing Activities
Change in short-term debt - net (164) 55 705
Repayment of long-term debt (179) (129) (565)
Proceeds from long-term debt 2 645 337
Purchases of treasury stock (825) (618) (1,693)
Reissuances of treasury stock 390 292 355
Dividends paid to stockholders (901) (887) (876)
Distributions to minority interests (51) (96) (22)
Net cash used in financing activities (1,728) (738) (1,759)
Effect of exchange rate changes on cash (20) (83) 57
Net increase (decrease) in cash and cash equivalents 176 (19) (353)
Cash and cash equivalents at beginning of year 211 230 583
Cash and cash equivalents at end of year $ 387 $ 211 $ 230
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
36
Notes to Consolidated Financial Statements
Significant Accounting Policies
Consolidation: All significant subsidiaries are consolidated. All
intercompany transactions are eliminated. As used herein, the term "3M"
or "company" refers to Minnesota Mining and Manufacturing Company and
subsidiaries unless the context indicates otherwise.
Foreign currency translation: Local currencies generally are
considered the functional currencies outside the United States, except
in countries treated as highly inflationary. Assets and liabilities
for operations in local-currency environments are translated at year-
end exchange rates. Income and expense items are translated at average
rates of exchange prevailing during the year. Cumulative translation
adjustments are recorded as a component of accumulated other
comprehensive income in stockholders' equity.
For operations in countries treated as highly inflationary, certain
financial statement amounts are translated at historical exchange
rates, with all other assets and liabilities translated at year-end
exchange rates. These translation adjustments are reflected in income
and are not material.
Reclassifications: Certain reclassifications have been made to
December 31, 1998, Consolidated Balance Sheet amounts to conform to the
current-year presentation.
Use of estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Cash and cash equivalents: Cash and cash equivalents consist of cash
and temporary investments with maturities of three months or less when
purchased.
Other securities and investments: Other securities consist of
marketable securities and interest-bearing bank deposits with varied
maturity dates. These securities are employed in the company's banking,
captive insurance and cash management operations. Investments primarily
include debt securities held by captive insurance and banking
operations; the cash surrender value of life insurance policies; and
real estate and venture capital investments. Unrealized gains and
losses relating to other securities and investments classified as
available-for-sale are recorded as a component of accumulated other
comprehensive income in stockholders' equity. The company's banking
operations were divested on June 30, 1999.
Inventories: Inventories are stated at lower of cost or market, with
cost generally determined on a first-in, first-out basis.
Other assets: Other assets include product and other insurance
receivables, goodwill, patents, other intangibles, deferred income
taxes and other noncurrent assets. Goodwill is amortized on a straight-
line basis over the
37
periods benefited, ranging from 5 to 40 years. Other intangible items
are amortized on a straight-line basis over their estimated economic
lives.
Revenue recognition: Revenue is recognized upon shipment of goods to
customers and upon performance of services. The company sells a wide
range of products to a diversified base of customers around the world
and, therefore, believes there is no material concentration of credit
risk.
Property, plant and equipment: Depreciation of property, plant and
equipment generally is computed using the straight-line method based on
estimated useful lives of the assets. Estimated useful lives range from
5 to 40 years for building and improvements and 3 to 20 years for
machinery and equipment. Fully depreciated assets are retained in
property and accumulated depreciation accounts until removed from
service. Upon disposal, assets and related accumulated depreciation
are removed from the accounts and the net amount, less proceeds from
disposal, is charged or credited to operations.
Advertising and merchandising: These costs are charged to operations
in the year incurred.
Derivatives and hedging activities: 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 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.
Realized and unrealized gains and losses for qualifying hedge
instruments are deferred until offsetting gains and losses on the
underlying transactions are recognized in earnings. These gains and
losses generally are recognized either as interest expense over the
borrowing period for interest rate and currency swaps; as an adjustment
to cost of goods sold for inventory-related hedge transactions; or as a
component of accumulated other comprehensive income in stockholders'
equity for hedges of net investments in international companies. If the
underlying hedged transaction ceases to exist, all changes in fair
value of the related derivatives that have not been settled are
recognized in earnings. Cash flows attributable to these financial
instruments are included with the cash flows of the associated hedged
items.
Accounting for stock-based compensation: The company uses the
intrinsic value method for the Management Stock Ownership Program
(MSOP). The General Employees' Stock Purchase Plan (GESPP) is
considered noncompensatory.
Comprehensive income: Total comprehensive income and the components of
accumulated other comprehensive income are presented in the
Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income. Accumulated other comprehensive income is
composed of foreign currency translation effects, including hedges of
net investments in international companies, minimum pension liability
adjustments, and unrealized gains and losses on available-for-sale debt
and equity securities.
38
Earnings per share: The difference in the weighted average shares
outstanding for calculating basic and diluted earnings per share is
attributable to the assumed exercise of MSOP stock options, if
dilutive, and also includes the effect of the assumed exercise of GESPP
options for periods through June 30, 1997. Beginning July 1, 1997,
GESPP options had no dilutive effect.
New accounting pronouncements: In 1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133." The company
must adopt Statement No. 133 no later than January 1, 2001. The company
is reviewing the requirements of this standard. Although the company
expects that this standard will not materially affect its financial
position or results of operations, it has not yet finalized its
determination of the impact of this standard on its consolidated
financial statements.
Effective January 1, 1999, the company adopted Statement of Position
(SOP)98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," and SOP 98-5 "Reporting on the Costs of
Start-Up Activities," both issued by the American Institute of
Certified Public Accountants. These statements did not have a material
effect on the consolidated financial statements because the company's
existing accounting policies were generally in compliance.
Restructuring Charge
To reduce costs and improve productivity, the company initiated a
restructuring program in the second half of 1998 to streamline
corporate structure, consolidate manufacturing operations and exit
certain product lines. Related to this, the company recorded a
restructuring charge of $493 million ($313 million after tax). A
portion of this restructuring charge ($39 million) has been classified
as a component of cost of goods sold. In 1999, the company recorded a
change in estimate that reduced the restructuring charge by $28
million. The restructuring charge does not include the write-down of
goodwill or other intangible assets. As of December 31, 1999, this
restructuring program was substantially complete.
Of the total restructuring charge, $275 million relates to employee
termination benefits for personnel reductions in each business segment
and geographic area of the company and in all major functions. Under
the plan, the company terminated 1,225 employees in the second half of
1998 and 3,288 employees in 1999, of whom about one-third were in the
United States and two-thirds were abroad. Because certain employees can
defer receipt of termination benefits, cash payments lag job
eliminations. After subtracting payments of $244 million made through
December 31, 1999, the company had a remaining liability of $31 million
related to employee termination benefits at year-end, most of which
relates to employees already terminated. This amount is classified in
current liabilities (payroll) on the Consolidated Balance Sheet.
The company has consolidated or downsized manufacturing operations,
including actions in seven locations in the United States, nine in
Europe, four in the Asia Pacific area and two in Latin America. As part
of the restructuring plan, the company has discontinued product lines
that had combined annual sales of less than $100 million and marginal
operating income.
39
The restructuring charge includes $112 million, net of salvage value,
for the write-down of assets included in property, plant and equipment.
These assets primarily include specialized 3M manufacturing machinery
and equipment. Estimated salvage values are based on estimates of
proceeds upon sale of certain affected assets.
The restructuring charge also includes $78 million for losses on
inventory write-downs and other exit costs. The company has taken an
inventory write-down of $39 million, which has been classified as a
component of cost of goods sold, for certain product lines that were
discontinued primarily in 1998. Other exit costs include $39 million in
incremental costs and contractual obligations for items such as
leasehold termination payments and other facility exit costs incurred
as a direct result of the plan. After subtracting $31 million in
payments made through December 31, 1999, the company had a remaining
balance of $8 million in other current liabilities for these exit costs
at December 31, 1999.
Restructuring Employee Write-down of
Information Termination Property, Plant
(Millions) Benefits and Equipment Inventory Other Total
1998 restructuring charge
Third quarter $102 $161 $29 $40 $332
Fourth quarter 169 -- 10 -- 179
Fourth quarter
change in estimate -- (18) -- -- (18)
Total-year 1998 $271 $143 $39 $40 $493
1999 change in estimate 4 (31) -- (1) (28)
Total restructuring charge $275 $112 $39 $39 $465
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
1999 cash payments (205) (23) (228)
1999 change in estimate 4 (1) 3
December 31, 1999 liability $ 31 $ 8 $39
Acquisitions and Divestitures
Acquisition of Dyneon minority interest: On December 28, 1999, 3M
finalized the acquisition of the outstanding 46 percent minority
interest in Dyneon LLC from Celanese AG for approximately $340 million
in cash, primarily financed by debt. The purchase method of accounting
was used for this acquisition. Based on a preliminary allocation, the
purchase price exceeds the recorded basis of the minority interest net
assets by approximately $265 million, of which approximately $180
million represents goodwill and other intangible assets that
40
will be amortized over 15 years or less. Dyneon's assets,
liabilities, revenues and expenses were already fully consolidated in
3M's financial statements, with the 46 percent minority interest
eliminated on the minority interest line to reflect 3M's net
position. If this acquisition had occurred at the beginning of
1999, the effect on results of operations would not have been material.
Divestitures: On June 30, 1999, the company closed on the sale of
Eastern Heights Bank, a subsidiary banking operation, and on 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 Markets segment, in the
third quarter of 1999. These pre-tax gains are recorded as a reduction
of selling, general and administrative expenses in the Consolidated
Statement of Income.
Gain on National Advertising Company divestiture: Effective August 15,
1997, the company sold National Advertising Company, an outdoor and
mall advertising subsidiary, for cash proceeds of $1.0 billion. After
adjusting for the net cost of the assets sold and for the expenses
associated with the divestiture, the company realized a gain of $803
million ($495 million after tax), or $1.18 per diluted share, in 1997.
National Advertising Company had annual sales of about $200 million and
operating income of about $35 million. In 1998, a $10 million gain was
recorded to finalize the accounting for this sale.
Supplemental Statement of Income Information
(Millions) 1999 1998 1997
Research, development and related expenses $1,038 $1,016 $1,002
Advertising and merchandising costs 484 448 471
Research and development expenses, covering basic scientific research
and the application of scientific advances to the development of new
and improved products and their uses, totaled $688 million, $648
million and $634 million in 1999, 1998 and 1997, respectively. Related
expenses primarily include technical support provided by the
laboratories for existing products.
41
Supplemental Balance Sheet Information
(Millions) 1999 1998
Accounts receivable
Accounts receivable $ 2,860 $ 2,751
Less allowances 82 85
Accounts receivable - net $ 2,778 $ 2,666
Inventories
Finished goods $ 1,103 $ 1,161
Work in process 544 613
Raw materials 383 445
Total inventories $ 2,030 $ 2,219
Other current assets
Product and other insurance receivables $ 291 $ 291
Deferred income taxes 172 175
Other 354 420
Total other current assets $ 817 $ 886
Other securities and investments
Held-to-maturity (amortized cost) $ 50 $ 164
Available-for-sale (fair value) 254 214
Other (cost, which approximates fair value) 237 482
Total other securities and investments $ 541 $ 860
Property, plant and equipment - at cost
Land $ 265 $ 283
Buildings and leasehold improvements 3,429 3,328
Machinery and equipment 9,083 9,102
Construction in progress 602 684
13,379 13,397
Less accumulated depreciation 7,723 7,831
Property, plant and equipment - net $ 5,656 $ 5,566
Other assets
Intangible assets and software - net $ 657 $ 523
Product and other insurance receivables 634 862
Prepaid pension benefits 265 243
Deferred income taxes 88 88
Other 43 29
Total other assets $ 1,687 $ 1,745
42
Supplemental Balance Sheet Information (continued)
(Millions) 1999 1998
Other current liabilities
Product and other claims $ 141 $ 221
Nonfunded pension and postretirement benefits 72 57
Restructuring 8 32
Deposits - banking operations* -- 149
Deferred income taxes 5 6
Other 630 649
Total other current liabilities $ 856 $ 1,114
Other liabilities
Nonfunded pension and postretirement benefits $ 761 $ 695
Product and other claims 397 447
Minority interest in subsidiaries 371 390
Deposits - banking operations* -- 260
Deferred income taxes 332 193
Other 447 396
Total other liabilities $ 2,308 $ 2,381
* Primarily demand deposits and, as such, the carrying amount
approximates fair value. The company's banking operations were divested
on June 30, 1999.
Supplemental Stockholders' Equity and Comprehensive Income Information
Common stock ($.50 par value per share; without par value at December
31, 1996) of 1 billion shares is authorized, with 472,016,528 shares
issued in 1999, 1998 and 1997. Common stock and capital in excess of
par includes $60 million transferred from common stock to capital in
excess of par value during 1997. Preferred stock, without par value, of
10 million shares is authorized but unissued.
In 1999, deferred income taxes for the unrealized gain on debt and
equity securities totaled $77 million, and for minimum pension
liability adjustments totaled $36 million. Reclassification adjustments
in 1999 for realized gains included in net income totaled $41 million
($25 million after tax). These gains related to appreciated equity
securities donated to the 3M Foundation in December 1999. In 1999, 1998
and 1997, other deferred income tax effects and other reclassification
adjustments were not material. The following table shows the ending
balances of the components of accumulated other comprehensive income.
43
Supplemental Stockholders' Equity and Comprehensive Income Information
(continued)
Accumulated other comprehensive income
(Millions) 1999 1998 1997
Cumulative translation - net $(694) $(518) $(547)
Minimum pension liability adjustments - net (30) -- --
Debt and equity securities, unrealized gain - net 136 10 8
Total accumulated other comprehensive income $(588) $(508) $(539)
Supplemental Cash Flow Information
(Millions) 1999 1998 1997
Income tax payments $653 $467 $1,123
Interest payments 114 130 91
Income tax payments in 1997 include $308 million related to the gain on
the sale of National Advertising Company.
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 nonmonetary exchange of productive assets. Also
in 1999, 3M donated to the 3M Foundation appreciated property with a
market value of $66 million, resulting in $8 million of pre-tax
expense, which represented the company's cost of the securities.
In 1998, the 3M Employee Stock Ownership Plan (ESOP) refinanced its
existing debt by issuing new debt of $385 million. Because the company
has guaranteed repayment of the ESOP debt, the debt and related
unearned compensation are recorded on the Consolidated Balance Sheet.
The repayment of principal and proceeds of long-term debt relating to
the ESOP have been excluded from the financing activities of the
company in the Consolidated Statement of Cash Flows because the funds
involved were received and disbursed by the ESOP trust.
In 1997, cash outflows from discontinued operations related to the
costs associated with the final disposition of the company's audio and
video businesses pursuant to the plan approved in November 1995.
44
Debt
Short-Term Debt Effective
(Millions) Interest Rate* 1999 1998
Commercial paper 5.95% $ 786 $ 978
Long-term debt - current portion 6.52% 36 131
Other borrowings 7.82% 308 383
Total short-term debt $1,130 $1,492
Long-Term Debt Effective Maturity
(Millions) Interest Rate* Date 1999 1998
ESOP debt guarantee 5.62% 2001-2009 $ 333 $ 359
U.S. dollar 6.375% note 6.38% 2028 330 330
U.S. dollar 6.625% Eurobond 5.84% 2001 250 250
3M Deutschland GmbH 5.75% Eurobond 2.95% 2001 187 216
German mark 5% Euronote 5.83% 2001 165 165
Sumitomo 3M Limited 0.795% note 0.80% 2003 98 88
Other borrowings 5.60% 2001-2037 117 206
Total long-term debt $1,480 $1,614
*Reflects the effects of interest rate and currency swaps at December
31, 1999.
Debt with fixed interest rates includes the ESOP, U.S. dollar 6.375
percent note, Sumitomo 3M Limited note, and a portion of other
borrowings. ESOP debt is serviced by dividends on stock held by the
ESOP and by company contributions. These contributions are reported as
an employee benefit expense in the Consolidated Statement of Income.
Debt not denominated in U.S. dollars includes the 5.75 percent
Eurobond, the Sumitomo 3M Limited note, and most of other borrowings.
Other borrowings include debt held by 3M's international companies, and
floating rate notes and industrial bond issues in the United States.
Maturities of long-term debt for the next five years are: 2000, $36
million; 2001, $652 million; 2002, $38 million; 2003, $131 million; and
2004, $35 million.
The company estimates that the fair value of short-term debt
approximates the carrying amount of this debt. The fair value of long-
term debt, based on third-party quotes, is estimated at $1.376 billion.
Debt covenants do not restrict the payment of dividends. At year-end
1999, the company had available short-term lines of credit totaling
about $661 million.
45
Other Financial Instruments
Interest rate and currency swaps: The company uses interest rate and
currency swaps to manage interest rate risk related to borrowings. The
notional amounts shown in the table below serve solely as a basis for
the calculation of payment streams to be exchanged. These notional
amounts are not a measure of the company's exposure through its use of
derivatives. These instruments generally mature in relationship to
their underlying debt and have maturities extending to 2001.
Unrealized gains and losses and exposure to changes in market
conditions were not material at December 31, 1999, for interest rate
swaps, and at December 31, 1998, for interest rate and currency swaps.
Currency swaps at December 31, 1999, had an unrealized gain of $13
million and unrealized losses of $61 million, largely offset by an
unrealized gain of $39 million relating to an underlying debt
instrument.
Notional Amounts
(Millions) 1999 1998
Interest rate swaps $550 $350
Currency swaps 465 265
Foreign exchange forward and option contracts: The company has entered
into foreign exchange forward and option contracts, the majority of
which have maturities of less than one year. The face amounts
represent contracted U.S. dollar equivalents of forward and option
contracts denominated in foreign currencies. The amounts at risk are
not material because the company has the ability to generate offsetting
foreign currency cash flows. Unrealized gains and losses at December
31, 1999 and 1998, were not material.
Face Amounts
(Millions) 1999 1998
Forward contracts $ 997 $1,050
Options purchased 140 590
Options sold -- 88
The company engages in hedging activities to reduce exchange rate risks
arising from cross-border cash flows denominated in foreign currencies.
The company operates on a global basis, generating more than half its
revenues internationally and engaging in substantial product and
financial transfers among geographic areas. Major forward contracts at
December 31, 1999, were denominated in European euros, Japanese yen,
Singapore dollars and British pounds.
Credit risk: The company is exposed to credit loss in the event of
nonperformance by counterparties in interest rate swaps, currency
swaps, and option and foreign exchange contracts, but does not
anticipate nonperformance by any of these counterparties. The company
actively monitors its exposure to credit risk through the use of credit
approvals and credit limits, and by selecting major international banks
and financial institutions as counterparties.
46
Income Taxes
At December 31, 1999, about $2.550 billion of retained earnings
attributable to international companies were considered to be
indefinitely invested. No provision has been made for taxes that might
be payable if these earnings were remitted to the United States. It is
not practical to determine the amount of incremental taxes that might
arise were these earnings to be remitted.
In 1998, the company refinanced debt related to its Employee Stock
Ownership Plan. The provision for income taxes excludes a $21 million
tax benefit (classified as part of the extraordinary loss) related to
this refinancing.
Income before Income Taxes,
Minority Interest and Extraordinary Loss
(Millions) 1999 1998 1997
United States $2,020 $1,326 $2,607
International 860 626 833
Total $2,880 $1,952 $3,440
Provision for Income Taxes
(Millions) 1999 1998 1997
Currently payable
Federal $ 423 $ 186 $ 823
State 66 52 127
International 402 308 370
Deferred
Federal 171 149 (57)
State 15 13 (5)
International (45) (23) (17)
Total $1,032 $ 685 $1,241
Components of Deferred Tax Assets
and Liabilities
(Millions) 1999 1998
Accruals currently not deductible
Employee benefit costs $288 $288
Severance and other restructuring costs 10 93
Product and other claims 205 254
Product and other insurance receivables (353) (439)
Accelerated depreciation (423) (333)
Other 196 201
Net deferred tax asset (liability) $(77) $ 64
Reconciliation of Effective Income Tax Rate 1999 1998 1997
Statutory U.S. tax rate 35.0% 35.0% 35.0%
State income taxes - net 1.8 2.4 2.3
International income taxes - net .2 .8 .2
All other - net (1.2) (3.1) (1.4)
Effective worldwide tax rate 35.8% 35.1% 36.1%
47
Business Segments
In the third quarter of 1999, the company reorganized its management
reporting structure into six business segments. Prior year amounts have
been retroactively restated to reflect this change in business segment
reporting. 3M's businesses are organized, managed and internally
reported as six segments based on differences in products, technologies
and services. These segments are Industrial; Transportation, Graphics
and Safety; Health Care; Consumer and Office; Electro and
Communications; and Specialty Material. These segments have worldwide
responsibility for virtually all of the company's product lines. 3M is
not dependent on any single product or market.
Transactions among reportable segments are recorded at cost. 3M is an
integrated enterprise characterized by substantial intersegment
cooperation, cost allocations and inventory transfers. Therefore,
management does not represent that these segments, if operated
independently, would report the operating income and other financial
information shown.
Operating income in 1999 includes a non-recurring net gain of $100
million. This relates to divestitures of certain health care businesses
and Eastern Heights Bank, litigation expense, an investment valuation
adjustment, and a change in estimate that reduced the 1998
restructuring charge. Of this $100 million gain, $62 million was
recorded in Health Care and $38 million in Corporate and Unallocated.
Operating income in 1998 includes a restructuring charge of $493
million in Corporate and Unallocated.
Business Segments Major Products
Industrial Tapes and coated abrasives
Transportation, Graphics Reflective sheeting, commercial graphics
and Safety systems, films, inks and substrates,
respirators, automotive products and
optical films
Health Care Medical/surgical supplies, skin health
products, pharmaceuticals, dental products,
health information systems, microbiology
products and closures for disposable diapers
Consumer and Office Sponges, scour pads, high performance
cloths, consumer and office tapes,
repositionable notes, carpet and fabric
protectors, floor matting, commercial
cleaning products and do-it-yourself
products
Electro and Communications Connecting, insulating and splicing
solutions for the electrical, electronics
and telecommunications industries
Specialty Material Fluorochemicals for automotive,
electronics, textile, paper and other
industries
48
Business segments (continued):
Business Segment Information Depr. Capital
Net Operating and Expendi-
(Millions) Sales Income Assets** Amort. tures
Industrial 1999 $ 3,394 $ 613 $ 2,357 $220 $ 200
1998 3,360 561 2,394 199 276
1997 3,419 544 2,366 186 283
Transportation, 1999 3,228 679 2,673 140 197
Graphics and Safety 1998 3,021 532 2,652 170 331
1997 3,112 585 2,368 191 363
Health Care 1999 3,118 686 2,076 203 187
1998 3,086 571 2,168 161 221
1997 3,004 521 2,042 183 217
Consumer and Office 1999 2,688 408 1,589 118 121
1998 2,613 398 1,614 136 178
1997 2,616 438 1,561 105 131
Electro and 1999 2,014 406 1,359 130 192
Communications 1998 1,741 263 1,177 111 222
1997 1,739 327 1,103 114 167
Specialty Material 1999 1,166 188 1,323 79 142
1998 1,105 194 1,112 66 186
1997 1,090 192 928 70 200
Corporate and 1999 51 (24) 2,519 10 --
Unallocated* 1998 95 (480) 3,036 23 16
1997 90 68 2,870 21 45
Total Company 1999 $15,659 $2,956 $13,896 $900 $1,039
1998 15,021 2,039 14,153 866 1,430
1997 15,070 2,675 13,238 870 1,406
*Corporate and Unallocated operating income principally includes
corporate investment gains and losses, certain derivative gains and
losses, insurance-related gains and losses, banking operating results
(divested June 30, 1999), certain litigation expenses, 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.
**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.
49
Geographic Areas
Information in the table below is presented on the basis the company
uses to manage its businesses. Export sales and certain income and
expense items are reported within the geographic area where the final
sales to customers are made. Prior year amounts have been retroactively
restated to conform to the current-year presentation.
In 1999, operating income for eliminations and other includes a non-
recurring net gain of $100 million related to gains on divestitures,
litigation expense, an investment valuation adjustment, and a change in
estimate that reduced the 1998 restructuring charge. In 1998, operating
income for eliminations and other includes a $493 million restructuring
charge.
Geographic Area Information Latin
Europe America, Elimina-
and Africa tions
United Middle Asia and and Total
(Millions) States East Pacific Canada Other Company
Net sales to 1999 $7,478 $3,800 $2,887 $1,467 $ 27 $15,659
customers 1998 7,231 3,856 2,375 1,539 20 15,021
1997 7,242 3,640 2,632 1,530 26 15,070
Operating 1999 $1,198 $ 574 $ 768 $ 348 $ 68 $ 2,956
Income 1998 1,185 515 512 339 (512) 2,039
1997 1,290 431 611 360 (17) 2,675
Property, 1999 $3,551 $1,007 $ 746 $ 352 $ -- $ 5,656
plant and 1998 3,376 1,107 709 374 -- 5,566
equipment - 1997 3,133 1,013 532 356 -- 5,034
net
Retirement and Postretirement Benefit Plans
3M has various company-sponsored retirement plans covering
substantially all U.S. employees and many employees outside the United
States. Pension benefits are based principally on an employee's years
of service and compensation near retirement. In addition to providing
pension benefits, the company provides certain postretirement health
care and life insurance benefits for substantially all of its U.S.
employees who reach retirement age while employed by the company. Most
international employees and retirees are covered by government health
care programs. The cost of company-provided health care plans for
these international employees is not material.
The company's pension funding policy is to deposit with independent
trustees amounts at least equal to those required by law. Trust funds
and deposits with insurance companies are maintained to provide pension
benefits to plan participants and their beneficiaries. In addition,
the company has set aside funds for its U.S. postretirement plan with
an independent trustee and makes periodic contributions to the plan.
50
The company's U.S. nonqualified pension plan had an unfunded
accumulated benefit obligation of $171 million at December 31, 1999,
and $175 million at December 31, 1998. There are no plan assets in the
nonqualified plan due to its nature.
Certain international pension plans were underfunded as of year-end
1999 and 1998. The accumulated benefit obligations of these plans were
$467 million in 1999 and $418 million in 1998. The assets of these
plans were $353 million in 1999 and $384 million in 1998. The net
underfunded amounts are included in current and other liabilities on
the Consolidated Balance Sheet.
Benefit Plan Information Qualified and Nonqualified Postretirement
Pension Benefits Benefits
United States International
(Millions) 1999 1998 1999 1998 1999 1998
Reconciliation of benefit obligation
Beginning balance $6,201 $5,392 $2,153 $1,773 $ 1,030 $ 995
Service cost 150 130 88 80 42 36
Interest cost 387 377 98 95 69 62
Participant contributions - - 7 6 9 6
Foreign exchange rate changes - - (34) 60 1 -
Plan amendments 8 100 3 - - -
Actuarial(gain)loss (823) 492 (21) 183 (56) (2)
Benefit payments (326) (290) (60) (44) (79) (67)
Ending balance $5,597 $6,201 $2,234 $2,153 $ 1,016 $1,030
Reconciliation of plan assets at fair value
Beginning balance $6,233 $5,411 $2,028 $1,796 $ 523 $ 482
Actual return on plan assets 807 1,018 173 164 19 52
Company contributions 86 83 51 58 64 50
Participant contributions - - 7 6 9 6
Foreign exchange rate changes - - (45) 45 - -
Benefit payments (313) (279) (59) (41) (78) (67)
Ending balance $6,813 $6,233 $2,155 $2,028 $ 537 $ 523
Funded status of plans
Plan assets at fair value
less benefit obligation $1,216 $ 32 $ (79) $ (125) $ (480) $ (507)
Unrecognized transition
(asset) obligation - (37) 21 24 - -
Unrecognized prior service cost 142 179 36 49 12 (48)
Unrecognized (gain) loss (1,325) (181) 13 47 (37) 58
Net amount recognized $ 33 $ (7) $ (9) $ (5) $ (505) $ (497)
Amounts recognized in the
Consolidated Balance Sheet
consist of:
Prepaid assets $ 184 $ 99 $ 74 $ 74 - -
Accrued liabilities (171) (175) (157) (80) $ (505) $ (497)
Intangible assets 6 69 1 1 - -
Accumulated other comprehensive
income - pre-tax 14 - 73 - - -
Net amount recognized $ 33 $ (7) $ (9) $ (5) $ (505) $ (497)
51
Benefit Plan Information Qualified and Nonqualified Postretirement
Pension Benefits Benefits
United States International
Millions) 1999 1998 1997 1999 1998 1997 1999 1998 1997
Components of net periodic
benefit cost
Service cost $150 $130 $115 $ 88 $ 80 $ 67 $ 42 $ 36 $ 36
Interest cost 387 377 354 98 95 96 69 62 65
Expected return on assets (501) (440) (381) (108) (103) (106) (34) (32) (28)
Amortization of transition
(asset) obligation (37) (37) (37) 2 (1) (1) - - -
Amortization of prior service
cost or benefit 45 38 36 8 8 9 (11) (11) (11)
Recognized net actuarial
(gain) loss 14 - - 2 3 (1) - - 1
Net periodic benefit cost $ 58 $ 68 $ 87 $ 90 $ 82 $ 64 $ 66 $ 55 $ 63
Weighted average assumptions
Discount rate 7.50% 6.50% 7.00% 5.67% 5.58% 6.47% 7.50% 6.50% 7.00%
Expected return on assets 9.00% 9.00% 9.00% 6.69% 6.72% 7.03% 8.19% 6.25% 6.25%
Compensation rate increase 4.65% 4.65% 4.85% 4.12% 4.02% 4.35% 4.65% 4.65% 4.85%
The company expects its health care cost trend rate for postretirement
benefits to slow from 6.1 percent in 2000 to 5.0 percent in 2004, after
which the rate is expected to stabilize. A one percentage point change
in the assumed health care cost trend rates would have the following
effects.
One Percentage One Percentage
(Millions) Point Increase Point Decrease
Effect on current year's benefit expense $ 15 $(13)
Effect on benefit obligation 102 (87)
Leases
Rental expense under operating leases was $113 million in 1999, and
$125 million in both 1998 and 1997. The table below shows minimum
payments under operating leases with noncancelable terms in excess of
one year, as of December 31, 1999.
After
(Millions) 2000 2001 2002 2003 2004 2004 Total
Minimum lease payments $61 $48 $33 $20 $13 $82 $257
52
Employee Savings and Stock Ownership Plans
The company sponsors employee savings plans under Section 401(k) of the
Internal Revenue Code. These plans are offered to substantially all
regular U.S. employees. Employee contributions of up to 6 percent of
compensation are matched at rates ranging from 10 to 35 percent, with
additional company contributions depending upon company performance.
The company maintains an Employee Stock Ownership Plan (ESOP). This
plan was established in 1989 as a cost effective way of funding the
majority of the company's contributions under 401(k) employee savings
plans. Total ESOP shares are considered to be shares outstanding for
earnings per share calculations.
In 1998, the ESOP refinanced its existing debt by issuing new debt of
$385 million at an interest rate of 5.62 percent. This refinancing
extended the life of the original ESOP from 2004 to 2009. The company
incurred a one-time charge of $59 million ($38 million net of tax), or
9 cents per diluted share, which is reported as an extraordinary loss
from early extinguishment of debt.
Dividends on shares held by the ESOP are paid to the ESOP trust and,
together with company contributions, are used by the ESOP to repay
principal and interest on the outstanding notes. Over the life of the
notes, shares are released for allocation to participants based on the
ratio of the current year's debt service to the remaining debt service
prior to the current payment.
The ESOP has been the primary funding source for the company's employee
savings plans. Expenses related to the ESOP include total debt service
on the notes, less dividends. The company contributes treasury shares,
accounted for at fair value, to employee savings plans to cover
obligations not funded by the ESOP. These amounts are reported as an
employee benefit expense. Unearned compensation, shown as a reduction
of stockholders' equity, is reduced symmetrically as the ESOP makes
principal payments on the debt.
Employee Savings and Stock Ownership Plans
(Millions) 1999 1998 1997
Dividends on shares held by the ESOP $ 31 $ 31 $ 30
Company contributions to the ESOP 7 44 37
Interest incurred on ESOP notes 21 29 32
Expenses related to ESOP debt service 14 37 36
Expenses related to treasury shares 50 2 2
ESOP Debt Shares 1999 1998 1997
Allocated 6,596,898 6,586,192 6,006,099
Committed to be released 280,615 85,153 184,181
Unreleased 6,709,549 7,457,885 8,286,949
Total ESOP debt shares 13,587,062 14,129,230 14,477,229
53
General Employees' Stock Purchase Plan
In May 1997, shareholders approved 15 million shares for issuance under
the company's General Employees' Stock Purchase Plan (GESPP).
Substantially all employees are eligible to participate in the GESPP.
Participants are granted options at 85 percent of market value at the
date of grant. Effective July 1, 1997, options are granted on the
first business day and exercised on the last business day of the same
month. Previously, GESPP options were exercised within 27 months from
the date of grant.
1999 1998 1997
Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
Under option-
January 1 -- $ -- -- $ -- 292,495 $62.35
Granted 1,210,189 72.25 1,271,120 69.91 1,123,358 77.50
Exercised (1,210,189) 72.25 (1,271,120) 69.91 (1,293,282) 74.67
Canceled -- -- -- -- (122,571) 71.21
December 31 -- -- -- -- -- --
Shares available for grant-
December 31 11,769,988 12,980,177 14,251,297
*Weighted average
Management Stock Ownership Program
In May 1997, shareholders approved 35 million shares for issuance under
the Management Stock Ownership Program (MSOP). Management stock
options are granted at market value at the date of grant. These options
generally are exercisable one year after the date of grant and expire
10 years from the date of grant. At year-end 1999, there were 10,580
participants in the plan.
1999 1998 1997
Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
Under option-
January 1 29,330,549 $67.72 26,831,852 $59.75 26,487,335 $52.61
Granted 5,697,333 94.32 5,872,537 92.78 5,598,761 91.25
Exercised (4,201,886) 52.50 (3,300,215) 47.76 (5,241,804) 46.99
Canceled (123,581) 93.35 (73,625) 93.35 (12,440) 91.70
December 31 30,702,415 $74.67 29,330,549 $67.72 26,831,852 $59.75
Options exercisable-
December 31 25,213,683 $70.27 24,031,395 $62.09 21,673,983 $52.12
Shares available for grant-
December 31 18,088,285 23,780,604 29,640,776
*Weighted average
54
Management Stock Ownership Program (continued)
Options Outstanding and Exercisable at December 31, 1999
Options Outstanding Options Exercisable
Range of Remaining
Exercise Contractual Exercise Exercise
Prices Shares Life (months)* Price* Shares Price*
$38.62-60.00 10,129,887 46 $50.00 10,129,887 $50.00
63.00-92.00 10,296,264 83 79.46 10,296,264 79.46
93.00-99.20 10,276,264 114 94.18 4,787,532 93.37
*Weighted average
Stock-Based Compensation
No compensation cost has been recognized for the General Employees'
Stock Purchase Plan (GESPP) or the Management Stock Ownership Program
(MSOP). Pro forma amounts based on the options' estimated fair value,
net of tax, at the grant dates for awards under the GESPP and MSOP are
presented below.
Pro Forma Net Income and Earnings Per Share
(Millions) 1999 1998 1997
Net income
As reported $1,763 $1,175 $2,121
Pro forma 1,652 1,072 2,032
Earnings per share - basic
As reported $ 4.39 $ 2.91 $ 5.14
Pro forma 4.11 2.66 4.92
Earnings per share - diluted
As reported $ 4.34 $ 2.88 $ 5.06
Pro forma 4.06 2.63 4.85
The weighted average fair value per option granted during 1999, 1998
and 1997 was $12.75, $12.34 and $13.67, respectively, for the GESPP,
and $22.86, $20.41 and $21.81, respectively, for the incentive MSOP
grants. The weighted average fair value was calculated by using the
fair value of each option on the date of grant. The fair value of GESPP
options was based on the 15 percent purchase discount. For MSOP
options, the fair value was calculated utilizing the Black-Scholes
option-pricing model and the assumptions that follow.
MSOP Assumptions 1999 1998 1997
Risk-free interest rate 5.4% 5.7% 6.6%
Dividend growth rate 5.0% 5.8% 5.8%
Volatility 22.3% 17.6% 15.0%
Expected life (months) 66 69 67
The GESPP and MSOP options, if exercised, would have the following
dilutive effect on shares outstanding for 1999, 1998 and 1997,
respectively: 4.5 million, 4.7 million and 6.0 million shares.
Beginning July 1, 1997, GESPP options had no dilutive effect. Certain
MSOP options outstanding for years 1999 and 1998 (8.7 million shares
and 10.8 million shares, respectively) were not included in the
computation of diluted earnings per share because they would not have a
dilutive effect.
55
Legal Proceedings
Discussion of legal matters is incorporated by reference from Part I,
Item 3, of this Form 10-K, and should be considered an integral part of
the Consolidated Financial Statements and Notes.
Quarterly Data (Unaudited)
(Millions, except per-share amounts)
First Second Third Fourth Year
Net sales
1999 $ 3,776 $ 3,863 $ 3,997 $ 4,023 $15,659
1998 3,700 3,770 3,766 3,785 15,021
Cost of goods sold*
1999 $ 2,162 $ 2,188 $ 2,253 $ 2,249 $ 8,852
1998 2,096 2,162 2,219 2,267 8,744
Income before extraordinary loss*
1999 $ 384 $ 476 $ 459 $ 444 $ 1,763
1998 400 386 178 249 1,213
Net income*
1999 $ 384 $ 476 $ 459 $ 444 $ 1,763
1998 400 386 178 211 1,175
Basic earnings per share - income before extraordinary loss*
1999 $ .95 $ 1.18 $ 1.14 $ 1.11 $ 4.39
1998 .99 .95 .44 .62 3.01
Basic earnings per share - net income*
1999 $ .95 $ 1.18 $ 1.14 $ 1.11 $ 4.39
1998 .99 .95 .44 .52 2.91
Diluted earnings per share - income before extraordinary loss*
1999 $ .95 $ 1.17 $ 1.13 $ 1.10 $ 4.34
1998 .98 .94 .44 .61 2.97
Diluted earnings per share - net income*
1999 $ .95 $ 1.17 $ 1.13 $ 1.10 $ 4.34
1998 .98 .94 .44 .52 2.88
Stock price comparisons (NYSE composite transactions)
1999 High $ 81.38 $ 96.38 $100.00 $103.38 $103.38
1999 Low 69.31 70.06 85.00 87.44 69.31
1998 High 96.13 97.88 84.44 87.50 97.88
1998 Low 80.06 80.38 65.63 69.38 65.63
* Third-quarter 1999 includes gains on divestitures, litigation expense
and a change in estimate that reduced the 1998 restructuring charge.
These items resulted in a net loss of $4 million ($3 million after
tax), or 1 cent per diluted share. Second-quarter 1999 includes gains
on divestitures, net of an investment valuation adjustment, of $104
million ($55 million after tax), or 14 cents per diluted share. Fourth-
quarter 1998 includes a restructuring charge of $161 million ($99
million after tax), or 25 cents per diluted share, and an extraordinary
loss from early extinguishment of debt of $38 million (net of tax), or
9 cents per diluted share. Third-quarter 1998 includes a restructuring
charge of $332 million ($214 million after tax), or 53 cents per
diluted share. The inventory portion of the restructuring charge,
included in cost of goods sold, totaled $29 million in third-quarter
1998 and $10 million in fourth-quarter 1998.
56
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Item 13. Certain Relationships and Related Transactions.
The information required by Items 10 through 13 are incorporated by
reference from the registrant's definitive proxy statement pursuant to
general instruction G(3), with the exception of the executive officers
section of Item 10, which is included in Item 1 of this Form 10-K. The
registrant will file with the Commission a definitive proxy statement
pursuant to Regulation 14A by May 1, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The financial statements filed as part of this report are listed in
the index to financial statements on page 30.
All financial statement schedules are omitted because of the absence of
the conditions under which they are required or because the required
information is included in the financial statements or the notes
thereto.
(b) Reports on Form 8-K:
3M was not required to file any reports on Form 8-K for the quarter
ended December 31, 1999.
57
(c) Exhibits:
Incorporated by Reference:
Incorporated by Reference in the
Report From
(3) Restated certificate of incorporation Exhibit (3) to
and bylaws, amended to and Form 10-Q
including amendments of for period ended
May 12, 1987. June 30, 1987.
Restated certificate of incorporation, Form 8-K dated
as amended as of May 13, 1997. June 30, 1997.
Bylaws, as amended as of November 11, 1996. Form 8-K dated
November 20, 1996.
(4) Instruments defining the rights of security
holders, including debentures:
(a) common stock. Exhibit (3) above.
(b) medium-term notes. Registration No. 33-48089
on Form S-3.
(10) Material contracts, management
remuneration:
(a) management stock ownership program. Exhibit 4 of
Registration No. 333-30689
on Form S-8.
(b) profit sharing plan, performance Written description contained
unit plan and other compensation in issuer's proxy statement
arrangements. for the 2000 annual
shareholders' meeting.
Reference (pages)
Form 10-K
Submitted herewith:
(12) Calculation of ratio of earnings
to fixed charges. 59
(21) Subsidiaries of the registrant. 60
(23) Consent of independent auditors. 61
(24) Power of attorney. 62
(27) Financial data schedule for the year ended
December 31, 1999 (EDGAR filing only).
58
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of l934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MINNESOTA MINING AND MANUFACTURING COMPANY
By /s/ Robert J. Burgstahler
Robert J. Burgstahler, Vice President
Principal Financial and Accounting Officer
February 18, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on February 18, 2000.
Signature Title
Livio D. DeSimone Chairman of the Board and
Chief Executive Officer, Director
Ronald O. Baukol Director
Edward A. Brennan Director
Edward R. McCracken Director
Allen E. Murray Director
Aulana L. Peters Director
Rozanne L. Ridgway Director
Frank Shrontz Director
F. Alan Smith Director
Louis W. Sullivan Director
Roger P. Smith, by signing his name hereto, does hereby sign this
document pursuant to powers of attorney duly executed by the other
persons named, filed with the Securities and Exchange Commission on
behalf of such other persons, all in the capacities and on the date
stated, such persons constituting a majority of the directors of the
company.
By /s/ Roger P. Smith
Roger P. Smith, Attorney-in-Fact